Wills, forced heirship and tax – planning for inheritance

After a lifetime ensuring that your family’s financial needs are met, you might reasonably consider that what happens after your death is up to them. However, there are advantages to a bit of forward planning – not least that your family may remember you more fondly.

Disputes over inheritance are usually an ugly business, and almost every family has a story. From BB King to France’s Bettencourt clan or Nelson Mandela, even the most famous families who should have access to the best advisers are prone to fall out over legacies – and these are only the ones that reach the media.

Contested inheritance is an increasing problem as families become more eclectic.

Contested inheritance is an increasing problem as families become more eclectic. The increasingly common mix of stepfamilies, second and subsequent spouses and half-siblings makes inheritance complex and past tensions are always liable to resurface. Making clear how you plan to divide your estate can help address potential disputes in the future, even if it requires having some sensitive discussions while you’re still alive.

Your heirs will be liable for inheritance tax in Luxembourg if you are deemed to be a resident of the country at the moment of death, and the entire estate will be taxed, including moveable property. This can become very complicated for citizens with international links and assets, although immovable property – real estate – in a foreign country that is taxable there will be exempt in the grand duchy.

Compulsory heirship

The rules in Luxembourg are complicated by the concept, widely prevalent in the civil law countries of continental Europe, of compulsory heirship. In this area, the grand duchy is unlike common law jurisdictions such as the United Kingdom and United States, where individuals can leave whatever they want to whomever they want.

This principle was tested in the UK in the recent case of Heather Ilott, when she demanded a share of the estate of her estranged mother who had left her entire wealth to animal charities. Following a protracted series of legal battles between the time of Melita Jackson’s death in 2004 and 2017, Britain’s Supreme Court found the original will should largely stand, lowering a lower-court award to Ilott from £163,000 to £50,000 from her mother’s £486,000 estate.

In Luxembourg, parents do not have that choice. As in other civil law countries including France, Luxembourg bars individuals from cutting off their children without any inheritance. The rules require that at least 50% of the estate should go to the children if there is one child, 67% if there are two, and 75% in the case of three or more.

This can be a major problem if the individual has married multiple times. If 75% of the estate is earmarked for children, for example, second or third spouses may struggle to retain the family home or retain sufficient assets to support themselves, unless the deceased’s estate is particularly large.

This can be dealt with in a marriage contract, granting ownership of the unreserved portion of the estate and lifetime use of the reserved portion. This allows second spouses or other dependents to retain the use of certain assets, such as the right to live in the family home or receive income from an investment portfolio.

Making a will

While the rules governing how you distribute your estate are prescriptive, if you do fail to make a will, your estate will be distributed according to the law on intestate succession. This stipulates that children and their descendants have first claims, followed by the surviving spouse, parents and their descendants, other relatives and, ultimately, the state.

For an expatriate living in Luxembourg, making a will allows him or her to elect to have inheritance from their estate governed by the country of nationality at death, rather than the rules applicable in the grand duchy

For an expatriate living in Luxembourg, making a will allows him or her to elect to have inheritance from their estate governed by the country of nationality at death, rather than the rules applicable in the grand duchy. While this can be an advantage, to sidestep the forced heirship rules, for example, it doesn’t mean that you may choose between the different inheritance tax rates.

To make a will, individuals must be older than 16 and mentally sound. Luxembourg recognises three types of legally-accepted will: holographic will (testament olographe, drawn up by the individual without using as notary) authentic will (testament authentique or testament par acte public, drawn up by a notary), and mystic will (testament mystique, delivered to the notary in a sealed envelope that remains unopened until the person’s death.

The rules are different for each type of will. The holographic will is the most simple, hand-written and signed by the person making it – but its effect depends on someone knowing where it is. If not deposited with a notary’s office, it may not be discovered or accidentally discarded. Wills can be registered with Luxembourg’s Registration Duties, Estates and VAT Authority (Administration de l’Enregistrement et des Domaines) for a small fee.

Changing families, changing law

Authentic wills are more formal, signed in the presence of a notary and two witnesses or of two notaries. Dictated by the person making the will and typed up by the notary, it is legally secure and is usually created with legal advice from the notary. The contents of a ‘mystic’ will remain secret until the envelope is opened after death – helpful if the deceased’s relatives may not like its contents.

Over time, people’s circumstances change – individuals get married or divorced, children are born, family members become estranged (or reconciled) and priorities may shift. While an individual’s wealth and circumstances may vary over time, governments are also liable to tinker with the laws governing inheritance and its taxation.

Wills may need to be updated from time to time to reflect these changes, otherwise there is a risk of leaving much of one’s assets, for example, to an ex-spouse with whom the deceased was no longer on speaking terms, or leaving the family with an onerous tax bill. It may be advisable to review a will every couple of years or after any major life event to ensure it is still relevant and appropriate.

Inheritance and donation

In Luxembourg, inheritance tax varies from zero for direct descendants to 48% for non-connected parties. The rate is variable and progressive, depending upon the value of the inheritance. Non-residents must pay a specific inheritance tax or estate duty (droits de mutation) on real estate located in Luxembourg at the same rate as residents.

While giving assets away during one’s lifetime may be a useful option, it does not help to circumvent the compulsory heirship rules, and the tax authorities have grown increasingly alert to the more obvious avoidance schemes. Tax is levied on gifts made during the individual’s lifetime, though it may be lower than the level paid on death. Gifts should be officially registered with a notary, except in the case of dons manuels, personal gifts such as jewellery, artworks or cash, which generally can be carried out without a notarial deed.

One final point – as a rule, families do not speak sufficiently about legacies and how wealth and assets will be passed on. This is one situation where it really is good to talk.