Do you want to save on gift tax and future inheritance tax? Then you can decide to donate your children on paper. How does this bestow on paper exactly and what are the rules?
It is much nicer to give with the warm hand instead of with the cold hand. There are also emotions on this subject and also read how you can protect yourself against unexpected situations.
How does it work on paper?
You agree with your children that you will pay an amount in the future. It is a form of deferred payment. Through a notarial document, you agree that you will make the money available after your death.
You may also agree on another time when you make the money available. In most cases this is after your death because your heirs may then be liable to inheritance tax.
Characteristic of this donation on paper is that you do not donate cash. You ensure that your children have a claim that is not due and payable to you and you pay interest annually on this debt to your children.
This interest is legally determined and amounts to 6%.
Why should I choose to donate on paper?
If you start transferring power in time, you will ultimately save a lot of tax. You can choose to donate the amount of the exemption annually or pay a one-off amount and donate tax on that at once. In this way you can then annually pay the interest payment of 6% without having to pay tax on it.
On the other hand, your child pays a capital gain tax on the amount that exceeds the exemption of € 30,000 per person. This amount is the exemption in 2018.
Giving benefits on paper
Some advantages at a glance to choose this order:
- By making a donation now you use the annual donation exemption and only pay later;
- You save on the inheritance tax because this debt is reduced to your legacy;
- The debt is deductible from your balance in box 3, as a result of which you will save capital yield tax;
- The power test for the AWBZ will be more favorable, as a result of which the monthly supplement will decrease;
You can influence the conditions of the gift yourself and in this way protect your assets from, for example, a divorce from your child.
Disadvantages on paper
There are also disadvantages to this construction:
- You are obliged to incur costs for a civil-law notary because of the donation deed;
- The interest of 6% must actually be paid, if there is a lot of time between your death and the donation you must also estimate and have this amount;
- Your child also has to pay taxes annually in box 3 and can prevent surcharges;
- Every year there is administration attached to this deed.
Facts about the debt recognition
It is necessary to pay a visit to the notary for this debt recognition. The notary fees are on average € 550 for a donation deed.
On paper, the gift counts as a deductible item only if you have paid the interest annually from the time of the paper donation. This interest of 6% must therefore actually be paid annually. When setting up this plan, also take into account the availability of money to make this annual interest payment. If you have not always paid the interest, you may still do so at once by applying interest on interest and no later than 180 days before your death.
If you do not have a box 3 power yourself, this will reduce the tax savings. After all, your child has to pay tax in box 3. In this way, there is a leak in terms of capacity.
If you donate (annually) to the donation exemption, donation tax is immediately due.
- For your child, the annual exemption is € 5,363 (2018);
- The rate of up to € 123,247 donation is 10%;
- The gift tax above € 123,248 is 20%.
A calculation example. Suppose you donate € 175,000 to your child on paper once in 2018, then you owe donation tax the following at once:
- Over € 175,000 minus € 123,247 and the exemption of € 5,363 you deduct € 9,278;
- You deduct 10% over € 123,247 and therefore € 12,324;
- In total, the donation tax is therefore € 21,602.
If you die within 180 days of the donation, the donation for the settlement of the estate will be disregarded. Then it is done as if no donation had taken place on paper. In this situation the advantage of saving on the inheritance tax then disappears.
Exclude your child’s partner
Earlier we wrote that you can design the gift in such a way that the partner of your child falls outside the donation. This goes with a so-called exclusion clause. With this provision you indicate that the donation is only intended for your child.
In case of a relationship break or divorce you prevent the donation from the distribution.
You can also set additional conditions regarding the moment of making the donation available and the minimum age that your child needs to reach to dispose of the money.
You can also install a right of withdrawal. For example, if your child unexpectedly passes away earlier than you.