Transferring Real Estate Wealth: Plan Ahead Rather Than React

For more than ten years, I have been supporting CapitalatWork clients on a daily basis in structuring their wealth. At CapitalatWork, our core business is wealth management. However, in our approach, wealth planning is never limited to the financial assets entrusted to us. It encompasses the client’s entire wealth, including real estate assets, whether held directly or through a structure such as an SCI or an SA.

This is particularly relevant in Luxembourg, where many of our clients have diversified their investments between financial portfolios and real estate.

In this context, year after year, we see that the transfer of real estate wealth is not always planned sufficiently in advance, and how much of a difference early planning can make, both from a family and a tax perspective.

When Should You Plan the Transfer of Your Real Estate Wealth?

The question of transferring real estate wealth never arises at a predetermined point in time. While age can sometimes be a trigger, it is more often changes in family circumstances that prompt people to reconsider their wealth strategy: divorce, a blended family, children leaving home or preparations for retirement.

These events frequently lead parents to reflect on what their children actually want. The younger generation does not always have the same relationship with real estate as their parents.

While parents may see property as a tangible, long-term asset, their children may focus more on the constraints associated with managing it, particularly when they live far away from the properties concerned. Today, many favour financial flexibility and prefer to have access to liquidity to finance an entrepreneurial project, purchase their main residence or invest according to their own objectives.

International mobility is also becoming an increasingly important consideration.

When a child settles abroad, the civil and tax consequences of a transfer can change significantly. Some countries tax gifts or inheritances according to the beneficiary’s place of residence. In such circumstances, a gift that appeared appropriate a few years earlier may lose some of its appeal or, conversely, become a relevant tool for optimising the overall tax cost of transferring wealth.

Far beyond considerations of age alone, wealth transfer should therefore be approached holistically, taking into account the children’s life plans, where they live and the international tax implications, in order to protect the family’s interests over the long term.

Real Estate Wealth Transfer: Key Points to Consider

Inherited Co-ownership: A Potential Source of Deadlock

In the absence of planning, the transfer of assets upon death follows the statutory rules of succession. In the case of real estate, this generally results in joint ownership between the heirs, potentially combined with a split of ownership rights in favour of the surviving spouse, who retains the usufruct of the property.

Joint ownership presents a structural challenge: any significant management decision, such as a sale, letting or major works, requires the unanimous agreement of the heirs.

As soon as interests diverge, the situation can become deadlocked, resulting in family tensions and, ultimately, only two real ways forward: an amicable agreement or court proceedings to divide the property, a lengthy and costly process that is often damaging to family relationships. This is precisely the type of situation that advance planning can help to avoid.

Gifting Real Estate: How Can You Retain Control?

When a client chooses to gift real estate, they generally wish to retain the income generated by the property. Reserving the usufruct addresses this need: it allows the donor to continue receiving rental income and to retain a degree of control over the property, as any sale will require their consent.

However, it should be borne in mind that, in the case of directly held property, management decisions remain subject to the joint agreement of the bare owner and the usufructuary.

In certain circumstances, this constraint can work against the donor. I recall the case of a client who gifted the bare ownership of her own home to her son.

Following health problems, she wanted to move but found herself unable to sell the property because her son would not agree.

Gifting Real Estate: What Value Is Taken into Account upon Death?

This is a technical point, but one with genuine implications for wealth planning: previous gifts are brought back into account for the purposes of the estate in order to determine each heir’s share and ensure an equitable distribution. In the case of real estate, the valuation is made as at the date of death rather than the date of the gift.

Two children who received properties of equivalent value twenty years earlier may therefore find themselves in a highly unequal position if one property has appreciated considerably more than the other.

Although unintended at the outset, this imbalance can become a source of conflict if it has not been anticipated. Specific planning techniques exist to prevent this type of situation.

Which Tools Can Help Structure a Real Estate Wealth Transfer?

Given the diversity of family situations and wealth-planning objectives, several legal mechanisms can be used to organise the transfer of real estate wealth more effectively and reduce the risks associated with joint ownership.

A specific legacy, made through a will, can be used to allocate a particular property to one or more beneficiaries.

