How to Prepare for Tax Changes and Audits Affecting Trust Asset Management Structures?

In recent years, an increasing number of individuals have turned to trust asset management structures (TAMs) as a tool for the long-term management and protection of family wealth, including businesses, real estate, and other investments. Many have also used these structures to facilitate intergenerational wealth transfers.

A recently submitted legislative proposal, however, could introduce a fundamentally new approach to the taxation of TAMs.

Fortunately, this does not mean that existing structures will necessarily need to be restructured, and the advantages of trust asset management are expected to remain available in the future. The key change is not aimed at lawfully established structures themselves, but rather at the level of detail required to substantiate asset movements and their tax treatment.

If you already have a trust asset management structure and would like to prepare for potential tax audits, or if you are considering establishing one, the Private Clients team of LeitnerLeitner can provide tailored advice based on your specific circumstances. Feel free to contact us for personalized support.

Going forward, proper documentation and the ability to trace the history of assets will become significantly more important. Under the proposed rules, it may be necessary to demonstrate how an asset distributed to a beneficiary can be economically traced from the original contribution to the trust through to its eventual distribution.

At the same time, the Hungarian tax authority's audit approach may become more stringent.

According to the proposal, existing trust asset management structures and private foundations would first be reviewed, followed by mandatory tax audits of all such structures within the applicable statute of limitations period.

Particular importance may be attached to questions such as:

• When and at what value an asset was originally transferred into the trust;
• Whether the asset was subsequently sold or transformed;
• Whether newly acquired assets were financed from multiple pre-existing assets;
• Whether an economic connection can be demonstrated between the original and the subsequently held assets.

How Can Trust Asset Management Structures Prepare for the Legislative Changes and Future Audits?

• Review the complete set of trust establishment and asset transfer documentation.
• Compare the composition of the originally settled assets with the assets currently held by the trust.
• Before distributing assets to beneficiaries, assess whether the asset being distributed is the same asset originally contributed and, if not, what tax consequences may arise.

Trust asset management structures established for legitimate wealth planning purposes will continue to be a viable solution. However, greater attention than ever will need to be paid to ensuring that asset movements, transformations, and their tax treatment can be clearly documented and traced throughout the life of the structure.

How Can We Prepare to Mitigate the Tax Risks of Trust Structures and for the Expected Tax Audits?