Inheritance issues and estate planning for families including remarriage and step children or even step grandchildren can trigger complex issues but the following story including successive lifetime gifts is a reminder that certain options are to be avoided.
Daniel gets his childhood holiday home for Christmas
Daniel always remembered his fantastic holidays as a child to the family holiday residence. Nowadays, he is still going there with his wife and children.
The property is shared between six members of the family and they recently decided to gift the property to Daniel shortly before Christmas. Daniel’s grandmother, Alice, is one of the co-owners along with her husband, Pierre, who is not Daniel’s grandfather as Alice remarried. Pierre is the only co-owner of the property who is not related by blood to Daniel.
Avoiding a hefty gift tax?
If Pierre were to gift his share of the property directly to Daniel, it would trigger a 60% inheritance tax. Therefore, Pierre was advised to carry out a gift to Alice who in turn would gift to Daniel to benefit subsequently from the more favourable tax environment between spouses and between individuals related by blood.
In effect, a gift between spouses can be made free of tax up to a value of €76,000 every 10 years and a gift from a grandparent to a grandchild can be made free of tax up to a value of €31,865. Above these thresholds, inheritance tax is then applied in brackets of 5% to 45%.
Daniel gets a taxing gift
Considering that this double gift was actually an indirect single gift carried out by Pierre to Daniel with the sole intention to avoid gift tax normally payable at the rate of 60%, the tax authorities requested additional tax and penalties claiming that the double gift was an abuse of process. A litigation procedure ensued and the tax authorities’ demand was deemed lawful as the double gift was considered a fraudulent process.
As a result, Daniel had to pay 60% gift tax calculated on the value of the gift to which was added an 80% penalty along with a penalty for late payment of 0.4% per month on the amount of tax due.
The story does confirm this, but it would not be surprising that the property had to be sold so taxes could be paid. The notaire advising and proceeding to such abuse of process could also be deemed liable for the loss incurred by Daniel.
It is possible that the double gift would have been considered lawful if the first gift had been kept by Alice for some time before gifting it on to Daniel.
Another option that could have been envisaged depending on the circumstances is a purchase of Pierre’s property share by Daniel.
In any case, it must be pointed out that it is always beneficial to seek independent legal advice to help you through the intricacies of estate planning and prevent potential pitfalls.