Yesterday the Flemish parliament introduced a tax break for “bequests to friends” and for bequests to charities. These are just the sweeteners to close the dual bequest route.
The route is closed to people living in Flanders, people living in Brussels or Wallonia can still use the dual bequest.
A dual bequest allows the testator to engage in philanthropy while reducing the inheritance tax for friends and relatives who would pay inheritance tax at the higher inheritance tax rates.
For friends, nieces and nephews, the sliding rates start at 25% on the first €35,000, 45% on the next tranche of €40,000, and 55% on every euro over €75,000. And as this is group rate, all friends pay 55% on every euro over €75,000.
A dual bequest in a will is really two bequests: one bequest to a family member, friend or relative and one bequest to a charity (e.g. a non-profit organisation or a foundation). On that bequest, the higher inheritance tax rates are due.
The second bequest to the charity, is currently taxed at a flat rate of 8.5% (and that will go down to 0%, see below). However, out of its bequest, the charity must pay the inheritance tax that is due on the first bequest. As the charity pays less inheritance tax, there is more money left for the friends and relatives.
E.g. if a friend receives a bequest of €200,000, the inheritance tax (in Flanders) is €95,500 (47.75%). With a dual bequest, the friend can inherit up to €130,000. The charity inherits €70,000 but has to pay the inheritance tax due by the friend (€ 57,000) and its own inheritance tax on the balance (€1,100), keeping a net of €12,900.
This technique is optimised by maximising the bequest to the friends and relatives and minimising the bequest to the charity. And that is what the government objects to.
The route is closed by increasing the inheritance tax that is due on the bequest to friends and relatives so that it is not interesting anymore for the charity to accept the bequest. The charity would need to inherit at least 60% of the estate to keep anything out of the bequest. However, the friends and relatives then end up with less than with a simple bequest to them.
The bequest for a friend
The “vriendenlegaat”, a bequest to a friend or to several friends, allows you to give up to €15,000 to one or more friends at a tax rate of 3% instead of 55%.
Put like that, this sounds very appealing. A tax saving of 52% on €15,000? That would be too good.
If you leave everything to your direct family and you want to give €15,000 to a friend, he would normally pay 25%. If he will now pay 3% and save 22%, or €3,300. This is the real and only saving.
If you have no family and you have no alternative but to leave everything to your friends, they will pay the higher inheritance tax rates. If you make a friends’ bequest in your will, these friends will pay €38,175 on the first €75,000 and 55% on every euro over €75,000. They will just get a reduction of €3,300.
Keep in mind that the friend’s bequest requires a will in which you clearly indicate which friends will benefit from the tax break.
0% rate for gifts to charities
By way of compensation for the loss of gifts the charities are likely to incur now that the dual legacy route is closed, lifetime gifts and bequests to charities will be tax-exempt. The Flemish government hopes that people will make more gifts to good causes.
However, private foundations set up to promote a disinterested cause are excluded. It is thought that they are not all that charitable. Lifetime gifts will be taxed at 5.5% and bequests at 8.5%.
The same favourable rates apply to gifts and bequests to charities within the European Economic Area. Gifts to charities outside the EEA (notably the UK after Brexit) are taxed at rates up to 40% for real estate and 7% for gifts of cash and movables. Bequests are taxed at the highest rates like bequests to friends with rates up to 55% (in Flanders).
1 July 2021
The law enters into force on 1 July 2021.
If you live in Flanders and you have made a will with a dual legacy, you should review your will. As of 1 July 2021, the dual bequest will not be effective anymore. It is not the date of the will but the time of your death that determines whether the new rules apply.