Life insurance and requalification in indirect donation

Attention to the reclassification in indirect donation of the benefit of a life insurance contract (Credits: 123RF)

In certain circumstances, an insurance contract may be reclassified by tax administration and indirect donation. Illustration with a specific case where the beneficiaries were ordered to pay inheritance tax and a 40% surcharge for willful misconduct.

In 1989, at the age of 76, Ms K took out a life insurance policy on which she made a first payment of 914 euros (6,000 francs). Later, she appointed Mr. and Mrs. X (Ms. X is also curator of Ms. K) as beneficiaries of her contract, each for half. In 2014 and 2015, when she was 101 years old, she made two more payments of 750,000 euros each. She died 6 months later. As the shares belonging to spouses X are subject to Article 990 I of the General Tax Code (CGI), they receive, after application of Article 990 I of the CGI, 634,066 euros each.

However, the tax administration reclassifies the life insurance contract as an indirect donation. The sums received are subject to taxation on free transfer rights applicable between non-parents. The tax administration then claims from the spouses a transfer fee of 334,066 euros each, interest on arrears for 21,380 euros and a 40% increase provided for in the event of a deliberate breach of 21,380 euros.

The spouses challenge and take their case to court and then, after several judgments against them, to the Court of Appeal.

The reclassification of the donation life insurance contract

The donation is defined in the civil code, as an inter vivos act by which the donor immediately and irrevocably deprives himself of the thing given in favor of the donee who accepts it. Reclassification of the life insurance contract as an indirect donation therefore implies a liberal intention of the policyholder, his willingness to withdraw immediately and irrevocably and the acceptance of the beneficiaries.

The tax administration considered that there was a liberal intention because of the privileged ties that the deceased had with the beneficiaries (who lived near her home, took care of the management of her property and Ms. was the curator of of the amount paid in respect of the deceased’s assets (EUR 1.5 million for a total assets of approximately EUR 4 million) and the fact that no payments have been made since 25 years on the contract. In addition, the amounts paid came from the resale of securities held in a Swiss account, generating a taxable capital gain of 265,435 euros and social security contributions of 40,273 euros.

The tax administration then argued that the condition of immediate and irrevocable divestiture depends on the existence of a contingency on the life insurance contract. However, the advanced age of the deceased at the time of the payments (at the age of 101, she could not ignore the imminent occurrence of her death) and the importance of the sums paid reflect the illusory nature of the right of redemption and its willingness to strip irrevocably.

Finally, the tax authorities considered that the acceptance of the beneficiary after the naked death was an obstacle to the reclassification of the contract.

The Court of Appeal upheld the position of the tax administration, the reclassification of the life insurance contract as an indirect donation and therefore the taxation of the sums collected on the free transfer rights applicable between non-parents.

The deliberate failure of the beneficiaries

On the other hand, the Court of Appeal invalidated the 40% increase for deliberate failure by the beneficiaries.

Indeed, while it is possible to imagine that because of Ms. X’s status as a guardian, the spouses were aware of Ms. K’s estate status, it is not established with certainty that they became aware of the beneficiary clause designating them.

On the other hand, they cannot be blamed, even though they would have known like everyone else by reading articles in the economic press of the tax benefits of life insurance, not having noted themselves that the contract which benefited them had to be analyzed as an indirect donation.

As the deliberate intention to evade the transfer duty free of charge was not demonstrated, the Court of Appeal ruled that the penalty for deliberate breach was 132,626 euros each.

Source: CA Versailles 12-10-2021 n ° 20/03376


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