As well as the grief of bereavement, remaining family members have to deal with the cold reality of inheritance. Efficient planning can minimise the heartache, maximise fairness and maximise tax efficiency. Here we look at some of the options.
There is no inheritance tax in direct line to direct descendents in Luxembourg. In other words, on their death, a Luxembourg resident can pass on real estate held in this country and other assets tax-free to children, grandchildren, etc., as long as they too are resident in this country.
The situation becomes tricky when descendents who live outside the grand duchy seek to benefit from these rules. International law states they should pay the inheritance tax applicable in their country of residence.
Tax evasion clampdown
“In days gone by it was simple,” explained Lex Thielen, senior partner at the law firm of Lex Thielen & Associés, “because people would keep their assets in Luxembourg and thanks to banking secrecy laws, they did not need to declare this to their tax office.”
However, since 2016 tough, comprehensive global rules on the exchange of savings information make this impossible. Data about an individual’s assets must now be transferred by banks (and soon other advisors) to the tax office of the client’s country of residence.
There is clear temptation to appear to be resident in Luxembourg even if most of a person’s life takes place outside the country. International rules state that a person must be resident in a country for at least 183 days a year (i.e., half a year or more) to be classed as resident. This is something to consider for people who travel widely and live abroad for many weeks or months during their retirements.
Proof of residency
Proving where your home location is can be tricky. In certain countries, tax offices will use things such as where a mobile phone is used and where credit card payments were made to build a picture. Also, if someone has their family home in another country with their children attending the local school, tax offices will more often than not judge this to be the tax domicile. This can be even if most of the year is spent in Luxembourg and the family owns property in the grand duchy.
Some people even go through divorce proceedings in an attempt to indicate clearly that Luxembourg is at the centre of their lives. Having your main employment based in Luxembourg is usually enough to prove residence.
There can also be problems when we approach our final moments. The internationally accepted rule is that the location of your last domicile decides which inheritance law will be applied (for assets other than international real estate). Yet we may wish to move to a retirement home across the border, or we may need extensive medical care abroad.
“There is a risk that these people will de facto establish their residence abroad, even though they have lived their entire lives in Luxembourg,” Thielen warned. This problem has lessened as Luxembourg has built numerous nursing and retirement homes recently. “Questions such as this are normally less about estate planning and more about just knowing the rules,” he added.
How the law structures family assets
These rules are universal across Europe, but specific to Luxembourg and other civil code legal systems is how assets are apportioned after death. The starting point is to understand how the law structures family assets (see article on page 61). Assuming a couple has the statutory marriage regime at the time of bereavement, the most usual outcome is for children to receive equal shares of the deceased parent’s estate, including the family home.
Thus, two children will receive half, three children a third, and so on. Alternatively, the surviving spouse can retain usufruct of the house for life. Or they can decide to leave the home, and take a share of their spouse’s bequest. This share is equivalent to that of an extra fictitious child, to a minimum of 25%. Thus with one child, the spouse can choose to take a half of the whole estate, with two children a third, but with four children the spouse would receive 25% rather than 20%.
Under Luxembourg law, only one part of the estate can be reallocated by the legator. This share can be up to the equivalent to a fictitious extra child’s share (see table above). The rest must go to the different children, or grandchildren if the child is deceased.
The civil code also sets a framework for how assets are allocated. Without a will, an only child will inherit the entire amount of the deceased parent’s portion, two siblings would receive half of this, and so on. However, a will can limit the amount children receive. With an only child, the parent can specify that up to half their estate will go to another person or organisation, with the inheritor receiving a minimum of 50%. For two siblings, the minimum is one-third, and for three children or more, one-quarter can be reallocated.
These changes must be made with a will. This can be written out long-hand and signed, even minutes before death, or alternatively it can be drawn up with two notaries or at one notary with two witnesses.
Thielen recommends keeping a will with a lawyer or a notary to ensure it can’t be tampered with. He also recommended not putting conditions in the will “because if the condition is considered to be illegal or impossible to fulfil, then the condition is void, but the courts could also decide to annul the will if the condition was decisive”.
Pay what you must
It used to be quite easy to evade tax by setting up a holding company through which assets would be held and then so-called “bearer” shares transferred. Recent rule changes have made this manoeuvre harder to organise, and in a few years it will become impossible as lists of bearer share holders and maybe even beneficial owners of companies will be circulated routinely.
Nevertheless there are still things that people can do to make sure they don’t run into an excessive inheritance tax bill. “Everyone has to pay their taxes, otherwise our societies won’t work, but even so, you don’t have to leave a tip,” Thielen commented. For example, there is certain leeway on pre-bereavement donations and life insurance policies are often handled in different ways in different countries.
A complication can occur if the bereaved spouse has remarried. That new spouse is in line to inherit usufruct of the couple’s house, even if it eventually belonged legally to the children. This can be frustrating as it makes the home almost impossible to sell and banks will not lend money on the back of this limited collateral.