Gift an investment portfolio while retaining the right to its income

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Anyone who invests does so in order to achieve a long-term return. “Long term” is, of course, open to interpretation. This is why it is quite possible that over the years you have built up an investment portfolio that you ultimately "no longer need" to enjoy the rest of your life in comfort. What’s more, with age sooner or later the question comes up: what will happen to my investments once I’m gone?

Unfortunately, Belgian law governing inheritance and gifts cannot be summarised in a couple of pages. This is why you need to start with the small print: whenever you are planning a transfer of your assets, always seek advice and assistance from a wealth planning expert or a notary who is familiar with your personal situation.

Situation 1: You do not arrange anything

If you have not arranged anything before your death, your legal heir(s) will pay inheritance tax on your securities portfolio. The tax is calculated on the total movable assets (cash, investments, jewellery, etc.) that a beneficiary receives, i.e. not on each component separately. The exact amount of inheritance tax due will depend on a number of factors. The region you lived in over the last five years prior to your death is important, as is the established value of the estate. All the regions apply progressive rates. This means the first bracket is taxed at a low rate, the next bracket at a higher rate, and so on. In addition, the (familial) relationship plays a role in determining how much inheritance tax each beneficiary has to pay. For direct descendants or ascendants (children, grandchildren, parents, grandparents), and married or legally cohabiting partners, movable property (such as an investment portfolio) is taxed at the lowest overall rates in the Flemish Region. The rates here are 3% for the lowest bracket and 27% for the highest bracket. In the Brussels-Capital Region and the Walloon Region the lowest rates are 3% and the highest is 30%. If the legal heir is not a married or legally cohabiting partner nor a direct descendent or ascendant, the rates are (much) higher.

Situation 2: You bequeath your investment portfolio in your will

If you make specific arrangements for your investment portfolio after you are no longer there, for example by means of a will, then the beneficiary will also pay inheritance tax on your securities portfolio. The principle and the rates are the same as described above (exceptions apply for charities – not covered here).

However, the major advantage of making a will is that you have much more flexibility to allocate your estate, so you can do something different to the "standard procedure". In addition, you can always revisit your decision and draw up a new will, which voids any earlier will.

A will allows you, for example, to favour one of your children or even someone who is not a legal heir (a friend, the woman next door, etc.). However, there are some restrictions that have to be observed. For example, if you have more than one child, you cannot simply leave everything to an "outsider" or to a single child; in that case, the disadvantaged children can claim their minimum share. If you leave something to a third party, they will also pay a higher inheritance tax: the rates can rise to 55% in the Flemish Region and up to 80% in the Brussels-Capital Region and Walloon Region.

It is clear, then, that a flexible instrument such as a will will not reduce inheritance tax (3% in the best case). This is precisely why you may want to consider gifting part or all of your investment portfolio during your lifetime. On the other hand, you may have built up that portfolio with a lot of discipline and dedication. You took the risks, so you may not want to simply give the portfolio away as a “gift”. Fortunately, there is a solution here: to gift an investment portfolio while reserving the usufruct.

Situation 3: you gift with retention of income

One way would be to simply gift your securities portfolio via a bank transfer, in this case without reserving the usufruct. To do this, you draw up registered letters and/or provide a document confirming the gift (a "pacte adjoint"). The great advantage is that no gift tax is due, nor will the recipients need to pay inheritance tax, provided you are still alive for at least 3 years (Flemish Region and Brussels-Capital Region) or 5 years (Walloon Region) following the date of the gift. If you do die within this so-called “waiting period”, the beneficiaries will then be liable for inheritance tax. Furthermore, if the relevant paperwork was not drawn up according to the rules of the game or has been lost, the beneficiaries may be targeted by the tax authorities. With a gift like this, you therefore take a certain risk. You cannot issue a gift while reserving the usufruct, and some types of investment are excluded (such as term deposit accounts and class 21 and class 23 savings insurance policies).

A notarised gift reserving the usufruct offers a number of benefits over an "ordinary" gift (bank gift), even though you do have to pay gift tax on it. In the case of a notarial gift, you only transfer the actual property. The usufruct remains with you – the donor – and does not transfer to the beneficiary until your death. Advantages for you:

> You retain control of the portfolio Suppose a security in the portfolio underperforms or is overvalued. Even if you have given away ownership, you can still sell these shares. Please note that you may only do this if it represents correct management of the portfolio and you either keep the funds generated as cash in the portfolio or use them to buy other securities. In other words, you may not sell something from the portfolio and then take the funds for yourself.

> You retain the income As the beneficiary, you retain the rights to the income from the portfolio, such as dividends on shares and/or coupons on bonds. Please note: you can only claim income from the portfolio; capital gains must generally be reinvested.

> You remain in control Imagine your child or the recipient falls in love and not only shares his or her heart, but also his or her wallet... That’s why you can have the notary deed state that the recipient may not transfer the property as long as you are alive. This can be done, for example, by stipulating that the portfolio may not be part of a community of property, nor be under any form of joint ownership.

Gifting an investment portfolio with reservation of the usufruct is a very flexible way of making a gift, while at the same time linking conditions and charges to the gift. You can go as far as you want and add extra terms and conditions (useful to know: you can also add some to an ordinary bank gift). Some examples:

> A conventional right of return in the event of the death of the beneficiary: if your child or other beneficiary dies before you, the investment portfolio will revert to you. > An additional financial charge: the income from dividends and coupons may vary from year to year. This is precisely why you can also provide for a (minimum) financial income. If the income falls below a certain percentage in any year, your child or another beneficiary must make up the deficit.

> Coverage of exceptional costs for you as donor, such as renting a serviced flat or medical care. > Are you gifting an investment portfolio jointly with a partner? In this case, it may also be useful to include a clause of agreed transfer of the usufruct in the deed. This sounds complicated, but what it means is that the surviving partner benefits from the usufruct of the entire securities portfolio after the death of the first partner, under the same terms, conditions and charges as set out in the deed of gift.

How much gift tax is payable?

If you gift your investment portfolio with reservation of the usufruct, you must go to a notary and the deed must be registered. In addition to the notary’s fee, there are the costs for the deed itself. There may also be additional costs if the notary has to carry out searches.

The gift tax between parents and children is usually 3% (in the Flemish Region and Brussels-Capital Region) or 3.3% (in the Walloon Region). For others, the gift tax increases to 7% in the Flemish Region and the Brussels-Capital Region and to 5.5% in the Walloon Region. Please note again: you cannot simply give everything to one child or to outsiders; in that case, the disadvantaged children may claim the part to which they are entitled after your death. Gift tax is calculated based on the value of full ownership of the portfolio. Once these gift taxes have been paid, inheritance tax will no longer be payable when the recipient becomes the full owner. Still not ready to think about gifting? At Keytrade Bank, you can easily put your money to work in the meantime

This article does not contain any investment advice or recommendation, nor a financial analysis. Nothing in this article may be construed as information with a contractual value of any sort whatsoever. This article is intended for information only and does not constitute in any way a commercialization of financial products. Keytrade Bank cannot be held liable for any decision made based on the information contained in this article, nor for its use by third parties. Every investment entails risks such as a possible loss of capital. Before investing in financial instruments, please inform yourself properly and read carefully the document "Overview of the principal characteristics and risks of financial instruments" that you can find in the Document centre

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