Two-stage making

The two-stage making (formerly called "fideï-commis de residuo" or "making over hand") can be used for several purposes.

First, it is a means to dispose of your estate yourself multiple times, "ruling over your grave," as it were.

Second, it can be a means of saving inheritance tax (formerly called "inheritance tax").

There are a number of situations in which you would not only want to determine what happens to your own estate but would also want to regulate what happens if an heir has inherited from you and then dies.

Example 1.

Roel and Anke are married and have no children. Given Anke's age, there are no more likely to be any. The contact between Anke and her family is good but the relationship between Roel and Anke's family is poor to say the least.

Suppose the joint assets of Roel and Anke are €300,000.00. Roel and Anke have not made wills. When Roel dies first, his half of the joint estate goes to Anke so that she owns a total of € 300,000.00. Shortly thereafter, Anke dies. The total assets are then inherited by Anke's family. If Roel had known that, he would be turning in his grave.

What could Roel have done to prevent his share of their joint assets from going to her family upon Anke's death?

Roel and Anke could each make a will stipulating that in case the latter of them died, one half of the total assets would go to Roel's family and the other half of the assets would go to Anke's family.

The risk of this construction is that if Anke were to change her will after Roel's death there would still not be what Roel would have wanted.

To eliminate that risk, Roel could include a two-step making arrangement in his own will.

This arrangement broadly amounts to the following.

In his will, Roel appoints Anke as sole heir.

However, he stipulates that what Anke has not used up at the time of her death of what she inherited from Roel (in the example € 150,000.00) does not accrue to Anke's heirs but to those whom Roel names in his will. Such an arrangement is called a two-step making since you in fact dispose of your own estate twice. Anke is called the "encumbered one" and those whom Roel names in his will as those who will receive what is left of Roel's estate, the "expectants." In this way, Roel prevents anything of his own estate from ever reaching his in-laws.

Example 2.

Dolf and Loes are divorced. They have a daughter Leonie together. After the divorce, Loes received a gift from her parents. When Loes dies, Leonie is her only heir. If Leonie dies afterwards (without children, without a husband and without a will), Leonie's father is her only heir and so everything Leonie owns -including the gift from her grandparents and what she has inherited from Loes- goes to Dolf. Probably, had they known that, that would not have been Loes' (and her parents') intention.

The probability of Loes' daughter dying shortly after Loes is not statistically significant. However, should Loes and her daughter have been involved in a car accident together, for example, there is a real chance of that happening.

To prevent assets belonging to Loes (or her parents) from ending up with Dolf, Loes can include the two-step disposition in her will. She can name her daughter as sole heir in her will and provide that anything her daughter did not use up from Loes' estate at her death would not go to Dolf but, for example, to Loes' parents.

Example 3.

Mrs. Jansen has been a widow for many years. She has three daughters. All the daughters are married. However, the relationship between Tom, the husband of her youngest daughter Petra, and his mother-in-law leaves much to be desired. Tom and Petra have no children. When Mrs. Jansen dies, her three daughters are her heirs. Should Petra die afterwards, Tom will inherit what Petra owned, including the inheritance she received from her mother.

Again, this could have been avoided by Mrs. Jansen. She can make a will in which she stipulates that what was left at Petra's death of what Petra had inherited from Mrs. Jansen goes to her other daughters (Petra's sisters). Thus, she can prevent anything from her estate from going to Tom, even if Petra had made a will in which she named Tom as sole heir.

So the two-stage making can be used to dispose of your own estate - or what of it has not been used up - twice. Reigning over your grave, in other words.

Mrs. Jansen could also have stipulated in her will that everything that would be inherited should be kept and paid out to the expectant heirs (Loes' sisters) upon the death of the heir. This is called a two-step making with custodial obligation or fideï-commis. Usually, however, the intention is that the heir can freely dispose of the inheritance and only what is left of that inheritance at death goes to the expectants. There is then no custodial obligation; this is called a two-stage making without custodial obligation or a fideï-commis de residuo.

What is the advantage of a two-stage disposition?

This construction allows an heir to freely dispose of what he has inherited during his lifetime.

