Everyone is aware of the fact that the reform of civil inheritance law, which is due to come into effect in September 2018, will have implications for the tax structuring of people’s assets.
And so will the announced amendment of matrimonial property regimes regulated by the Civil Code.
For the legislator, this is an occasion to settle a controversy about the tax treatment of certain life insurance policies between spouses which has been raging for more than 30 years now.
Albeit still in the draft stage, the authors of the text deserve to be commended because, in line with the stance the Tax Ruling Commission adopted against the central federal administration’s position for many years, they decided to side with the taxpayer.
The clarification refers to the tax implications of the death of the spouse of the policyholder, in cases where they married under the regime of community of property, and where the death of that spouse does not lead to the payability of the insurance benefit (and hence not to the termination of the policy or to payments in favour of the surviving spouse).
The Civil Code stipulates that the rights ensuing from a life insurance policy, underwritten by the beneficiary in person and acquired by the latter on the death of his or her spouse, are his or her personal (and not their joint) asset, without prejudice to a disbursement to the joint assets if the regime is wound up in cases where the insurance policy was funded with their joint funds.
The Insurance Policies Act stipulates that any sums due to a spouse in a communal estate by virtue of a life insurance policy are his or hers to keep, even if the premiums were paid for by the community. There is no need to recompense the community unless the premiums exceeded the normal capacities of that community.
As we see, these two articles contradict each other in places, but they do have one thing in common which is to rule for once and for all that the entitlements under a life insurance policy fall to the surviving spouse, even if the spouses married under the regime of community of property. The tax consequence of that is that the surviving spouse who has a life insurance policy he or she took out in person is not liable for inheritance tax, even if the premiums were paid out of the joint assets. The benefits paid out, which increase the assets of the estate, are not subject to inheritance tax when there are joint children.
In 1999 however, these articles of the Insurance Policies Act were ruled to be unconstitutional, albeit for a different reason, which only muddled the waters of two hierarchically equivalent standards even further.
Doctrine and administrative case law became divided on how these policies should be treated from a taxation point of view, and most unusually, the central tax administration services and the Tax Ruling Commission (TRC) found themselves in opposite camps.
The first theory, supported by the tax administration, meant that the surviving spouse, even if he or she had not received anything on the date of the death, was liable for inheritance tax; the second one, supported by the TRC, held that there was no tax due at the time of death.
There was no alternative but for the legislator to intervene, which is what he is about to do by clearly concurring with the TRC’s point of view and amending the texts and expressly and unarguably stipulating that, if a couple has joint children, the surviving spouse in a communal estate is not liable for tax on the value of the life insurance policy at the time of death.
In Flanders, the legislation was already amended in December 2016, and now stipulates that, in the event of death of the spouse in a communal estate, the surviving spouse is liable for tax as the benefits under the policy are paid and, at the latest, at the time the policy is terminated.
However, in doing so, the Flemish legislator failed to address an obvious inconsistency between the two texts, and did not take account of the fact that when there are joint children the benefits due to the joint assets must be exempt from inheritance tax; in view of the amended legislation, that exemption became impossible to apply in practice.
With this, the federal legislator also aims to settle the issue of insurance policies, jointly taken out by spouses in a communal estate, and the last deceased: another clarification which is equally welcome and which, within the applicable principles, fits in with the above. In cases where the reciprocal rights are assigned upon the first death, and if there are joint children, the surviving spouse may, on the basis of an explicit legal text, qualify for an exemption of inheritance tax.
By contrast, the legislator will consider that, in situations like that, the surviving spouse acquires the surrender value of the policy as a personal asset following the death of his or her spouse. This also means that, under the new regime, inheritance tax may still be due on half of the surrender value of the policy on the date of the first death in the context of a policy jointly taken out by two spouses in a communal estate who do not have any joint children.
However, as commented in numerous articles, this doesn’t change anything with regard to policies jointly taken out by spouses who married under regimes other than the regime of community of property and where, in function of the way the policy is structured, people may still qualify for a full exemption of inheritance tax.
In a most divisive landscape, this legislative initiative is obviously most interesting, not only for residents of the Brussels-Capital and the Walloon Regions, but also for their counterparts living in the Flemish Region, because matrimonial property law is a federal matter, with the result that the Flemish tax legislator will have to deal with this amendment to the baseline of the civil legislation that regulates the rights between parties.