Inheritance planning through marriage contract – Flemish authorities intervene

Common feature of these terms is that they determine the way in which the matrimonial property will be divided at the time of termination of marriage, for example in the event of death. The allocation of goods through these terms is done outside the inheritance: the settlement in the context of matrimonial property terms is effected via the liquidation distribution of the marriage property law, which always precedes the settlement of the estate. As a result, no inheritance tax is due.

In Article 2.7.1.0.4 of the Vlaamse Codex Fiscaliteit (Flemish Tax Code), the fiscal authorities provide for a fiction clause in order to impose taxes on a number of these advantages. Until the amendment by the Decree of 3 July 2015, this article stated that the allocation of more than half of the common property, subject to the condition of survival, to a spouse is taxed by the inheritance tax.

Notwithstanding the fiction clause of Article 2.7.1.0.4 of the Flemish Tax Code, there were still some techniques available to set up an inheritance planning through a marriage contract, which resulted in relatively little to even no inheritance tax being due upon the death of a spouse. Such agreements are therefore a thorn in the side of the Flemish Tax Administration.

1 First legislative intervention – survivorship clause

A technique that is frequently used to allocate the common property to the surviving spouse is the survivorship clause. Under this clause, the full common property is allocated to the surviving spouse, who is indicated by name in the marriage contract. As this surviving spouse unconditionally obtained the common property and not on condition of survival, Article 2.7.1.0.4 of the Flemish Tax Code was not applicable and no inheritance tax was due.

After the administration repeatedly tried to tax this construction through legal procedures without result, the Decree of 3 July 2015 decided to delete the survival condition of Article 2.7.1.0.4 of the Flemish Tax Code. This way, the “loophole” of the survivorship clause was definitively closed.

2 Burdened attribution clause

A second technique that is often used to allocate the common property to the surviving spouse is an attribution clause. In the application of this attribution clause, the surviving spouse obtains

the entire common property. However, such clause is endorsed by Article 2.7.1.0.4 of the Flemish Tax Code.

In practice, however, a solution was found for this issue, i.e. the attribution clause with claim. According to this clause, all goods of the common property go to the surviving spouse, with the charge that she acknowledges a debt towards the estate in the amount of everything she receives over half of the net community.

Consequently, a claim arises on the part of the estate vis-à-vis the surviving spouse, which eliminates the operation of Article 2.7.1.0.4 of the Flemish Tax Code. It is often also determined then that this claim must not be paid until the death of the survivor and that the debt will be interest-bearing. When the surviving spouse dies, the still outstanding debt, increased by the interest due, becomes a liability of the estate.

However, on 7 July 2016, the Flemish Tax Office published a position (position no. 16053) which states that the outstanding debt shall not be accepted as a liability in the estate of the surviving spouse. Nevertheless, the position provides that the heirs who did incur a debt claim at the earliest death are not subject to inheritance tax to the extent that they obtain payment of their debt claim upon the death of the surviving spouse. The value of the debt claim that was taxed in respect of these heirs at the earliest death may therefore be deducted from their taxable share in the second estate.

3 The participation clause

For spouses who are married under the system of separation of property, there is also a matrimonial property law clause aimed at reducing the inheritance tax, i.e. the participation clause.

This participation clause is a clause under which spouses who are married under the system of separation of property contractually settle their accounts at the time of termination of their marriage as if they were married under a communal estate regime. The surviving spouse hereby obtains a claim on the estate of the deceased spouse. The amount of that claim is also included in the liabilities of the estate of the predeceased spouse, so that the taxable basis of his estate is significantly reduced.

This technique has also already been challenged by the administration before court. However, in March of this year, the Court of Cassation ruled that the settlement debt is after all deductible as liability of the estate.

4 Proposal for the Flemish Government Decree

The recent cassation ruling on the participation clause has prompted the Flemish Government to make a legislative intervention. In the Council of Ministers of 14 July 2017, a preliminary draft decree was adopted, which – according to the explanatory memorandum – shall create some clarity for the participation clauses on the one hand and the attribution clauses with claim. In concrete terms, the preliminary draft decree stipulates that settlement debts for inheritance tax are no longer acceptable as liability of the estate.

In order to be consistent, the preliminary draft decree also provides that the debt that is excluded from the estate of the surviving spouse cannot be considered as debt claim either – which is taxable as an asset- in the estate of the predeceased spouse.

The preliminary draft decree will now be forwarded to the Council of State for advice. For the time being, we will have to wait and see if the Council of State will formulate remarks and if the text of the decree should be revised. However, the Flemish government is determined to put an end to planning the inheritance through a marital contract.

Frank De Langhe – Nicolas Lauwers
BVBA De Langhe Advocaten