From 100 percent tax to 0 percent tax

Vlabel, the Flemish tax authorities, recently announced (in an advance ruling published on 17 December 2019) that the survivor takes all clause is a valid non-taxable alternative for spouses when it comes to inheritance tax.

While there was already a form of protection for partners married under separation of property in the form of an (optional) final setoff clause – the property of each partner was kept separate, but protection was still in place for the surviving spouse – this form of solidarity did have one enormous disadvantage in the fact that it was very heavily taxed at no less than 100 percent.

An interesting alternative in tax terms, such as the survivor takes all clause, was thus more than welcome for partners married under separation of property. Because the surviving spouse does not receive anything under a survivor takes all clause in his or her capacity as heir, but rather as a spouse, as a result of the liquidation/distribution of the matrimonial regime, inheritance tax does not apply. And because an agreement of this type in the marriage contract is not a gift either, but rather a matrimonial benefit, the survivor takes all clause is not taxed as a gift either.

For example, two spouses jointly have moveable property in undivided interest of 1,000 euros. One contributed 900 euros while the other only contributed 100 euros. When this undivided property is transferred by means of the marriage contract and the survivor takes all clause to the surviving spouse, this constitutes a matrimonial benefit. That means no gift or inheritance tax is payable, even when the spouse that only contributed 100 euros now receives the whole undivided interest of 1,000 euros.

Please note, when it comes to immoveable property, this transaction would mean that registration tax is payable, being the purchase and/or division duties.

Notional provisions attempt to discredit the reasoning

The reasoning that, in a strict sense, we are not inheriting anything and consequently no inheritance tax is payable has been assailed over the years by so-called statutory notional provisions. For example, the law provides explicitly that the surviving spouse who was married under a regime of matrimonial property must pay inheritance tax on everything he or she receives over and above half of the jointly-owned assets (art. 2.7.1.0.4 of the Flemish Tax Code). But the survivor takes all clause does not fall under notional provisions such as this one.

For example, the matrimonial property is worth 1,000 euros and is awarded in full to the surviving spouse. Then inheritance tax will be payable on everything he or she receives in excess of half of the matrimonial property. In our case the tax would be payable on everything above 500 euros.

Would an accrual clause not be a better option?

A surviving spouse can also be protected using an accrual clause, but that clause is coupled to very strict conditions. For example, the contributions made by and the life-expectancy of both partners must be the same and no option can be included for compensating for the age difference by means of an unequal contribution. If these conditions are not met then the property that is distributed through an accrual clause is still subject to gift or inheritance tax.

None of those conditions apply to the survivor takes all clause for the undivided interest.That means that it is a good alternative to the accrual clause for spouses with different life expectancies or with unequal assets.

Is it the best option for everybody?

Because the survivor takes all clause is included in a marriage contract, unmarried partners are unable to take advantage of it. That means that the accrual clause, together with all its conditions and restrictions, is still an interesting option.

While the survivor takes all clause is not a gift or inheritance and is not treated as such when it comes to taxes, it could still impact upon the rights of children and stepchildren, which will be the case if the surviving (step) parent receives too much property. The Civil Code includes a correction mechanism for partially revoking a sum when the surviving spouse receives more than their share.

A delicate puzzle

The survivor takes all clause for the undivided interest is a welcome nontaxed means of protecting the surviving spouse without having to pay inheritance tax. However, aside from an evaluation of the marriage contract, children and stepchildren cannot be forgotten. Estate planning between partners remains a challenging puzzle in which a great many interests must be weighed up against each other.

If you require any advice or assistance in this delicate task, please don't hesitate to contact us. We will be happy to help you create a personal plan.