It's never too early to start estate planning

Who will inherit and how much? Apart from the main questions that everyone asks about passing on their wealth, there are a number of factors to take into consideration and pitfalls to avoid, especially in an international context. Claude Medernach, Legal Counsel Family Office Services at Banque de Luxembourg, discusses these issues.

What are the main issues to consider in estate planning?

There are two key questions to think about when it comes to passing on your wealth. Who will inherit? And how much will they each get? In Luxembourg, these questions are partly answered in the main principles set out in the Luxembourg Civil Code, which determines the order of succession. The heirs are the children and surviving spouse, failing that the parents if they are still alive, and otherwise any brothers and sisters or nephews and nieces. From a tax point of view, in principle there is no inheritance tax to pay in Luxembourg for direct heirs, which means your surviving spouse or children. If there is no surviving spouse or children, and the estate passes to a brother, sister, nephews or even a third party, inheritance tax will apply and can in the worst case be as much as 48% of the estate. It is important to note that – within certain limits – it is possible to deviate from the rules set by the Civil Code, in particular by drafting a will, which may be a simple document handwritten by the testator (a holographic will) or a document formally registered with a notary (testamentary will).

How far can you deviate from the rules laid down by the Civil Code ?

For inheritance, Luxembourg law provides for a reserved portion and an available portion. The reserved portion is the value of the estate that must be distributed to the heirs in the order laid down by the Civil Code. The available portion is the part of the estate that can be transmitted according to the wishes of the testator. If there is one child, the reserved portion corresponds to half the value of the estate. If there are two children, it amounts to two thirds of the testator's assets. In other words, the testator can determine who gets the remaining third, bearing in mind that inheritance tax may apply to this part of the estate. If there are three or more children, the reserved portion corresponds to three-quarters of the value of the estate.

There is often an international dimension to the family and property situation of Luxembourg residents. What impact might this have on inheritance?

It is important to take the international dimension into account. The heirs may live outside Luxembourg. In many cases, part of the estate, such as a second home, might be located abroad. If your child lives in Paris, for example, you should be aware that he or she will have to pay inheritance tax on their share of the inheritance, as provided for under French tax law. The same applies to an heir living in Germany. If the property is located abroad, the law of the country of its location applies. Inheritance tax will therefore be payable on the value of the property depending on the country, region or canton (for Switzerland) where it is located. Not anticipating these aspects can lead to disappointment.

What advice would you give to people who want to plan their succession and avoid unpleasant surprises?

To anticipate these issues. It's never too early to start. When planning your succession, we also recommend involving all parties concerned to avoid family disputes. These might arise when, for example, the heirs discover unbalanced situations after the death of the testator. It is always preferable to discuss things together and establish a solution during your lifetime, especially if the situation is at all complex – for example if a family business is central to the succession.

What pitfalls can be avoided by careful planning, especially when a family business is involved?

If the estate includes a family business, the value of the business is a component of the overall estate and thus contributes to the reserved portion. This should be borne in mind. For example, the business cannot be transferred only to the heirs who have decided to participate in it, unless the private assets alongside the family business are so substantial that they can provide the reserved portion for the children not involved in the business. The estate concerns all the heirs. It is important to anticipate and plan for all these issues. This may involve drawing up a family governance charter or shareholders' agreement, which governs each person’s rights and duties (whether they are subsequently active or passive shareholders in the company) and establishes a set of rules to safeguard the business.