Paper donation

Paper donation

 

You may have heard about it, but what exactly does a gift on paper mean? In this blog, we would like to tell you a little more about it.

What does a gift on paper mean?
Officially, it is a gift under acknowledgment of debt, where you donate an amount on paper and then borrow it directly back from the person to whom you are donating it. In other words, you acknowledge owing the gift. It is a form of gift that is often used to transfer assets from parents to children.

To settle a gift on paper properly, a number of conditions must be sufficient:

• Donations must be recorded by notarization.
• Annually, you must pay interest equal to 6% of the amount donated.

What can you donate at all?
Initially, the law already allows you to donate an annual or one-time amount to your children. Each year, this involves an amount of €6,035 per child, or a one-time amount of €28,947 if your child is between the ages of 18 and 40. For an expensive study you can even increase this amount to € 60,298. Plenty of opportunities you might say to transfer money tax-free to children. So what then is the now of an additional gift on paper?

Inheritance tax savings
Inheritance tax is often high on the lists of taxes that people feel most resistant to. After all, the assets of the person who is deceased have been accumulated after the person has already paid income and, in many cases, estate taxes their entire life. So why tax it again? It can indeed feel unfair, but fortunately a gift on paper offers the possibility of easing this pain. This is best explained with an example:

A husband and wife who are both now 70 and will die on the same day in 10 years. The estate involves a mortgage free home of €500,000 and a bank account balance of €250,000. The question now is what impact can a gift on paper to the 3 children have?

If we look at the total tax to be paid without a gift on paper, this amounts to € 29,260 per child. If a gift on paper had taken place, € 180,000 could have been transferred tax-free to the children. This is 10 years of 6% interest on a total claim of € 300,000. In addition, the gift on paper also reduces the estate of the parents, after all, they owe this amount to the children and they have already paid 10% on this at the time of the gift on paper. This provides an advantage because without the paper donation, this part of the estate would have been taxed at the higher rate of 20%. The total tax payable in this example amounts to € 17,819 per child. A difference of € 11,441 and thus in total € 34,000 less tax!

Planning is essential
Those who are a bit savvy about transferring their assets to their (grand) children can therefore save significant amounts of inheritance tax. For the gift on paper, however, a financial plan is essential. After all, if in the future you are no longer able to meet the interest payments, you may be faced with a higher assessment than you had initially assumed.

Also the new wealth tax rules in box 3 can have a detrimental effect on the gift on paper, every situation here is unique. A personal financial plan can provide the desired insights. If you would like to know more about this, please feel free to contact us. We will be happy to help you further.