As life expectancy increases, children are inheriting from their parents at an increasingly late age, and more often when they no longer have any particular financial needs. Transferring wealth to your grandchildren is a way to help them get started in life and allow them to build up wealth. How can we help future generations? What precautions should we take to maintain family harmony?
How should I proceed during my lifetime?
In theory, grandchildren have no rights to their grandparents’ inheritance. It’s therefore up to grandparents to organise the transfer of part of their estate to their grandchildren.
During their lifetime, grandparents can transfer wealth to their grandchildren via a gift or a will.
- Gifts involve the immediate and free transfer of assets to grandchildren. A gift is a final act and cannot be reversed. While there are many ways to mitigate the immediate impact of gifts (such as attaching certain conditions to the gift so that the donor maintains certain prerogatives over the gifted assets), their irrevocable nature can make them less appealing. Gifts are legally more restrictive but are more advantageous from a tax point of view, particularly when they involve movable assets. In fact, an indirect gift by private deed is tax exempt if the donor remains alive for one year after the gift date. Otherwise, inheritance tax may apply. The advantage of a will is that it only takes effect at the time of death and can be amended or revoked at any point up until then. From a tax point of view, transferring wealth via a will (inheritance tax) may be less favourable than via a gift (gift tax).
Can I gift or bequeath my entire estate to my grandchildren?
Grandparents’ freedom to bestow gifts on their grandchildren (discretionary portion) is always subject to compliance with the reserved portion rule. The reserved portion is the part of your estate that your children cannot be deprived of.
The discretionary portion varies according to the number of children:
Number of children Reserved portion Discretionary portion 1 1/2 1/2 2 2/3 1/3 3 or more 3/4 1/4 To avoid any problems at the time of death, it is therefore prudent not to transfer more than the discretionary portion to your grandchildren.
My son and daughter have a different number of children. Can I still gift or bequeath the same amount to each of my grandchildren?
It’s certainly possible to transfer the same amount to each grandchild. To avoid creating an imbalance between what each branch of the family receives, you can stipulate that gifts made to grandchildren will (or will not) be taken into account when determining the share that will go to each of your children at the time of your death. In such cases, you should express your wishes as clearly as possible, for example, in a will.
What gift tax and inheritance tax are applicable to linear descendants (children or grandchildren)?
Gift tax if the gift is made by notarial deed:
- 1.8% if the gift is included in the estate for division between the heirs (at death, previous gifts will be taken into account when determining the share that will go to each heir, such that each heir (ab intestato inheritance) will ultimately receive the same amount).
- 2.4% for unrecoverable gifts to linear descendants (gifted by preference and beyond their share)
If the gift is made by private deed (only possible for movable assets) no tax is payable if the donor remains alive for one year after the gift date. Otherwise, inheritance tax may apply if the beneficiary has received an extra-legal share.
Inheritance tax for direct descendants:
- 0% on the legal share
On the extra-legal share (what they receive over and above others)
- 2.5% - 8% on the discretionary portion
- 5% - 16% on the share exceeding the discretionary portion
Example
Mr Dupont has EUR 1,200,000 in assets. He has two sons: John, who has a daughter Anne (branch 1), and Paul, who has no children (branch 2).
Mr Dupont draws up a will and bequeaths EUR 600,000 to Anne (who is part of branch 1). It is assumed that neither John nor Paul claim their reserved portion.
- Mr Dupont's available share amounts to EUR 400,000 (1,200,000/3) (cf. Article 913 of the Luxembourg Civil Code).
- The share to be expected by the sons following the bequest to Anne is EUR 300,000 each, since the will provides for a bequest of EUR 600,000 to Anne, the granddaughter.
- Had there been no will, John (branch 1) and Paul (branch 2) would each have received EUR 600,000 (ab instetato inheritance, cf. Article 745 of the Luxembourg Civil Code).
Branch 1 therefore receives EUR 900,000: EUR 300,000 for John and EUR 600,000 for Anne (had there been no will, branch 1 would have received EUR 600,000).
Anne will be taxed at 5.5% on the surplus received by branch 1 (EUR 300,000) (extra-legal portion within the limit of the available share of EUR 400,000, see above).
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