My finances, my projects, my life
June 22, 2024

Estate planning: a family matter

  Compiled by myLIFE team myWEALTH July 28, 2023 1668

As difficult as it is to talk about, especially with loved ones, discussing inheritance planning can help avoid conflicts and misunderstandings. How do you plan for it? Who inherits what in the event of your death? What do you need to remember? myLIFE is here to guide you, including if you are an entrepreneur.

Preparing to pass on your estate is an emotionally sensitive subject, but it is highly important that you devote enough time and attention to it. Whether your goal is to protect your loved ones or preserve what you’ve built up over the years, it’s important to look at estate planning and start making arrangements as early as possible. By taking this step and anticipating any tax issues, you can ensure greater peace of mind for yourself today – as well as for your family when the time comes. Inheritance tax should be factored in and will vary depending on the order of succession, where the assets are located and the heirs’ place of residence. In Luxembourg, lineal heirs and legatees (parents, grandparents and children) are exempt from these rights within the limit of the legal share. Inheritance tax can be as high as 48% for people who have no family relationship with the deceased.

What is an “estate”?

Your “estate” comes into existence only at the time of your death. The size of the estate depends primarily on your marital status. It consists of your movable and immovable property, less any debt and gifts under certain conditions. If you’re married, the composition of your estate also depends on your matrimonial regime.

When making plans for your estate, you must carry out an asset review, preferably with the help of a trusted third party, such as your banker, in order to list all the assets to be bequeathed or passed on (financial, real estate, professional assets, etc.) and to analyse your financial situation (family composition, matrimonial regime, professional and tax situation, etc.).

Once you’ve reviewed your assets, clear goals can be set.

Once you’ve reviewed your assets, clear goals can be set (protecting your spouse or children, preparing for the transfer of the business, carrying out a philanthropic project, etc.). Next comes a structuring phase using wealth experts to analyse the options available to achieve these goals while allowing you to meet your current needs and bring your other projects to fruition. A range of options are available (gifts, life insurance, etc.) and care must be taken to fully understand the tax impact of each one before making a decision.

Clearly defined wishes

Once you have a clear idea of your financial situation, it is time to put your wishes into writing in the form of a will. This legal document allows you to specify the beneficiaries, establish how your assets will be divided among them and address any family disputes if you are not sure they can be avoided. If there’s no will, your estate will be divided according to legal provisions.

If you decide to write a will, be aware that you aren’t free to do as you please. In Luxembourg, the law specifies that descendants cannot be disinherited (reserved heirs). If you have children, most of your assets will automatically be divided equally among them. This is called the hereditary reserve (réserve héréditaire) and it cannot be contested. Thus, at least 50% of the estate must be bequeathed to your child when there is only one, 67% (two thirds) to your children when there are two and 75% if there are three or more.

Your spouse will benefit from the usufruct of the property or a share equivalent to that of the child. It is, however, possible to leave the surviving spouse either a standard share and the usufruct of the rest of the estate, or the entirety of the estate in usufruct. It is always advisable in this case to seek the support of an expert to avoid making any mistakes.

The situation can become complicated in the case of a blended family or when the family members come from several jurisdictions within the EU in particular.

Broaching the subject with your loved ones

The situation can become complicated in the case of a blended family with children from different partnerships, or when the family members come from several jurisdictions within the EU in particular. Here again, we strongly recommend that you review your situation with an expert. Take the time to talk about your estate with your loved ones to prepare them, defuse future tensions regarding the inheritance and make the transition as smooth as possible when the time comes. Remember that the situation isn’t easy for anyone, especially when financial considerations and psychological aspects become intertwined.

Passing on the family business

For an entrepreneur, the family business is the most highly prized asset to be considered when putting their affairs in order. Who will take the helm? What can you do to observe the hereditary reserve principle when the company makes up most of the estate to be bequeathed? Given that this is your life’s work, in which you’ve placed your hopes and your savings, it’s better to plan ahead, as this can be a delicate stage. It usually takes five years to properly plan for the transfer of a business. Once again, this subject must be discussed as a family in order to determine who will take over the running of the company and, above all, ensure all heirs are treated fairly despite any possible grudges.

To ensure the ongoing prosperity of the business, which often matters a great deal to entrepreneurs, many will choose to appoint one or more successors from within their family. Doing so has several advantages for each party. For you, it offers the guarantee that the culture and values of the company, as well as the family tradition, will be upheld. For your children, who already know your clients and the inner workings of the business, this allows them to become more involved and leave their own mark on a structure that they know implicitly.

Transferring your business to one or more family members is made all the more difficult by the fact that you will have to come to terms with gradually giving way to this new generation and seeing certain decisions called into question. Maintaining honesty and openness will be crucial throughout this part of the process. Bringing in the expertise of an independent, neutral third party can facilitate the passing of the baton. With their support, you can properly manage the tax and inheritance aspects arising from the transfer of a business.

If you’d like to find out more, take a look at our special features on succession and transferring a business.