Marital agreements or a gift?

Gift?

The Supreme Court ruled in a case that an inheritance tax assessment was incorrectly imposed. In this case, the following was at play. A man and woman were married in community of property in September 2015. In October 2017, marital terms were still established, giving the woman entitlement to 90% of the community property and the man 10%. The man (deceased) passed away in December 2017, within 180 days of entering into the marital terms. The woman was the sole heir of the man.

The issue was whether entering into these marital terms could be considered as a gift for the Inheritance Tax Act. The Tax Authorities' inspector argued that there was a gift equal to 40% of the size of the marital property community since the woman received 90% of it instead of 50%.

No gift?

The Court of Appeal ruled that entering into these marital terms was not a gift, but it did constitute tax evasion (fraus legis). Therefore, inheritance tax was still due. It had not been proven that there was any reason for entering into the marital terms other than avoiding inheritance tax.

According to the Court of Appeal, there was a conflict with the purpose and intent of the Inheritance Tax Act. The Court of Appeal also considered that, at the time of entering into the marital terms, there were not somewhat equal life and death chances because the deceased was already seriously ill. Thus, entering into the marital terms constituted an advantage to the beneficiary that should be treated as a gift within 180 days before the deceased's death. Such a gift is taxed as if it were acquired under inheritance law.

Exceptional cases

The Supreme Court first stated that entering into marital terms does not constitute a gift, even if the spouses receive an unequal share of the community property through the marital terms. Only in exceptional cases, if entering into marital terms can be considered as tax evasion, is the resulting wealth transfer considered an acquisition under inheritance law. Therefore, the Supreme Court ruled that the Court of Appeal had applied an incorrect criterion.

In its ruling of February 16, 2024, the Supreme Court listed the conditions under which such an exceptional case can be assumed. Entering into marital terms can indeed constitute tax evasion (fraus legis) if:

a. avoiding inheritance tax was the decisive motive, and moreover
b. it would conflict with the purpose and intent of the inheritance tax act if the wealth transfer between the spouses and the subsequent death of one of them were not considered as an acquisition under inheritance law.

According to the Supreme Court, such a conflict arises if it is almost certain at the time of entering into marital terms that the spouse entitled to the smallest share of the community property will die before the other spouse. Then it must be assumed that the change could have no other practical meaning than avoiding inheritance tax.

No evidence of advantage

The tax inspector did not present any facts or circumstances based on which, if proven, it could be concluded that it was almost certain at the time of entering into marital terms that the man would die before the woman. Therefore, according to the Supreme Court, there was no reason to treat the woman's advantage resulting from entering into the marital terms, applying fraus legis, as an acquisition under inheritance law.