The mentally retarded child and inheritance law

Under current inheritance law, a mentally disabled child cannot, in principle, make a will. However, the person who has been placed under guardianship because of a mental disorder can make a will with the permission of the district judge.

If no will is made, the consequence is that if the mentally retarded person dies and there would be property, he/she will leave the parents, brothers and sisters as heirs, and to the extent that they are predeceased: their descendants. If there should be none, the grandparents and their descendants will be the heirs.

How does a mentally retarded child acquire assets? Generally, it will be because of an inheritance from his/her parents. If the parents want a mentally retarded child to inherit, nothing needs to be arranged. However, it will often be the case that parents do feel the need to ensure that their child lacks nothing, but also that they will regret paying needless inheritance tax on the assets that ultimately came from them.

An example:

A married couple has two children Anneke and Frederik. Frederik is mentally disabled and resides in a home. The parents are married in a community of property. In this general community of property, the assets of both spouses are common.

There is a total estate of € 900,000.00. The parents have not made wills. When father dies, each of the children inherits € 150,000.00.

Mother receives half plus a child's portion. Afterwards, mother dies.

The assets have remained the same. She thus leaves € 600,000.00. Anneke and Frederik each inherit

€ 300.000,00. Meanwhile, Frederik has thus inherited € 450,000.00. Frederik is unable to marry and there are no children. Frederik lives a long time and eventually outlives Anneke. Because he is cared for under the Long-Term Care Act (formerly the AWBZ), his assets have grown considerably. By now there is €2,000,000.00. Because Anneke is predeceased, both of her children are Frederik's sole heirs. Each nephew/niece thus inherits € 1,000,000.00.

The latter will each owe € 383,504.00 in inheritance tax, so in total

€ 767,008.00 (rate 2025). Is there any way to avoid this high inheritance tax?

Special will

By using a special testamentary arrangement, a lot of inheritance tax can be saved. This arrangement may involve the parents bequeathing to Frederick, instead of his inheritance share, the usufruct of the inheritance share he would have received if there had been no will. This inheritance itself (i.e. the property, charged with usufruct) is granted to Anneke by will. This means that Frederick is only entitled to the income. There is then a good chance that the district judge, to whom approval must be requested on behalf of the disabled person to acquiesce in the will, will not be able to agree to this. He will then be able to require that his legitimate portion be invoked on behalf of Frederick.

This means that upon the death of the first parent, Frederik will be entitled to at least an inheritance share of 1/6 of the estate, the so-called legitimate portion.

To prevent the cantonal judge from not approving, it can be stipulated in a will that Frederik, as usufructuary, is not only entitled to the income of the usufruct capital but also has the right to digest. The power of digestion means that he is authorized to also get at the assets themselves in case the income should not be sufficient.

The will may provide that Frederick is authorized to digest only to the extent that the costs of his care are not for the account of the government or other third parties and cannot be defrayed from the income due to Frederick.

In addition, the will may provide for the establishment of a trust over Frederick's usufruct and the appointment of a trustee; this trustee will take care of the investment of the usufruct assets and, if necessary, the distribution of income to Frederick.

Furthermore, it may be provided in the will that if, at the end of a calendar year, the administrator considers that not all the fruits enjoyed in that year, after deduction of the taxes due thereon, have been necessary for the payment of the costs of Frederick's care, those fruits will be added to the capital.

Result

Now what is the result of all this? Frederick, or at least his trustee, has full disposition of Frederick's estate, albeit with special labels attached. The district judge has no real reason not to approve this testamentary disposition. After all, Frederick's interests were not in fact harmed. To the extent that funds might be needed for his care, the entire usufruct capital could be used if necessary. In case one should have any concern that the cantonal judge will not agree, a so-called two-step disposition (formerly called "fideï-commis de residuo") can be included in the will as an alternative.

This means that what Frederik will retain from the inherited assets will still go to Anneke and her heirs, respectively. This construction is less favorable for inheritance tax purposes than the usufruct arrangement but still significantly more advantageous than if Anneke inherited directly from Frederick.

With a two-step disposition, Anneke is deemed to have inherited from her parents and therefore falls under a lower inheritance tax rate (10% over € 154,197.00 and 20% over the remainder, rate 2025) than if she inherited directly from Frederik, in which case she falls under the inheritance tax rate of brothers and sisters (30% over € 154,197.00 and 40% over the remainder, rate 2025).

Assuming now that Frederik hardly needed any money for himself and his assets indeed grew, as described above, to € 2,000,000.00, the following situation arises.

At the time of his father's death, Frederik received from his mother only the usufruct with power of interposition of a total of € 450,000.00. Anneke received bare ownership of this. She paid inheritance tax on this at the death of her father and her mother. Conversely, Frederik, because he received only usufruct, paid somewhat less inheritance tax. In the end, this does not matter that much in total. The total that would be owed in inheritance tax by Frederik and Anneke remains about the same.

Upon Frederik's death, however, in the case mentioned above, inheritance tax would be due €767,008.00. By making use of the usufruct form, no inheritance tax is due upon Frederik's death.

A saving therefore of € 767,008.00 in inheritance tax.