Share this
By Taxperience on March 2024
You may have heard about the possibility of managing your wealth through a family fund. A family fund can be highly appealing for affluent families.
Here, we will delve into several possibilities of a common investment fund ('CIF'), also known as the family fund. Specifically, we will explore transferring real estate to the (grand)children through a family fund.
Firstly, we'll discuss the CIF in general, then we'll delve into the process of gifting real estate to the (grand)children through an CIF.
Common Investment Fund
A Common Investment Fund (CIF) is a pooled fund where participants combine their assets to invest collectively or have them invested. A CIF typically comprises a manager, a custodian, and at least two participants.
Below is an illustration of a CIF structure, with father, mother, and children as participants. In this example, father serves as the director of the foundation, which acts as the custodian and manager of the fund's assets.
.png?width=1406&height=664&name=Schema%20TAX%20(EN).png)
By structuring the underlying documents correctly, the CIF qualifies as a closed-end fund and thus as fiscally transparent. This essentially means that the assets of the CIF are fiscally attributed to the participants, who are required to include these assets in their income tax returns, typically under box 3 for investment assets.
There are several reasons why the family fund is appealing:
- Estate Planning: Wealth can be transferred to the next generations in a controlled manner.
- Retention of Control: Parents retain control over the assets through the governance of the foundations acting as custodian and manager.
- Involvement of Children: Children can gradually become involved in asset management and, if desired, can be included in the governance of the management foundation in the future.
- Consolidation of Assets: Assets such as securities or real estate portfolios can be kept together.
Gifting Real Estate to (Grand)Children through a Family Fund
One of the situations where the family fund can be utilized is in gifting real estate to (grand)children. Let's delve into this further.
To gift real estate through a family fund, the property must first be contributed to the CIF. In exchange for this contribution, participation certificates in the CIF are issued. In situations where the real estate already has two owners, no transfer tax is due upon this contribution, provided that the legal or economic ownership of the real estate remains unchanged during the contribution.
In cases where the real estate has only one owner at the time of contribution, a second participant must be found beforehand in order to form a fund. For example, the second beneficiary in the CIF could be the spouse under prenuptial agreement or an adult child. Regarding the 'transfer' of ownership of the real estate, considered as a gift, 10.4% transfer tax and 10 to 20% gift tax are indeed applicable. This essentially results in double taxation. However, in these cases, the so-called 'concurrency regulation' can be utilized, whereby the paid transfer tax is deducted from the gift tax owed.
Once the family fund is established, the economic ownership of the real estate can be gifted to the (grand)children by transferring participation certificates in the fund. For instance, if 10% of the participation certificates are gifted to the children, then the economic ownership of the real estate transfers to the children by 10%, granting them the right to 10% of the net rental income from the respective properties, as well as 10% of their value appreciation.
Regarding the gifting of the participation certificates, both transfer tax and gift tax are applicable. However, the previously mentioned concurrency regulation can be utilized in this case.
Example Calculation:
Father privately owns a real estate portfolio and intends to gift a portion of his real estate to his children. The value of the real estate portfolio is €2,000,000. The properties are contributed to the CIF, and 200 Participation Certificates are issued at €10,000 each.
Father then gifts 10 Participation Certificates to his children. The gift tax on this amounts to €10,000. However, in this case, gift tax is not due because transfer tax has already been paid on a higher amount, totaling €10,400 (10.4% on €100,000). As a result, the aforementioned concurrency regulation applies.
Therefore, no gift tax is due on the gift!
Conclusion
Rate Advantage
By transferring (part of) your wealth to your (grand)children now, a rate advantage of 10% is achieved. The initial rate of gift tax for gifts to children is indeed 10%. By annually gifting a portion of your wealth, 10% of future inheritance tax is saved. The above rates also apply in inheritance tax, meaning that assets that would inherit at 20% are gifted at 10%.
All your wealth that is already gifted to the children during your lifetime will no longer be part of your estate.
Supervision
Furthermore, the children can already start building their own wealth, which remains fully under your supervision.
Taxperience Family Business
Above, we briefly outlined the possibilities for gifting real estate to your (grand)children through a family fund. In addition to tax savings concerning inheritance and gift tax, you retain supervision over your wealth for a longer period, allowing your children to benefit from financial advantages in the meantime.
Taxperience Family Business comprises tax specialists and notaries with extensive experience in guiding wealth transfer to the (grand)children. If you have any questions regarding this matter, please feel free to contact one of our advisors. We are here to assist you.