Revocability of donations between spouses: tax abuse?
A donation between spouses is a popular component when setting up estate planning. In particular, the revocable nature of such donations creates a number of opportunities. Although the exercise of a right of withdrawal has always been accepted for tax purposes in the past, it appears that this practice is increasingly under attack.
Donations are generally irrevocable except if they take place between spouses (other than by prenuptial agreement). A revocation of a donation between spouses occurs retroactively: in principle, the assets revert to the donor. However, good faith third parties who have obtained movable property for valuable consideration from the donee are protected from the consequences of the revocation. The donor can then only claim the corresponding value from the donee. Moreover, the exercise is strictly personal and the possibility of revocation is only linked to the lifetime of the donator: in other words, only upon the decease of the donator, the donation will be definitive. A revocation is also possible after the decease of the donee.
Asset planning tool
Frequently, parents have the desire to transfer all or some of their assets to their children during their lifetime with (i) the lowest possible tax burden and (ii) maximum control over the donated assets.
A common succession practice is to operate with a general partnership that offers the possibility of incorporating a retention of control through the articles of association. Thus, the parents are often the managers of the general partnership.
In consequence of the contribution of their assets to the general partnership, the parents obtain share certificates. The spouses will first donate these to each other. Subsequently, each spouse-donee will further donate the received share certificates to the child(ren).
Should the parents later consider that the proposed structure is no longer desirable, they can revoke their mutual donation. In principle, the general partnership shares then revert to the parents.
Vlabel throws a spanner in the works
In recent years, there has been a tendency in the decisions of the Flemish Tax Authority (hereinafter: Vlabel) to include a donation between spouses when evaluating the issue of (too much) control by the parents which often leads to a situation of tax abuse.
In Vlabel’s view, the aforementioned construction creates the same legal consequences as a donation made under the condition precedent of the testator’s decease. Such a donation is caught by a legal fiction, as a result of which it will still be subject to inheritance tax. The underlying reasoning is that in both cases a legal transfer takes place but has an economic effect only at the time of the decease.
Recently, Vlabel went a little further and qualified the revocation of a donation after the decease of the spouse-donee as a tax abuse in itself. In casu the husband revoked a donation to his spouse after the latter’s death and the children would consequently inherit the donated property with application of inheritance tax. According to Vlabel, the only motive was avoiding inheritance tax for the children. However, in casu the actual reason was that the spouse-donee had disinherited her donating husband. Surprisingly, Vlabel was vindicated by the court of first instance, as a revocation would no longer be “credible” after the decease of the donee. At that moment, the right of withdrawal is no longer exercised against the spouse, but against the heirs (which is possible under civil law).
In our view, Vlabel’s view is open to debate. When the share certificates of a general partnership are donated to the children, ownership transfers and, in our view, the rules of civil law must be taken into account, as well as other considerations. Eager to know how the Court of Appeal will rule on this …
Mathias De Schrijver and Evert Moonen
De Langhe Attorneys