Family wealth succession planning is a critical issue for wealthy families. Choosing the right succession structure not only affects the simplicity and speed of the inheritance process but also has significant tax implications. In this article, we compare three common methods of succession planning for family wealth worth 600 million HUF: testamentary and legal inheritance among direct relatives, the establishment of a family wealth foundation, and transferring the wealth into a trust. The aim of this article is to examine and compare the tax burdens associated with each method.
1. Testamentary and Legal Inheritance Among Direct Relatives
The most common form of inheritance occurs through either legal inheritance or a will, where the wealth is transferred to the heirs according to the decedent’s instructions. Under Hungarian inheritance law, direct relatives (parents, children, and spouses) enjoy favorable tax treatment.
In Hungary, inheritance between direct relatives is tax-free, meaning that if the wealth is inherited by children, parents, or a spouse, no inheritance tax is due.
Example: If the 600 million HUF worth of family wealth is inherited by the children of the decedent, they do not have to pay inheritance tax, as inheritance between direct relatives is exempt from tax. The heirs will receive the full 600 million HUF without any deductions.
2. Establishing a Family Wealth Foundation
A family wealth foundation is a legal entity that allows the family wealth to be preserved and managed long-term. The founder transfers their wealth to the foundation, which manages it and distributes it according to the founder’s wishes to family members.
From a tax perspective, a family wealth foundation is not tax-free. However, it offers several advantages, such as protecting the wealth and ensuring a more equal distribution among family members. The foundation does not transfer the wealth directly to the heirs but manages it for their benefit. Heirs must pay inheritance tax on any wealth they receive from the foundation. The inheritance tax rate is 15% of the value of the received wealth.
Example: If the 600 million HUF worth of wealth is transferred to a family wealth foundation and the foundation distributes the wealth among five children, each child will receive 120 million HUF. The inheritance tax will be 15% of 120 million HUF, i.e., 18 million HUF per child. After the tax is deducted, each child will receive 102 million HUF.
3. Transferring Wealth into a Trust
A trust is another option where the decedent transfers ownership of their wealth to a trustee, who manages the wealth on behalf of the beneficiaries. In Hungary, the tax treatment of trusts is more complex, as the trustee must pay taxes on the transferred wealth, and the beneficiaries also have tax obligations.
In the case of a trust, the beneficiaries must pay income tax on the wealth they receive, which in Hungary is 15%. Additionally, inheritance taxes may apply if the trust is specifically set up for inheritance purposes.
Example: If the 600 million HUF worth of wealth is transferred to a trust and the trustee distributes the wealth to the children, each child will receive 120 million HUF. The tax liability on the received amount will be 15% income tax, which amounts to 18 million HUF per child. Therefore, after tax, each child will receive 102 million HUF.
Summary
The three methods of succession planning differ significantly in terms of tax burdens, and it is crucial to consider the specific family situation and the goals of wealth management. Direct inheritance is the most tax-advantageous since it is exempt from inheritance tax. Both the family wealth foundation and the trust provide more protection and control over the wealth, but they are more complex from a tax perspective. In both cases, beneficiaries must pay 15% tax on the wealth they receive, with the family wealth foundation also potentially incurring inheritance tax.
For further information please do not hesitate to contact us
Dr. Katona Géza, LL.M. ügyvéd (Rechtsanwalt / attorney at law)
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Katona és Társai Ügyvédi Társulás
(Katona & Partner Rechtsanwaltssozietät / Attorneys’ Association)
H-106 Budapest, Tündérfürt utca 4.
Tel.: +36 1 225 25 30
Mobil: + 36 70 344 0388
Fax: +36 1 700 27 57