However, the person from whom the inheritance is made (the testator) determines to whom what is left of that inheritance will accrue upon the heir's death.

Another advantage may be that two-stage making saves inheritance tax in some cases (see below).

What are the disadvantages?

If a two-step disposition is made without a custody obligation, the heir (the encumbered person) can freely dispose of the inheritance during his lifetime. However, the law states a number of obligations for the encumbered person:

• the encumbrancer must make a description of what he/she has inherited;

- the expectant must be informed that he/she may still receive something upon the death of the encumbered person.

Thus, in the case of a two-stage creation without a custody obligation, this may be the well-known "glad-handing of a dead sparrow."

• the encumbrancer must annually declare to the expector what remains of the inheritance.

This latter obligation is being questioned by a number of scholars. Until this is clarified, it must be assumed that this obligation is indeed there.

These obligations, despite the fact that the encumbrancer can freely dispose of what has been inherited, can be inconvenient for the encumbrancer in some cases.

Inheritance tax

A disadvantage of the two-stage making can be that inheritance tax is levied twice on the same assets. With a two-stage disposition, inheritance tax is calculated on the acquisition by the expectant parent as if the expectant parent acquired directly from the testator.

Suppose the parents of Loes from example 2 have made a will in which they have included a two-step inheritance. They made this will at a time when the marriage between Loes and Dolf was not going well. To prevent anything ever ending up with their son-in-law, Loes' parents stipulated in their will that any unused portion of what Loes had inherited from them would not go to Loes' heirs (which might include Dolf) but to Loes' children. If Loes would have inherited €100,000.00, she would owe inheritance tax on this amount. Inheritance tax is calculated in rate group I (acquisitions by spouse and children) 10% to 20%.

As a child, Loes has an exemption of €25,490.00. The inheritance tax owed by Loes is therefore € 7,451.00 (rate 2025).

If Loes dies afterwards and the € 100,000.00 is still there, her daughter will again pay inheritance tax on this € 100,000.00. However, due to the two-stage making, the inheritance does not fall in rate group I (acquisitions by spouse and children) but in IA (acquisitions by grandchildren) 18% and 36%.

This is because the inheritance tax for an acquisition by the expectant parent is calculated as if Loes' daughter had inherited the €100,000.00 directly from her grandparents. Thus, Loes' daughter pays inheritance tax once again and that is € 13,411.00 (rate 2025).

However, the fact that for the purposes of calculating inheritance tax, it is assumed that the expectant inheritor receives directly from the testator can also be favorable (see Example 4).

Example 4.

Mrs. Pietersen (widow) has two sons: Paul and Joost. Joost is mentally and physically disabled and resides in a nursing home. He is not married and has no children. When Mrs. Pietersen dies, Paul and Joost each inherit €100,000.00. They are liable for inheritance tax on this amount in tax rate group I (10% and 20%), which is € 7,451.00 each (rate 2025). Since Joost lives in a nursing home and does not need much to live on, when he dies several years later, he has not used up any of the € 100,000.00 he inherited from his mother.

His only heir is his brother Paul. If inherited from a brother, inheritance tax is calculated in rate group II (30% and 40%). Paul therefore pays inheritance tax on the €100,000.00 inherited by Joost and perhaps also on any equity of Joost. The inheritance tax due on €100,000.00 in rate group II is €29,193.00 (rate 2025).

Mrs. Pietersen could have included in her will a two-step disposition. She would then have provided that whatever Joost left from what he had inherited from her at her death should go to Paul. In that case, upon Joost's death, inheritance tax would be calculated in tax group I on what would remain (still €100,000.00) because in a two-step disposition, inheritance tax is calculated as if the expectant (Paul) obtained directly from the testator (his mother Mrs. Pietersen) and not from the encumbered (his brother Joost). Thus, with a two-stage disposition, Paul would not owe €29,193.00 but €7,451.00.

A saving of no less than € 21,742.00 in inheritance tax.

Thus, the two-stage making can be used particularly well in a number of cases to save inheritance tax. Particularly in cases involving unmarried children who have no descendants (and will not have any), two-stage making is a particularly good tool for inheriting assets acquired from parents in a lower rate group between siblings.