Succession planning is a term that is heard more and more. The term is also known as wealth planning or estate planning. Succession planning focuses on taking steps during life to transfer assets to next of kin. As the name estate planning suggests, investment in real estate plays a prominent role in this In many cases. This is why Momo Estates can give you the right answer to the question of what is the most effective form of estate planning.
What is succession planning?
If you do not take steps regarding the transfer of your assets during your lifetime, this will be determined by legal regulations (inheritance law). The steps a person takes to self-regulate this is called succession planning. Inheritance planning is chosen to:
- Protecting or favouring certain relatives
- The ability to bequeath all or part of the assets to people who are not legally considered heirs
- Relieving inheritance tax or inheritance tax that heirs have to pay
- Be able to provide next of kin with an inheritance (wealth transfer) before death
There are various options for succession planning. These may involve transferring assets, leaving a business, making a gift, ensuring burden-sharing or a gift of immovable property. This last point is discussed in more detail below. When we write about succession planning in the remainder of this article, we refer to the donation of immovable property.
Key considerations in succession planning with respect to property
Many investors face a dilemma as to what is the most interesting choice for them in terms of succession planning with regard to real estate. There are roughly two choices in this:
- First make an investment in real estate yourself and gift it to heirs or relatives at a later stage. In this example, we will assume for convenience that a construction is formed between parents and their children.
- First make a gift in cash as the basis of a split purchase in property. Under this construction, there is bare ownership of the property in the case of the children and usufruct of the parents (the original investors).
What is the most effective form of succession planning?
By analysing the above choices, a good picture can be formed of what the most effective form of succession planning will be. If the latter form is chosen, it means in practice that the parents will manage the property. In doing so, there is also the certainty that the children will automatically receive full ownership of the property upon the death of their parents. After all, usufruct is extinguished by the resulting situation. Because full ownership of the property will come to them in this way, they will have no obligation to pay inheritance tax.
If we look at the former situation, where the parents first purchase the property independently, it is not a given that they gift the property to the children. A different choice may have been made in this. However, if this is the case, the children will indeed have to pay inheritance tax. This is therefore a less favourable form of inheritance planning.
Application of legal rules on succession planning
The tax authorities look very critically at the correct application of the legal rules regarding inheritance planning. This involves a very specific valuation of usufruct in which a coefficient is applied. This coefficient is tailored to the age of the usufructuaries: the higher their age, the lower the value of the usufruct needs to be. In addition, the children must show that they finance their share of the property from their own funds or by means of donations. Of course, Momo Estates' experts can inform you personally about the conditions of this construction.
For the sake of completeness, it is worth mentioning that an inheritance planning construction is not reserved for parents and children but in this, for example, other family lines can also be followed. In addition, it is very worth mentioning that inheritance planning is very applicable when buying real estate in Germany. In this case too, the aforementioned construction can be chosen where. In both Belgium and Germany, no inheritance tax needs to be paid in that case.
Feel free to contact Momo Estates for personal advice on the application of succession planning in conjunction with real estate investment. We will be happy to help you further in this area.