Arrange your 'donation on paper' before the end of the year

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The end of the year is approaching. Time to consider whether you want to enrich someone other than the tax authorities with your generosity. Through a gift. For example, a gift on paper, which allows you to retain control over the gifted amount, but the recipient can benefit from a gift tax exemption and later, a lower inheritance tax basis. What is a gift on paper, and what conditions must it meet to have the desired effect? And why does it have to be arranged by notarial deed before the end of the year?

Donation on paper

A "gift on paper" (sometimes also called a "gift in connection with death") is a special form of gift. A standard gift usually involves agreeing that the sum of money or a specific item will be given directly to the recipient (also called the "donee"). A gift on paper stipulates that the donor gives a sum to the donee, but this sum is only paid out after the donor's death. In other words, the donee can only claim this sum after the donor has died. Legally, this is a gift, but in practice, the donor is not yet "poorer." The gifted sum remains part of their estate; the donee receives nothing. Therefore, the gift exists only on paper for the time being! The idea behind this is that with a gift on paper, less inheritance tax has to be paid upon the donor's death, because the gift is then considered a debt of the donor's estate, and the inheritance is therefore smaller. However, this is not always true. This article discusses how to arrange a gift on paper and what the actual tax consequences are.

The gift on paper must be recorded in a notarial deed

The law requires that a gift that is only due upon the donor's death, and therefore only takes effect after the donor's death, must be recorded in a notarial deed. The gift must also be made in writing personally. This means that the gift cannot be made through a power of attorney. Therefore, you must personally visit a notary for a gift in writing; a gift in writing prepared by an accountant is invalid. If these requirements are not met, the gift will be invalid (also legally called "void") upon the donor's death. This means that the gift is legally assumed not to have been made; the donated sums are then no longer considered a debt of the inheritance; the gift amount is part of the inheritance assets. Therefore, inheritance tax must be paid.

What if the gift was due before death, but the donee fails to do so and still claims the gift upon the donor's death? In that case, the court has ruled that the requirement for a notarial deed does not apply. However, if circumstances show that the donor and donee did not intend for a gift to be due before death, then the requirement for a notarial deed applies without reservation.

Example

Parent M annually deposited a gift amount into his children's bank accounts. Shortly after each gift, the children transferred the amount back to M, labeling it "loan." A written loan agreement between M and the children stipulated that these loans were entered into for an indefinite period and could not be claimed by the children. Therefore, the court ruled in this case that the gifts were on paper. The circumstances—the short time between the gift and the loan, the indefinite term of the loan, and its non-claimability—show that M and the children did not intend for the gift amount to go to the children during M's lifetime. Because the gifts on paper were not recorded in a notarial deed, they were invalid. Therefore, upon M's death, these sums could not be deducted from his estate as a debt, and inheritance tax had to be paid on them.

The above example is taken from practice and it shows what can go wrong if you arrange it incorrectly.

Is gift tax or inheritance tax payable on a gift made on paper?

Gift tax is immediately due on a gift made on paper if the amount exceeds the annual gift tax exemption. However, inheritance tax may also be due on a gift made on paper! This is because the gift only takes effect after the donor's death. In that respect, a gift made on paper is similar to a legacy from a will: in both cases, the recipient receives a sum of money from the deceased, and the deceased enjoyed this until their death. The law then treats the gift on paper as if it were part of the donor's estate, and the recipient received the sum from that estate. However, paying inheritance tax on a gift made on paper can be avoided if the donor pays for this "enjoyment." How this works is explained below.

If the beneficiary does have to pay inheritance tax on the gift, he or she can fortunately deduct the previously paid gift tax from it.

Please note! A gift on paper not only affects gift and inheritance tax, but also income tax. The gifted amount is considered an asset of the beneficiary in Box 3 of the Dutch income tax return. Income tax must therefore be paid on this amount if all assets combined exceed the tax-free allowance. Also, keep in mind that assets in Box 3 can affect personal contributions, allowances, student grants, etc.

No inheritance tax if the donor pays interest for the enjoyment

No inheritance tax is due on a gift on paper if the donor who "borrows back" the money pays for the enjoyment of the sum. This can be done by paying interest on the "loan." The law stipulates precisely how much must be paid before enjoyment can no longer be considered complete: at least 6% interest per year on the donated, unpaid amount. The donor must actually pay this interest and be able to prove it, for example, with bank statements. If the donor does not pay the interest immediately but adds it to the "loan," it must be added to the gifted amount, and the donor is also liable for 6% interest per year on this amount. The same applies if the donor is late in paying the interest.

Note! 6% interest per year is a strict, legally mandated limit. At 5.99% interest per year, inheritance tax must be paid on the entire "borrowed" amount, because "a little pleasure is still pleasure"!

The beneficiary is also not liable for inheritance tax if the donor pays the entire gift, including all interest, to the beneficiary more than 180 days before their death. In that case, this is considered a normal gift and no longer an inheritance.
Actually paying out the gift is therefore a way to end the enjoyment.

A different interest rate applies to paper donations made before 2010

The 6% interest rate was introduced by law on January 1, 2010. Previously, a "business interest rate" was sufficient. This is an interest rate that approximates the market rate, and for that reason, the business interest rate is often lower than 6% per year. This old regulation still applies to gifts on paper made before January 1, 2010. As with the current regulation, the (lower) business interest rate must actually be paid by the donor.

Summary and tip

A gift on paper records a gift to the beneficiary, which is only paid out after the donor's death. Therefore, the beneficiary can only request payment of the gift after the donor's death.
This legally constitutes a gift, but in practice, the donor can continue to enjoy the proceeds until their death, while the beneficiary has not yet received anything. For this reason, there are a number of special considerations regarding gifting on paper.

First, this donation must be recorded in a notarial deed and made personally; making the donation by proxy is not possible.

Secondly, to prevent the beneficiary from having to pay inheritance tax on the gift upon the donor's death, the donor must pay interest of 6% per year (or a (lower) business interest rate if the gift was made before January 1, 2010) on the gifted amount. In this way, they no longer have the benefit of the gift. The donor must actually pay the interest and be able to prove that
he has paid this. If the donor fails to pay the interest or pays it too late, then 6% interest per year is also due on the unpaid interest.

A gift on paper can be tax-efficient, as it can reduce the inheritance (and therefore the inheritance tax). However, for this tax trick to be effective, a gift on paper must be structured correctly. For example, the gift must be recorded in a notarial deed, and you, as the donor, must appear in person before the notary. In addition, 6% annual interest must actually be paid to the beneficiary.

Would you like more advice on this topic and still benefit from the exemptions that apply this year? For information about gifting, please also visit " How does gifting work, gift tax, and exemptions ?" And come visit us or give us a call. An initial (phone) consultation is free. To schedule an appointment for an in-office meeting or a video call, please call +31 (0)10 44 53 777. We look forward to seeing you.

This article is taken from 'Met Recht Geregeld' (www.metrechtgeregeld.nl), a product of FBN Juristen.

This article should not be considered legal advice. FBN Lawyers and MAES Civil-Law Notaries take the utmost care in the content of these articles, but accept no liability for any incompleteness or inaccuracy of an article, nor for any consequences thereof.