How Can We Prepare for the Tax Changes Affecting Trust Structures and the Expected Tax Authority Audits?

In recent years, LeitnerLaw has helped numerous family businesses navigate generational transitions and wealth planning through the use of trust structures (trust-based asset management arrangements). The growing popularity of trust structures is no coincidence: when properly established, they provide an effective framework for the conscious management and protection of wealth across multiple generations.

Before outlining the expected changes to the personal income tax rules applicable to trust structures resulting from the amendment proposal submitted on 17 July, it is important to emphasize that these changes do not call into question the foundations of trust arrangements that were established in compliance with the applicable laws for genuine purposes such as succession planning, asset protection, and wealth management, rather than purely for tax avoidance.

Nor do the proposed amendments necessarily require all existing trust structures to be redesigned. However, they are likely to necessitate more detailed documentation of asset movements, as the traceability of transactions and the ability to verify the origin of assets will become significantly more important. When determining tax liabilities, it is expected that proving how distributed assets have evolved through various transactions and economic processes from the original asset contribution to the beneficiary will be of key importance.

Tax Exemption Will No Longer Be Automatic for Trust Structures

One of the fundamental principles of the current framework is that, subject to certain conditions, both the initial transfer of assets into a trust and the subsequent distribution of assets to beneficiaries after five years may take place tax-free. The new rules, however, place greater emphasis on ensuring that both the original assets and any appreciation in value remain traceable throughout subsequent transactions.

As a result, it may become particularly important in the future to demonstrate:

• Which assets were originally transferred into the trust;
• When the assets were contributed and at what value;
• Whether any sales, in-kind contributions, or other transformations occurred in the meantime;
• The sources from which new investments were financed;
• Whether new assets were generated and at what value they were recorded; and
• Whether a clear economic link exists between the original assets and the assets ultimately distributed to beneficiaries.

The proposed legislation affects not only substantive tax rules but could also significantly reshape the framework of tax authority audits. According to the draft, the Hungarian Tax Authority (NAV) may initially review trusts and private foundations established before 12 September 2023. Subsequently, from 1 January 2028, mandatory tax authority audits may be introduced for all trusts and private foundations within the applicable limitation period.

Dr. Nóra Rácz, partner, director at LeitnerLeitner,        Diána Elek, advisor at LeitnerLeitner

Trust Structures Remain a Relevant Wealth Planning Tool

• The long-term preservation of family wealth;
• Supporting generational succession;
• Structuring complex entrepreneurial and business assets; and
• Establishing an organized framework for wealth management decisions.

What Can You Do to Ensure a Future Audit Finds Your Trust Structure in Order?

• Review the complete documentation relating to the initial asset contribution.
• Compare the original asset portfolio with the current composition of trust assets.
• Prepare an asset movement map illustrating transactions and asset transformations.
• Conduct a preliminary tax analysis of planned asset distributions.
• Review family holding structures and multi-generational ownership arrangements more closely.
• Strengthen the documentation, business rationale, and economic substance of transactions.

During the expected audits, the tax authority may examine not only the current asset position but also the entire history of the trust, including the initial transfer of assets, individual transactions, reinvestments, and distributions made to beneficiaries.