Once again the « mortuary clause » survives the tax authorities’ attacks

Article 5 of the Inheritance Tax Code (hereafter referred to as « ITC ») creates a legal fiction according to which the surviving spouse is considered being the one having obtained the part of the other spouse by virtue of a donation or testamentary disposition when a marriage contract allocates him more than half of the communal estate – on condition of survival.

According to this disposition the part exceeding half of the common estate that is allocated to the surviving spouse by means of an amendment clause, is treated in the same way as a donation and will be taxed as such in the surviving spouse’s inheritance.

In order to avoid inheritance rights, a technique of inheritance planning has been developed allowing a legitimate avoidance of the application of this disposition by using the so-called « mortuary clause ». This technique consists of adding a clause by which terms the common estate of spouses will revert to one of the spouse « whatever the reason of the dissolution of the matrimonial regime ».

Mister V and Misses S are married under the communal estate regime. The spouses have changed their marriage contract before the notary by adding a clause providing that « the spouses agree that the common estate existing at the time of the marital dissolution, for whatever reason this dissolution occurs and without taking into account the reason, will revert in full property to Mister V ».

The Belgian state considered that allocation of the totality of the common estate to Mister V by means of application of the amendment clause recorded in the marriage contract had to lead to the collection of inheritance rights in application of article 5 ITC.

Nevertheless, for article 5 ITC to be applicable, the surviving spouse should receive more than half of the common estate pursuant to a clause that was included in a marriage contract without condition of survival.

In this particular case, the Court of Appeal of Brussels considers that the clause did not meet the condition of survival that is required for the application of article 5 ITC since it provided the allocation of the totality of the common estate existing at the time of the marital dissolution « for any reason whatsoever » to Mister V.

In this regard the Court recalls that « The mere fact that the spouse obtaining the unequal division of the communal estate survives, is not enough for the application of article 5 ITC, since this provision requires that the allocation of more than half of the communal estate results from a clause providing the condition of survival of the beneficiary spouse ».

We can only approve what the Court says in his reasoning since the text itself of article 5 ITC clearly says that the condition of survival is a requirement for the application of that disposition. The interpretation of the disposition in question implies that the application of article 5 ITC can legally be avoided with a marriage contract stipulating that the totality of the marriage community will be allocated to one of the spouses whatever the reason of the dissolution of the matrimonial regime.

This is an application of the constitutional principle of legality of taxation pursuant to which each situation that is not covered by a tax law, evades taxation when all of the operative events of a tax are not met. This means that each taxpayer has the right to avoid taxation by making sure that he does not enter into the scope of a provision introducing taxation.

Finally we need to specify that in a recent arrest the Court of Cassation has determined that the « mortuary clauses » are marriage contracts and that therefore they do not fall within the scope of article 7 ITC.

So this means that it was pointless for the administration to successively invoke the application of the articles 5 and 7 ITC with regard to the ‘surviving spouse takes all’-clauses of unequal division of the communal estate. Despite an abundant jurisprudence favourable to that kind of clauses, the administration continues to battle this form of inheritance planning in a ferocious way.

In its circular of April 10th 2013, the tax authorities state that such clauses contain a « tax abuse » because they are considered to harm article 5 ITC « considering that death is imminent and inevitable, the deed is only passed with the intention to avoid the application of article 5 ITC, aiming at each allocation of a communal estate by death ». The circular continues stating that « it is the taxpayer who needs to prove that the mortuary clause is justified by other motives than to avoid inheritance tax. If the taxpayer can not provide such proof, inheritance tax will be collected on grounds of article 5 ITC on the part exceeding half of the communal estate which is allocated to the surviving spouse ».

However, the tax authorities seem to forget that the fundamental element permitting her to invoke tax abuse, consists of the fact that the operation must be executed « contrary to the objectives pursued by a disposition of the Code or its implementation decisions ». It is only when that proof is provided that it is up to the taxpayer who wishes to escape from the anti-abuse provision to prove that the choice for the disputed legal action was made for other reasons than tax reasons.

Moreover when reading the text of the circular it seems that it only regards the amendment – in extremis- of the marriage contract, which in any case would exclude the clauses that are drawn up at the time the death is « not imminent and inevitable ».

Taking into account the resistance of the tax authorities against that kind of inheritance planning we need to be reluctant with regard to the recording of such clauses in a marriage contract, in particular when the recording of such clauses precedes an imminent death.

Finally we must say that the issue regarding the use of such clauses is no longer existing in the Flemish Region seen the fact that the condition of survival has been removed from the article of the FCT. So the mortuary clause is still alive and kicking, except in the Flemish Region.