Estate planning: making preparations for when you’re gone

Things are easier when you’re familiar with your financial situation and the legal rules.

We often forget about longer-term issues amidst the hustle and bustle of everyday life. And that’s totally normal! But there are some issues that we should be make time for, and one of those is estate planning. After all, it’s about making provisions for your loved ones.

Of course, no one likes to think about their own death, but if you don’t settle your estate, there’s the danger of arguments over inheritance, your partner risks getting into financial difficulties, and your loved ones will not be taken care of as you would have liked. This means that especially when taking key life decisions, you can’t ignore the issue of inheritance. Your assets will grow, your relationship with your partner and children will change – these are all aspects that should be taken into account. Any potential tax issues should also be considered, in order to be best prepared from a tax perspective in your estate planning.

The matrimonial regime is key

We only talk of an estate once someone has passed away. In principle, this is made up of your assets minus all liabilities. However, the actual size of the estate depends on your marital status. If you are married, your actual estate will depend on your matrimonial regime. There are three options here: the statutory property regime, the separation of property regime, and the universal community of property regime.

If there is no will, the estate is divided up between the closest relatives.

If there is no will, the estate is divided up between the closest relatives. Civil law determines who inherits, and the share of the estate inherited by each legal heir. As is the case in many other countries, Luxembourg law stipulates a statutory share that prevents children being fully disinherited, and defines the minimum share of an estate that children must receive after the death of their parents. An only child must receive at least 50% of the estate, two children at least 67%, and three or more children at least 75%.

In order to prepare properly for the transfer of your estate, you should establish a wealth statement as early of possible, and update it regularly. Drawing up a wealth statement requires a precise inventory, so it’s advisable to set up a file with all the key documents: marriage certificate, divorce certificate, family records, proof of ownership and agreements on joint ownership, proof of assets and liabilities, information on the main official contact persons in the event of death, etc.

A wealth statement can be created on the basis of all these documents, where necessary, with the help of a specialised bank adviser. This will include all your assets (financial, real estate and commercial assets, etc.) and liabilities, and analyses potential changes in your wealth.

Having a clear overview means that you can focus on optimising your personal situation.

Having a clear overview means that you can focus on optimising your personal situation. Estate planning includes two options of particular interest: gifts and life insurance.

Various means of protection

As well as providing protection for family members in the event of an accident or death, life insurance and death cover are also interesting instruments from a tax perspective, as you can use them to save money for retirement or build up capital to transfer to a beneficiary (this is particularly attractive for people who are not family members). Not only are the premiums paid tax deductible, the capital paid out upon maturity also has the advantage of being neutral from a tax perspective if the policyholder is also the beneficiary. It’s worth noting that tax deductions are subject to clear conditions and may change with changes in legislation.

Gifts refer to the transfer of ownership of one or several of your assets to individuals or entities during your lifetime. Although, in theory, such gifts must be notarised in Luxembourg, legislation allows certain gifts to be made without written certification. In practice, numerous gifts of valuables, cash, securities portfolios, etc. are made privately.

With regards to costs, in addition to notarial costs, registration fees (of between 1.8% and 14.4%) apply depending on the family relationship between donor and recipient. Certain special situations, such as gifts to foundations, for university bursaries and public educational institutions, are exempt from registration fees. In principle, real estate gifts are subject to transfer fees of 1% of the market value of the real estate, together with a surcharge payable to the local council in the city of Luxembourg of 50% of the transfer fees due. There is a 50% reduction in registration fees on gifts that are made as part of a marriage agreement or in anticipation of a future marriage.

Getting it in writing is paramount

The most reliable format for determining who will inherit your estate is still a will. This is a document governing the transfer of your assets to selected individuals or entities. However, there are certain legal restrictions, particularly as regards the legal heirs. Although a notarised will is not binding, it is the most reliable format for determining who will inherit your estate, as it is not contestable. Depending on your family status, and especially if you have a registered civil partnership, this document is particularly important in order to safeguard your partner’s share of the inheritance.