Suppose you have one nephew, and you want to leave your nephew some €500,000 of movable assets. He will have to pay €305,000 of inheritance tax on this bequest, and will be left with only €195,000 net. The rates in Flanders for bequests to nephews and nieces are 45% on the first €75,000, 55% on all amounts between €75,001 and €125,000 and 65% on any portion above €125,000. In other words, your nephew will pay 61% inheritance tax on this bequest!
2. Solution: Include a charity in your will
The mechanism known as the "dual legacy" basically consists of including a charity in your will and leaving this charity a specified portion of your estate. For the charity, this bequest comes with a catch: the charity has to pay your heirs’ inheritance tax. In our example, the charity will therefore pay the inheritance tax which, in principle, would be payable by your nephew.
Imagine that, like us, you want to support Arnoud Raskin’s Mobile School project. You can specify in your will that out of the total movable assets of €500,000, €250,000 should go to Mobile School. That charity would then have to pay your nephew’s inheritance tax as well as its own tax on this bequest, and the remainder of the bequest can be freely used for its projects.
3. How would this dual legacy situation be taxed?
In our example, the nephew’s inheritance tax would be paid by Mobile School. Your nephew would therefore receive the net amount of his bequest. Mobile School would have to pay 8.5% on the full bequest of €250,000. Secondly, Mobile School would also have to take care of the inheritance tax on the nephew’s bequest (also €250,000).
Mobile School’s tax (8.5%) - €21,250
Nephew’s inheritance tax - €142,500
We can thus see that Mobile School is left with €86,250 from this bequest. On the other hand, the nephew receives a net bequest of €250,000. In other words, he is left with €55,000 more than if there had been no dual legacy.
The reason for this is that the charity paid the nephew’s inheritance tax; the mechanism does not create an additional bequest. This does not apply to other taxes that may be imposed; it is thus an exception.
4. Does it also work for heirs other than nephew or nieces?
The benefit is greatest for bequests to nephews, nieces and third parties, because these are taxed in the highest bracket (up to 65% in Flanders). However, it is possible to apply the dual legacy mechanism in other situations. It could also be advantageous for bequests to siblings and even to children. It depends on the size and composition of your estate and the number of children.
5. What should you watch out for?
You have to write a will in which you bequeath a portion of your estate to a charity on the condition that the charity pays the inheritance tax of one or more heirs. It is preferable to indicate a monetary amount, rather than making a specific bequest.
Since you don’t know exactly how your estate will look at the time of your death, it is also recommended that you specify a percentage of your estate to be given to the charity, rather than a fixed amount.
In any case, the aim is to ensure that the charity is left with enough of the bequest to avoid the dual legacy being perceived as a means of tax avoidance, with no intention of leaving anything to the charity.
We can help you calculate how much of your estate you should allocate to the charity.
By including a charity in your will using the dual legacy mechanism, you can give a portion of your estate to a charity that’s close to your heart, and at the same time your heirs will be able to keep more of their share of the inheritance. The advantage of the dual legacy mechanism is greatest when used for heirs subject to a high tax rate (nephews, nieces or other third parties). However, it’s also possible to apply the mechanism for bequests to siblings and even your children.
Authors: Jan Devos and Bert Lutin