Abolishing the duo-legacy in Flanders

As from 1 July 2021, the Flemish Government abolished the duo-legacy. In case you modified your will in the past to organize such duo-legacy, it might be a good idea to revise your will and look for possible alternatives.

Donation at the tax authorities’ expenses

A duo legacy actually means that you make two legacies. One to a not-for-profit organization and one to your heirs. The legacy to the not-for-profit organization is subject to inheritance taxes at a reduced rate (in Flanders 8,5%). The legacy to the beneficiaries (relatives or third parties) is subject to the ‘standard’ rates, depending on the degree of kinship and the amount. In Flanders these rates can amount to 55%, in Wallonia and Brussels even up to 80%.

But via a duo-legacy you can save quite some taxes. How? By making a legacy to the not-for-profit organization subject to the condition that this organisation will pay the inheritance tax on the other legacy.

Example
Imagine that your inheritance consists of a house of 250.000€ and a bank account with 200.000€. You leave everything to your brother. In Flanders, your brother will have to pay 227.000€ inheritance tax on this inheritance. Consequently, your brother received net 223.000€.

When you donate the 200.000€ bank account to a not-for-profit organisation, with the assignment to pay the inheritance taxes on the part your brother will inherit, the bill will look as follows:

the not-for-profit organisation receives 200.000€, minus the own inheritance tax (17.000€) and minus the brother’s inheritance tax on the building (117.000€). The not-for-profit organisation consequently receives net 66.000€.

your brother receives 250.000€, which is more than he would receive when he would have obtained the total inheritance.

It goes without saying that in case the not-for-profit organisation would have to pay more taxes than it would receive, it will reject the legacy.

Abolishment of the duo-legacy in Flanders

‘Abolishment’ is maybe exaggerated, you can still make a duo-legacy, but the Flemish Government deleted its tax advantage. As from 1 July, the amount of inheritance taxes to be paid by the not-for-profit organisation for the other beneficiaries, is taken into consideration to calculate the taxable base in the hands of the relatives or third parties. At the end the other beneficiary does not obtain any advantage with a duo-legacy. The following example was given in Parliament.

Example
The nephew of the deceased receives a legacy of 280.000€ through a duo-legacy. A not-for-profit organisation receives a legacy of 220.000€ with the assignment to pay for the nephew’s inheritance tax. On the legacy of 280.000€, 139.500€ inheritance tax is due. The marginal tax rate on this legacy is 55%.

Under the previous regulation, the nephew would obtain 280.000€. The 139.500€ inheritance tax is to be paid by the not-for-profit organisation.

Under the new regulation, the taxable base in the hands of the nephew is increased with the lowest of the following amounts:

310.000€: this is the gross amount of inheritance tax, 139.500€/(1-0,55).

the amount of the legacy to the not-for-profit organisation, in this example 220.000€.

In other words, the nephew’s inheritance total taxable amount is 500.000€, being the total value of the inheritance.

The duo-legacy in the will still foresees that the not-for-profit organisation should pay the nephew’s inheritance tax, but this is no longer 139.500€, but 260.500€. Consequently, the not-for-profit organisation will have to pay more than it receives, so it will reject the legacy.

What with legacies for good causes?

The duo-legacy was an important source of income for many not-for-profit organisations. Since the advantage is taken away, there is a chance that such organisations will no longer receive these legacies. In order to avoid that, donations and legacies to good causes in the Flemish region are as from 1 July exempt from stamp and inheritance tax.

This exemption does not apply to private foundations, even when they have an altruistic goal. The previous rates of 5,5% stamp duty and 8,5% inheritance duty remains applicable to such foundations.

Where you live

An element which should be taken into consideration is that the abolishing of the duo-legacy only applies to the Flemish Region. In the two others regions, this technique is still possible. Therefore it is important to know which regulation applies. This is not subject to the place where you will was made or where you lived at that time. It is determined based on your residence. In case you moved during the last five years before your decease, the region where the testator has lived the longest time during that five years is competent.

What is written in your will

You can only organise a legacy through your will. In case you previously planned for a duo-legacy ‘old style’, should better review your will. The abolishment of the duo-legacy in Flanders has been on the table for quite some time, so possibly your will is already adapted. But when this is not the case, you do not only risk that the not-for-profit organisation will reject the legacy, but also that a large part of your inheritance goes to the tax authorities.