The article was published on December 18, 2025 in Äripäev.
Beyond the traditional private limited company, Estonian law currently offers no legal structure designed specifically for family wealth management that would be both flexible and have a predictable tax treatment, writes Tõnu Kolts, managing associate at law firm COBALT.
Many Estonian entrepreneurs who started their businesses decades ago, as well as investors whose portfolios have grown significantly over time, are today faced with the question of how to plan their wealth for the future in the most effective way. Increasingly, families have established family office type structures to manage investments and ensure a smooth transfer of assets to the next generations. While similar objectives can be achieved through a traditional private limited company, that structure has its own strengths and limitations.
Foreign trusts and foundations
For this reason, family wealth planning often involves looking to foreign trusts and foundations. These are common wealth-planning tools in many jurisdictions, but distributions made to beneficiaries residing in Estonia may result in unexpected tax liabilities that beneficiaries have not anticipated.
In Anglo-American legal systems, trusts are an important instrument for long-term wealth management. In continental Europe, similar functions are fulfilled by various foundations, often referred to as family foundations. These structures allow assets to be separated, beneficiaries to be designated, and rules to be established for how assets are used and transferred across generations. Such structures are not chosen solely for tax reasons, but primarily to protect assets, ensure family continuity, and provide flexible governance.
Estonia does not have a comparable institution. The foundations currently available under Estonian law are not intended for holding family wealth or making regular distributions to beneficiaries. Nor is there a clearly regulated possibility to appoint a professional manager to administer family assets in accordance with the founder’s long-term intentions.
Avoiding unexpected costs
Potential tax risks are only one aspect of the issue. Foreign trusts and foundations are typically administratively complex and costly, requiring the involvement of local advisers. In addition, tax consequences must be carefully analysed already at the stage of establishing the structure in order to avoid unpleasant surprises later on.
In most cases, family wealth planning can also be successfully implemented in Estonia by using a private limited company combined with a well-drafted shareholders’ agreement, articles of association, and, where necessary, a will or inheritance agreement. Such a model is generally simpler, more cost-efficient, and based on clear tax rules.
Inconsistent tax treatment
Over the years, different interpretations have emerged in Estonia regarding the taxation of income received from trusts or foreign foundations. Questions have arisen as to whether trust income should be taxed on a current basis at the level of the beneficiary, even though beneficiaries often have no access to or information about such income in practice. In some cases, distributions have been viewed as inheritance or gifts, but inheritance presupposes probate proceedings, which typically do not take place in these situations. Nor does current practice support the view that such distributions could be treated as tax-exempt gifts.
As a general rule, distributions made to beneficiaries are classified as other income, which the beneficiary must declare and on which personal income tax must be paid, regardless of whether and how the income was previously taxed at the level of the trust or foundation. This approach can create a significant risk for beneficiaries.
Distributions may be received decades after the structure was established, and beneficiaries may not even be aware that a tax obligation arises. In many cases, it is also not possible to credit foreign taxes withheld, as these were not paid in the name of the beneficiary. Given the extensive international exchange of tax information, the Estonian tax authority may identify foreign income years later and raise questions only at that stage.
Private limited company: simple, but lacking privacy
In the absence of a dedicated family wealth management structure, Estonian family offices typically operate through private limited companies. This is often a practical and tax-stable solution that offers flexibility. However, the annual financial statements of a private limited company are public, meaning that a family’s investments and financial results are visible in various overviews and media reports.
Although a private limited company allows assets to be legally separated and is often used within holding structures where the family office acts as a passive parent company and subsidiaries carry out business activities, this model does not always provide the same level of systematic asset protection as a family foundation or trust. In a company structure, the protection and continuity of family wealth depend largely on internal arrangements, shareholder agreements, and management decisions. As a result, the founder’s long-term intentions can be altered over time if ownership changes or family members’ views evolve.
In a family foundation, the separation of assets, inheritance rules, distributions to beneficiaries, and governance are clearly regulated by law or founding documents. These rules do not depend on changes in shareholders or management preferences, providing greater long-term stability for family wealth. This reduces the need for complex ownership chains or multiple subsidiaries and ensures that asset management principles remain consistent across generations.
The idea of a family foundation
Several countries have introduced dedicated family foundations designed specifically for managing family wealth. Poland is a recent example, having adopted such regulation a few years ago, and it has quickly gained popularity, including among foreign families.
A family foundation model works because assets can be separated for a specific purpose, family wealth is insulated from business risks, distributions to beneficiaries follow clearly defined rules, succession issues are handled systematically without the need for separate wills or inheritance agreements, and tax rules are clear and predictable.
A similar family foundation could be introduced in Estonia as a distinct legal form subject to tax rules comparable to those applicable to companies, with clearly regulated taxation at the level of beneficiaries. This would allow families to manage their wealth professionally, without legal uncertainty or excessive public disclosure.
The time is right for a solution in Estonia
Current practice demonstrates that the taxation of foreign trusts and foundations is neither clearly regulated nor predictable in Estonia. Families who use such structures in good faith to protect and transfer their wealth may face unexpected tax questions or liabilities.
There is a clear need in Estonia for a structure that enables family wealth to be managed with legal certainty, transparency, and reasonable costs. Establishing a family foundation would reduce tax risks, increase security, and create a locally grounded alternative to complex foreign structures. It would also open the door to new professional services in Estonia.
If Estonia wishes to keep pace with developments already seen in several European countries, now is the right time to bring this discussion to the table. The need is evident, and society is ready for it.
