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Passing on your assets cross-border

Passing on your assets cross-border

Direct heirs do not have to pay inheritance tax in Luxembourg, but only if they are resident in the Grand Duchy and the assets are held and passed on in an equitable fashion.
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However, often there is an international dimension, with inheritors or assets located abroad. This has a substantial impact on many aspects of how property is transferred.

When it comes to inheritance or the transference of assets, Luxembourg residents must increasingly consider international questions. Despite its small size, Luxembourg is home to people with a diverse range of backgrounds. Often their children live abroad, they may have real estate in different countries, and then there are international financial investments to consider. “Our clients’ lives have become considerably more international in recent years," said Marie Melikov, Senior Estate Planner at Degroof Petercam Luxembourg. “This has an impact when we discuss their particular challenges regarding succession planning.”

When foreign inheritance taxes apply

In Luxembourg, assets inherited in the direct line (i.e. by children) do not incur inheritance tax as long as the bequest is shared equally, with assets held in the Grand Duchy and the heirs also being resident. “However, many factors can come into play and have an impact on succession," notes Ms Melikov. “Let's imagine that your daughter moves to Paris and sets up a business there. If, on the day of your death, she has been living in Paris for more than six years, she will be subject to French inheritance tax on the entirety of the assets she receives, up to a maximum of 45% of these assets.” 

Faced with this likelihood, it is worth taking appropriate measures to maximise a fair distribution between your children. "For example, a donation of part of the family assets, such as a portfolio of securities based in Luxembourg, can be made before the beneficiary has spent more than six years in France. Applicable taxes are then those in force in Luxembourg, that is, limited to 1.8% of the asset value," she explains.

Considering how to structure assets held abroad

The family might wish to see a second home on the Belgian coast be passed to the next generation, and this would be subject to the applicable inheritance tax, in this case a maximum of 17% in the direct line in Flanders. “This would be the case if the deceased person owns the property directly," explained Ms Melikov. “If, on the other hand, the property was acquired indirectly, via a Luxembourg SCI vehicle for example, it will not be subject to Belgian inheritance tax.”

In the case of US assets held by the deceased, these would be subject to American inheritance tax. However, donating these assets before death would avoid US gift tax.

Failing to plan for these problems not only would see a reduction in the family estate, it might even put heirs in difficulty. "In particular, it is essential that each family member should have sufficient liquidity to pay any inheritance taxes, especially on illiquid assets such as real estate," added Ms Melikov. 

Plan for external factors

The challenge is to prepare, and your banker can help you discuss the options suited to your individual family situation. They can help you identify the external factors that may come into play regarding inheritance. "The nature of assets, their location, beneficiaries’ situation, the nationality of the people involved are just some of the many details that can have an impact on inherence which need to be taken into account," she said. The notion of timing is also important, as illustrated by the example of an heir moving to France. "As soon as an externality comes into play (such as when a child moves home or when you plan to invest abroad) it is important to be able to assess the impact that this may have on any property transfers. You are then able to consider the most appropriate measures," she added.

Plan while there is time

It is generally the responsibility of those who hold the assets to take care of these matters. They need to assess the impact of the succession on the beneficiaries and plan the inheritance of assets in the best possible way. "It is always easier to consider trade-offs when people are still alive, by selling or making gifts where possible," said Ms Melikov. This is particularly the case with blended families. If a person wishes to pass on assets to the children of their partner, it could be worthwhile considering adoption, an option which is possible in Luxembourg. "In this way, these children will not be subject to the inheritance tax that applies for a transfer to third parties (generally 15%, but which can go up to 48%) and will be able to benefit from the exemption," she said. 

Just an example of how the transference of assets must be organised in advance, especially if it includes an international dimension. 

Questions about passing on an inheritance internationally? Contact Marie Melikov, Senior Estate Planner:

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