Gift of Insurance Policies and Joint Life Second Death Policies
On 1 January 2022, Wallonia aligned its inheritance tax rules relating to life insurance on those of the Flanders. The Brussels Region has just amended its legislation along the same lines. The rules are now aligned in the three regions.
Among the new tax measures introduced by the Brussels-Capital Region, we would like to highlight the following:
Gift of an insurance policy
When a person takes out an insurance policy on their own life for the benefit of a third party, the beneficiary will receive the insured capital upon the death of the policy holder, and he will be liable to inheritance tax.
The inheritance tax can be avoided by redeeming the policy and gifting the cash or by gifting the insurance policy. The policyholder can give all their rights to the policy to the beneficiary. From a legal point of view, this transforms the "stipulation for a third party" that is liable to inheritance tax into a tax-exempt "stipulation for oneself".
In the three regions, the gift of the insurance policy no longer transforms this policy for another beneficiary into a policy for oneself. However, if the gift of the insurance policy is registered with the Brussels tax authorities and gift tax is paid, inheritance tax will only be due on the capital paid out minus the value of the policy on which gift tax was calculated.
The rules on inheritance tax
and life insurance are now
the same in all three regions
If gift tax was calculated at 3% on €100,000, and the beneficiary receives €125,000, inheritance tax will be due on €25,000. If the gift was not registered, inheritance tax will be due on €125,000 even if the policyholder dies more than three years after the gift (unlike Wallonia, the Brussels Region has no plans yet to make that five years).
The law shows some weaknesses, and that can give other problems as the Flemish Tax Authorities found out after a decision of the Supreme Court of 21 April 2022. We will also have to see what effect this decision will have on past insurance gifts and what adjustments can be made.
Joint life second death policies
With a “joint life second death” policy two policyholders (usually the parents) take out life insurance on their own lives with their children as the beneficiaries. The insurance company will only pay out upon the second death.
Upon the first death, the insurance company did not pay out the insured capital and no inheritance tax was due. The insurance policy remained in place with one policyholder, one life insured and the same beneficiaries. As the sole policyholder, the surviving spouse can exercise all the policyholder’s rights, and that includes the right to redeem the investments held by the policy.
Inheritance tax was only due on the second death when the insurance company sold the underlying funds and paid out the proceeds to the beneficiaries. This was a tax efficient and effective way to pass money / investments from one spouse to the other. When one policyholder uses her company pension as the insurance premium and subsequently dies, the other policyholder can access that money that is really the deceased’s money without paying inheritance tax.
For years, the Belgian tax authorities have been trying to find a way of charging inheritance tax, to no avail. All three regions now have legislation in place to charge inheritance tax not only when the insurance company pays out but also when the surviving policyholder takes a drawdown on the insurance policy and gets access to investments that were financed by the deceased policyholder. Inheritance tax is, therefore, due when the capital is paid out after the first but before the second death.
If the policyholders are married and have a community property regime, the drawdown is liable to inheritance tax for half. If they do not have community property, or if they can prove that they used personal property to pay the insurance premium, no inheritance tax will be due.
The new rules were published in the Belgian State Gazette of 1 August; they will apply from 11 August in Brussels.