On September 18, the Flemish Government approved a reform whereby the duo-legacy can no longer be used for tax planning. As a compensation, charities will be able to get rid of the inheritance and gift tax. For a distant relative or friend, the "friends legacy" is launched.
Duoleate - what?
Although the inheritance tax for a distant relative (read: other than partner, (grand)child, or parent, e.g., a cousin) or nonrelative (read: friend) was reduced in 2018, these heirs still pay a hefty 25 to 55 percent in inheritance tax on their inheritance today.
In order to alleviate this heavy burden, use is sometimes made of the technique known as "(reversed) duo-legacy". With this technique, you stipulate in your will that part of your inheritance will go to a charity (e.g. a NPO), and part to a cousin or friend, on condition that the charity pays the inheritance tax of the cousin/friend. Since the inheritance that accrues to the NPO is taxed at the lower rate of 8.5% (relative to the much higher rates applicable to "others"), there will be a large tax savings. The friend/cousin will have more net income than when he/she would have inherited without duo-legacy and the charity will receive additional income, thus a plus for both parties.
According to the government, the duo-legacy is currently too often used as a purely fiscal instrument, whereby the altruistic approach is pushed too far into the background. For this reason, Minister Matthias Diependaele proposed to adjust the fiscal treatment of the duolegat.
The figure of the duo-legacy as such will continue to exist but it will no longer be useful to realize a tax saving on behalf of a distant relative or friend.
And what's in return?
In order to avoid a reduction of income from gifts or bequests, charities will no longer have to pay tax on what they receive by way of donation or inheritance (as opposed to the current 8.5% inheritance tax and 5.5% gift tax). In this way, the altruistic element would be restored.
For the distant relative or close friend, on the other hand, the "friends legacy" is created. By means of an authentic will, you can bequeath up to 15,000 euros to one person or several people together, to which a rate of 3% will be applied (compared to the current 25%) in the form of a tax reduction. In concrete terms, this will amount to a tax saving of up to EUR 3,300.
Entry into force?
The new regulation will apply to deaths as of 01/07/2021. Thus, the effective date will not be linked to the date you made the will, but it will be linked to the date of death.
If you have already made a will with dual legacies in the past with a view to saving taxes for a family member or friend, then be sure to contact us to review it. As of next summer, the will will no longer produce the desired result and may even be rejected by the charity.