This solution provides a degree of flexibility in dividing the estate while respecting the heirs’ protected interests.

It can be a straightforward solution where the objective is to avoid a property being jointly owned by several children.

Where the aim is to achieve a balanced distribution among heirs while reducing the risk of subsequent disputes, a lifetime gift and partition (donation-partage) can be a particularly relevant tool.

Not only does it allow the transfer to be organised during the donor’s lifetime, it can also fix the value of the assets as at the date of the gift, providing valuable legal certainty for the family as a whole.

As part of a gradual transfer strategy, a gift with reserved usufruct is also frequently used. The donor retains the use of the property and the income it generates while planning ahead for their succession. This technique can be reinforced by a contractual reversion clause, ensuring that the property returns to the donor’s estate if the beneficiary dies before them.

Finally, where the principal consideration is the future management of real estate assets, a Société Civile Immobilière (SCI) may offer an interesting alternative. By replacing direct ownership of a property with ownership of shares in a company, it can facilitate the governance of family wealth.

In particular, appointing a sole manager can help avoid the deadlocks often associated with joint ownership and simplify decision-making. This can be particularly valuable where heirs live in different countries or have diverging interests.

In practice, the choice between these different tools will always depend on the family structure, the client’s objectives, the heirs’ places of residence and the nature of the assets concerned. Rather than applying a standard solution, transferring real estate wealth requires a tailored approach, combining several complementary mechanisms where appropriate to ensure the long-term sustainability of family wealth.

Real Estate Wealth Transfer in Luxembourg: What Are the Tax Implications?

A common assumption is that, because Luxembourg does not levy inheritance tax on statutory inheritances in the direct line, there is no need for succession planning. This conclusion needs to be qualified. Luxembourg’s official rules confirm the favourable treatment of direct-line statutory inheritance, but rates depend on both the family relationship and the portion inherited.

It is true that, in the direct line and provided the statutory rules of succession are respected, no inheritance tax is due in Luxembourg. However, once a transfer falls outside this framework, for example to stepchildren, nephews or nieces, inheritance tax can reach up to 45%.

This is particularly relevant for blended families, where the question arises from both a civil and a tax perspective, with stepchildren considered third parties for inheritance tax purposes.

Two solutions are frequently considered in this context: a gift, which can benefit from a fixed rate, or simple adoption.
The situation of a child living abroad, particularly in France or Germany, deserves special attention.

In these circumstances, inheritance tax may be payable in the child’s country of residence, calculated on the value of real estate located in Luxembourg. The amount can quickly become significant. In many cases, a gift, particularly one with reserved usufruct, can substantially reduce the cost.

For France specifically, the tax position of an heir resident in France may indeed extend to assets located abroad, subject to statutory residence conditions. France and Luxembourg do not have a bilateral inheritance-tax treaty resolving all such cases, making individual analysis particularly important.

France-Luxembourg Inheritance: A Practical Example

Consider the case of Ms M., a resident of the Grand Duchy aged 55. Her daughter, her sole heir, lives in France. Ms M. owns a property in Luxembourg worth €1.5 million and is considering gifting it to her daughter while continuing to receive the rental income.

Without any planning, upon Ms M.’s death, her daughter would have to pay more than €450,000 in inheritance tax in France.

By gifting the bare ownership during Ms M.’s lifetime, the taxable base for registration duties, taking her age into account, would be reduced to 50% of the property’s value, or €750,000, resulting in duties of approximately €140,000. Upon Ms M.’s death, her daughter would become the full owner without any additional duties being payable.
The difference between the two scenarios, nearly €300,000, illustrates in itself the benefit of planning ahead rather than dealing with the consequences only at the time of death.

Why Plan Your Real Estate Wealth Transfer in Advance?

Transferring real estate wealth is never merely a question of taxation. It requires a combination of family considerations, management constraints and tax optimisation, and it is always better addressed sufficiently far in advance to give the chosen solutions time to produce their effects.

This is precisely the role we play for our clients at CapitalatWork: acting as the conductor of a comprehensive wealth-planning strategy, in which real estate is considered alongside the rest of the client’s wealth, with consistency and the long term in mind.

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