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print article250-E Death & Taxes in the Netherlands

Taxes

There are two things that are certain in life: Death & Taxes. After experiencing the first, it was time to look into the second. Without providing the (personal) details, we’ll take a look at the the inheritance and associated estate taxes (erfbelasting).

For this case let’s assume the following:

Just to be clear, the dog is screwed. It’s not going to get anything (unless it was specifically mentioned a will).

Inheritance Tax and Deductions

If you visit the site of the Dutch tax department for estate tax/inheritance tax and associated deductions, you will find the following overviews (references included in captions).

Inheritance ValuePartner
Child, stepchild, disabled child
Grandchildren other decedentsOther relatives/persons
(e.g. brother/ sister/ parent)
€ 0 – € 126.72310%18%30%
€ 126.724 and more20%36%40%
Tax rates and brackets
You areTaxes exempt for following amounts
Spouse, registered partner, financial partner€ 661.328
Child (by marriage, adopted or birth)€ 20.946
Grandchild€ 20.946
Great grandchild€ 2.208
Disabled child€ 62.830
(conditions apply)
Parent(s)€ 49.603
Other (brother, sister, friend, etc.)€ 2.208
Tax exemptions for inheritance tax
Death & Taxes: light at the end?
Death & Taxes: light at the end?

Inheritance Tax without a Will

In case people have no will, the “Wettelijke verdeling” will take effect. This is the division of the inheritance as described by law in the Netherlands. This division of the inheritance is actually pretty simple.

The remaining parent already owns 50% of the total wealth of the family. The other 50% (the part of the parent that passed away), is divided into 3 equal portions. In case of a €600.000 total wealth, the remaining parent maintains it’s rightful 50% (€300.000), but also inherits 16.667% (€100.000). Each kid also inherits 16.667% (€100.000).

Based on the above, the kids will be required to pay inheritance tax (10%) on €100.000 – €20.946 = €79.054 * 10% = €7.905,40.

However, in reality it’s actually the remaining parent that has to pay this inheritance tax. Why? As the “longest living” parent will get full control over the inheritance (“vruchtgebruik”) and is required to pay the inheritance tax on behalf of any children. The children will not have access to these funds until their final parents passes away. But because of this, they will also not be required to pay any wealth (box 3) tax on this inheritance either. That being said, the longest living parent will thus be required to pay either income (box 1) or wealth tax (subject to the distribution of wealth/assets).

Interest?

It now get’s more complicated. The fact that the remaining parent is entitled to use the entire inheritance and has full control over it, results in “less” for the children. Why? Legally fixed interest (“rekenrente”), which is 6% to be exact (I assume here that no interest rate has been defined, which is possible!)

The inheritance is corrected using a factor, which depends on the age of the remaining parent (see this table). If say the remaining parent of the above noted example is 76, it means the inheritance for the kids is corrected (as well as for the remaining parent) with a factor 5.

The corrected inheritance is €100.000 – (€100.000 * 5 * 6%) = €70.000 for each kid. A total of €70.000-€20.946 = €49.054 * 10% = €4.905,40 is to be paid by the remaining parent in inheritance taxes. The remaining parent will now inherit (for tax purposes) €300.000 + €100.000 + €30.000 * 2 = €460.000 (which is all exempt from taxation, see above thresholds).

When the longest living parent would eventually pass away too, say 10 years later (and the total wealth and tax rates would remain unchanged). The inheritance for the two kids will be €400.000 (as the initially received inheritance of €100.000 is still exempt from taxation). Each kid will this get €200.000 before taxes and (€126.723 *10% + €52.331 * 20% = €23.138,50) €176.861,50 after taxes.

More interest examples are shown here (in Dutch).

Death & Taxes: the Will
Death & Taxes: the Will

Why would you make a Will

There are many reasons you would make a will. Some include (you can make this list very long if you want!):

  • Clearly defining your heirs;
  • Define the split in the inheritance (including definition of any charitable donations);
  • Defining who will execute the will;
  • Who is in charge of your funeral arrangement;
  • Who will be the legal guardian of your kid(s); and,
  • Indicate ways to reduce taxes 🙂

Obviously, that last part is what you are here for, right? It’s important for your legacy how you arrange everything around your death & taxes.

Interest Clause

One of the tools to limit your inheritance taxes is the “interest clause”. It roughly does the opposite to what happens with the “wettelijke verdeling” and the corrections for “vruchtgebruik” or “use” of the inheritance/wealth by the remaining parent in the above noted scenario without a will.

Assuming the “wettelijke verdeling” for the division of the inheritance stays (so no “opvullegaat” is being used). The kids would inherit €100.000 each. In this case no “vruchtgebruik”is used, so no shift for the inheritance tax from kids to parent happens. The remaining parent will have to pay the full inheritance tax (10%) on €100.000 – €20.946 = €79.054 * 10% = €7.905,40 for both kids. So initially you pay more.

In the example we assumed that the remaining parent would live for another 10 years and the wealth and tax rates stay the same. What happens now is that the €100.000 each kid received will “grow” with 6% per year under this interest clause (compounded!). After 10 years the “debt” (or “vordering”) the remaining parent has to both kids will be €179.084.77. Now the total inheritance is only €600.000 – €179.084,77*2 = €241.830,46. Each kid will thus inherit €120.915,23. Taxes will be €9.996,92 per child.

Comparison

In the first case without a will, the total tax burden was €4.905,40 + €23.138,50 = €28.043,90 per child. In the second case with a will, the total tax burden was €7.905,40 + €9.996,92 = €17.902,32 per child. A difference of €10.141,58! That’s a ton of money.

Considering a will will cost you anything between €350 and €1.000 per person (depending on how complicated your situation is and whether you go online or in person to a notary), it’s potentially money well spent!

Notes

Now, this is only one example and simplifies the situation. If both parents would die quite shortly after, the benefit of the interest clause will be limited (if not even worse than the situation without a will). If there is a big age difference between parents, and they die say 30 years from each other, it can be very beneficial. In such a case it could be that no taxes are owed once the longest living parent passes away. It all depends on your personal situation, your wealth, health and preferences.

Problem is that you don’t know what happens. Having a good will, can give you maximum flexibility and allows you to use tools to limit taxes. An online will might not be the smartest thing to do, especially for people aspiring to FIRE (inheritances can be substantial in such cases). I would hardly recommend you spend a bit of time and money talking to a specialist and notary. It could save your family and heirs a lot of money in the long run. Not to even mention any major issues that could have been prevented with a good will.

We ourselves are about to (finally) complete ours in the coming weeks. Let’s hope we can get some grip on our Death & Taxes.

 

Date Inserted: 08 July 2020
Last Updated: 08 July 2020
 
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