Bequeathing or donation: what is the difference and what does it cost?

You have likely heard people of bequests and donations, but what are they really? Aren’t they the same thing? Well, not exactly. myLIFE is here to explain what you can bequeath and donate, to whom, and how much it might cost.

In the case of both a bequest and a donation, an asset (or a right) is voluntarily transferred to one or more people. The main difference is that a donation is between living persons while a bequest comes about because of a death.

In other words, the person receiving a donation (the beneficiary) gets it immediately during the lifetime of the donor without the need for a special procedure. When the donation is being formally documented by a notary, the terms donation and gift are synonymous. Conversely, a bequest is a measure contained in a will and takes effect after the death of the testator (the person making the bequest). In this case, the beneficiary is known as the legatee.

It should be remembered that different rules apply depending on the nature of the transferral. Let us explain.

Gifts/donations

What can be donated and to whom?

A donation can be made to natural persons (children, spouses, parents, etc.) or legal entities (associations, charities, etc.) and may concern:

• movable property: car, shares in companies, jewellery, money, etc.;
• immovable property: house, apartment, land, etc.

It is also possible to donate just the bare ownership or the usufruct of a movable or immovable property. This means that the donor transfers either the ownership of the asset (bare ownership) or the right to use it (usufruct).

Is a notary required to make a donation?

The Luxembourg Civil Code states that, in order to be valid and incontestable, a donation should in theory pass before a notary. However, there are certain exceptions in practice. These include gifts by hand and indirect donations:

• a gift by hand means that the donor simply hands an item of movable property over to the beneficiary;
• an indirect donation is a donation that takes place via a circuitous route, i.e. a neutral act where the donative intent is not ostensibly expressed (e.g. a bank transfer).

In such cases, there is no requirement for formal documentation, but any person wishing to prove the existence of the donation and its date must be able to produce written evidence (record of delivery of letter of intent or thanks, bank statement, etc.).

In the case of immovable property, however, a formal document drafted by a notary is required, unless the asset is located outside Luxembourg. In such cases, the applicable rules are those in force in the country where the asset is located.

How much does a donation cost?

There are often fees that must be paid in the event of a donation. While the beneficiary tends to incur these fees, the notarised act may also specify that the charges be partially or wholly borne by the donor.

If the donation concerns immovable property located abroad, there is no stamp duty to pay in Luxembourg; the asset is subject to the donation laws of the country where it is located.

=> Stamp duty: This varies depending on the relation between the donor and the beneficiary, as well as the value of the asset.

• Stamp duty ranges from 1.8% (direct descendants) to 14.4% (no family relation).
• It is 4.8% for donations to charities, certain public bodies and not-for-profit organisations and foundations.
• Stamp duty is halved for wedding gifts or gifts included in a marriage contract.
• Lastly, there is no stamp duty on donations to foundations, scholarships at universities and other public education institutions, or gifts by hand.

If the donation concerns immovable property located abroad, there is no stamp duty to pay in Luxembourg; the asset is subject to the donation laws of the country where it is located.

=> Notary fees: These vary according to the value of the asset.

=> Transcription fees: These are payable on immovable property located in Luxembourg and represent 1% of the property’s fair value.

=> Municipal administration tax: This must be paid on immovable property located in Luxembourg City. It is 50% of the stamp duty and does not apply to single-family houses, apartment buildings, etc.

In the event of donation of bare ownership, stamp duty is payable only on a percentage of the fair value of the asset, which varies depending on the age of the beneficiary upon receipt of the donation.

Tax deductions

Under certain conditions, gifts and donations are tax deductible in Luxembourg. This concerns cash donations given to recognised public-interest foundations and organisations but also donations in cash and in kind given to the National Culture Fund and to cultural institutions and organisations.

To be eligible, you must either be a Luxembourg resident and submit a tax return or annual statement; or be a non-resident and submit a tax return with assimilated resident status. Total annual donations* must be at least €120 and the annual deduction cannot exceed 20% of the taxpayer’s net income or €1,000,000.If this ceiling is breached, the donations may be carried over to the next two tax years.

* Donations recognised as being in the public interest in another European Union (EU) member state, a member state of the European Economic Area (EEA) or Switzerland are also deductible.

Bequests

What can be bequeathed?

Just like with a donation, movable and immovable property can be bequeathed. However, it is incumbent upon the testator to define the assets that are part of their estate and that they are entitled to transfer.

If the testator is not married:
The estate consists of all their assets, minus their debts.

If the testator is married:
They must draw up a list of assets to be divided up (liquidate the matrimonial regime): those that actually belong to the testator and those which are common property. This depends on the matrimonial regime that was chosen at the time of the marriage:

• Statutory community of property regime: Shared property (everything acquired during the marriage) is divided equally. One half is retained by the surviving spouse and the other half becomes part of the estate. This other half is added to the testator’s own assets (those purchased prior to the marriage or received during the marriage by donation or inheritance, and personal property such as clothes, degree certificates, property rights, etc.).

• Universal community of property regime: Shared property (everything acquired before and during the marriage, except assets that are personal to each individual) is divided equally. One half is retained by the surviving spouse and the other half becomes part of the estate.

• Separate property regime: There is no shared property, only personal assets.

If no choice was made at the time of marriage, the default regime is that of statutory community of property.

Part of the assets must be transferred to the children, living ancestors or spouse (this is known as the reserved portion).

To whom can you make a bequest?

Once again, the testator cannot simply do as they please. The law dictates that there are compulsory heirs, i.e. persons who are legally entitled to part of the estate.

As such, some of the assets must be transferred to children, who are compulsory heirs (read about the order of inheritance in Inheritance: who gets what?). The estate may therefore comprise only the remaining assets (the available portion). If there are no compulsory heirs, the testator is free to divide up all their assets.

How much does a bequest cost?

In the case of inheritance, unless specified otherwise in the notarised deed, the legatees must pay fees on the property they inherit. There are two types of tax: inheritance tax and transfer tax on death.

=> Inheritance tax: This is payable if the deceased lived in Luxembourg and is calculated on the value of all movable property (located in Luxembourg and abroad) and immovable property (only that located in Luxembourg), less debts and funeral costs. It varies according to the relationship between the testator and the legatee, but also according to the value of the estate assets.

First, you should be aware that there are two different rates:

• one on the reserved portion (i.e. the part to which the heir is legally entitled, known as ab intestato inheritance);
• a second one on the unreserved portion (i.e. the part bequeathed according to the will).

These rates vary from 0% to 15%. In addition, the base rate is increased according to the net taxable amount of the portion bequeathed, provided it is more than €10,000. See here for a breakdown of the rates and increases applied for inheritance tax.

There are, however, situations where no inheritance tax is payable, including:

• on assets inherited by direct ancestors/descendants (parents, grandparents and children, except on the unreserved portion in the case of the latter);
• on assets between spouses or partners (in a partnership for at least three years) with children;
• on real estate located outside Luxembourg;
• if the estate is worth €1,250 or less.

=> Transfer tax on death: This is payable if the most recent residence of the deceased is not in Luxembourg. It is calculated only on immovable property (with rights of ownership or usufruct) located in Luxembourg. The tax treatment is the same as for inheritance tax.

Now that you know a bit more about the laws governing donations and bequests in Luxembourg, you have everything you need to organise your estate and ensure things go as smoothly as possible after you’re gone.