09 May 2024

The residual bequest and residual donation: plan your succession for future generations

by Simon Boon and Carolien Christiaens

A classic technique for organising your family's assets with an eye on future generations is a will with a residuary bequest or fideï-commis de residuo. This will provides protection and flexibility, both on a civil and fiscal level.

First and second beneficiaries

The testator provides a bequest in which certain assets go to a first beneficiary ('the encumbered') and stipulates that the residual value of these assets goes to a second beneficiary ('the expectant') at the time of death of the first beneficiary. The first beneficiary may, in principle, freely dispose of the assets and also use them up, although the testator can impose certain restrictions and conditions. It is often stipulated that the encumbered may only dispose of the assets for valuable consideration (e.g., selling) and may not give them away.

On a civil level, the following occurs: upon the death of the encumbered, the remaining assets first fictitiously return to the estate of the testator and then are allocated to the expectant. This also translates to the fiscal aspect. The expectant will be subject to inheritance tax at the time he acquires the residue, albeit at the inheritance tax rates that apply between the testator and the expectant.

Example: a single parent with a disabled child

Let's explain this further with a practical example. Stefaan is a single father with two daughters, Hannah and Sarah. Sarah has a physical and mental disability, resulting in a lower life expectancy than her sister and she will never be able to have children. In such family situations, a residual bequest is often provided to manage the succession. Stefaan provides in his will a general bequest 50/50 to each of his daughters and, in addition, a fideicommissum de residuo on Sarah's inheritance share in favor of Hannah. When Sarah dies, the remaining part of her bequest goes to Hannah. The inheritance tax rates to which Hannah is subject at that time are those in direct line (between Stefaan and Hannah) and not those in collateral line (between Sarah and Hannah). This is fiscally advantageous for Hannah, as the highest inheritance tax rate in collateral line is 55% for amounts above €75,000, compared to 27% inheritance tax in direct line for amounts above €250,000.

Example: a couple without children

Couples without children also often provide a residual bequest, as they want to protect each other as partners as much as possible by leaving the entire estate to each other. But what happens to the remaining part of the estate of the first deceased partner if the other partner also dies? In most cases, one's own family is preferred over the in-laws. However, if no fideicommissum de residuo is provided, the in-laws will still acquire the estate of the first deceased partner. In this example, the provision is for personal-family reasons and less for tax considerations.

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Last will

Residual donation

You can also use fideicommissum de residuo during your lifetime, namely in the form of a residual donation. The principle is almost identical to that of the residual bequest. We will explain the mechanism again through a concrete example.

A grandparent donates a securities portfolio to his child ('the encumbered') under the resolutive condition of the encumbered's death and not having used up the donated assets. In addition, the grandparent makes a donation to his grandchild ('the expectant') under the suspensive condition of the encumbered's death (the parent of the grandchild) and not having used up the donated assets by the encumbered. The grandparent can thus ensure that his child-in-law (the partner of his child) cannot claim the assets. Upon the death of his child, these donated assets immediately go to the grandchildren and remain within the same bloodline. Even with a residual donation, conditions and restrictions can be included in the donation deed through certain modalities. The principle remains that one may freely dispose (at least for valuable consideration) of the donated assets.

The residual donation must be done through a notarial deed. You pay gift tax at the time of the donation and again when the fideicommissum de residuo takes effect. The gift tax will then be levied on the value of the residue. Therefore, this technique can be fiscally interesting, especially for movable assets. The grandchild in our above example will avoid the higher inheritance tax on the encumbered assets and only have to pay the gift tax. The gift tax in direct line is a flat rate of 3%. For immovable assets, a residual donation is also possible in principle but fiscally less interesting given the higher rates.

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