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The Forbidden Art of Estate Planning
 
Estate planning used to be an art, but if you believe the tax authorities, it has become a dark art.

Estate planning is mostly assimilated with finding ways around the inheritance tax or the gift tax.  Avoiding tax should never be the first reason for planning your estate, and that will become even more true than in the past.

Whenever a new tax is introduced, someone somewhere will try and avoid it ... and there is nothing wrong with that. Tax avoidance is not tax evasion. Tax evasion is refusing to pay the tax when it is due.

Tax avoidance, on the contrary, is putting yourself in a situation where the tax is not due. We call that 'choosing the road of the lower taxation', and the Supreme Court has often repeated that it is allowed if only you accept all the consequences of that road.  When you drive to the south, you can avoid the French motorway tax by taking the 'routes nationales'. The scenery is better but it will take you much longer to get there : there are more traffic lights and you cannot drive more than 90.  You can legally avoid the high tax on company cars, the road tax and the excise duties on petrol, by taking the train and the metro. If you do not want to pay the tax that a metro ticket effectively is, you can take a bike. If you do not want to pay the bike tax ... we have not had a bike tax for a while, but you get the picture : it takes longer and you can get wet.

The taxman, however, does not like tax avoidance ; it messes up the government's budget. That is why, twenty years ago, he came up with a general anti-avoidance rule; that was going to stop all that tax avoidance nonsense.

Three years ago a Parliamentary Commission tried to find out why tax evasion cases worth billions of euros in taxes petered out after protracted proceedings in court. The tax inspectors told the Parliament that it did not work and that the courts stopped them from using it and, most importantly, it did not apply to private estate planning.

This year, Mr Di Rupo has given the taxman a new anti-avoidance rule ; will that change anything ?

To start with, you can still choose the road of the lower taxation, and if you do, you still have to accept all the consequences of that choice. However, the tax authorities can now stop you from abusing your right to choose the road of the lower taxation. The law calls that 'tax abuse' ; if it was not the intention of the tax law that you structured your affairs in a manner that allows you to pay less tax, the taxman can disregard the road of the lower taxation.  To put it simply : the taxman can tell you that he thinks you have been too clever by half just to save tax.

You then have to convince the taxman that you had other reasons to choose that road.  If you cannot convince him that the tax saving is just a happy coincidence, the taxman will make you pay the tax you thought you had so cleverly avoided.

That is new and we have not even started to see the extent of the grey area of what is acceptable tax abuse and what is not.

What is worse : neither does the taxman.

What is also new is that this rule will apply to estate planning starting 1 June.  Two weeks ago, the journalists at L'Echo and De Tijd had a field day. Nothing would be possible anymore. Forget about hand-to-hand donations (the famous 'don manuel', donations before a Dutch notary, etc.).

That is a gross exaggeration.

The hand to hand donation is the perfect solution for passing money, investments and movables. You must not go to a notary to make a hand to hand donation and no gift tax is due.  The only inconvenience is that you must hand over your belongings ; that is accepting all the conditions of the donation (you cannot give your cake and keep it for a rainy day).   It is not even tax avoidance : that is just estate planning that happens to be exempt of gift tax.   And if you live for another three years no inheritance is due. That is why you need some paperwork : to prove the date of the donation.

The donation before a Dutch notary is not different.  You cross the border to get a notarised deed so that the Belgian taxman cannot contest the date of the donation and the starting point of the three year period.

When you plan your estate, it is not forbidden to try and save on inheritance tax, but some of the techniques used in the past will become useless ; the taxman can look straight through them.  However, if you have other reasons that have nothing to do with tax, there is nothing he can do about it. A good adviser should always remind you that estate planning should never be motivated solely by tax reasons. It is more than that. Estate planning is also about making your assets last your lifetime, about providing for your spouse or partner and about helping children and grandchildren.

A popular techniques is to donate money to your children so that they can buy the bare ownership of a property while you buy the usufruit. Will that still be possible ?  If you donate the cash before a Belgian notary and pay 3 % gift tax, I do not see why not.  However, if the taxman thinks that this is abusive tax avoidance, you can still prove that you have other reasons. You want to protect yourself and your spouse and keep the usufruit : you can live in the property for the rest of your life or let it out and collect the rent if it becomes too big. Moreover, you may not want your children to have access to your money too early, etc ...

A technique that is as good as finished is a last minute change of your marriage contract. When one spouse is fatally ill, it was possible to change the marriage contract and decide that, whatever happens, the other spouse gets all the family assets. Put like that no inheritance tax was due ; that was an anomaly in the tax law, and it could work the wrong way if the healthy partner was hit by a bus. His estate inherited everything ; but if all went as foreseen, no inheritance tax was due.  That was obviously not the intention of the tax code, it is abusive tax avoidance and I cannot think of any reasons to do this except to save tax.

The new rule makes estate planning a bit more interesting but if you do not focus only on avoiding the tax, you should have nothing to worry about.

Marc Quaghebeur
14 June 2012




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