Life insurance taken out for spousal benefit: a reduction in estate taxation

Life insurance and inheritance tax

A traditional life insurance policy serves two aims: savings and the transfer of property. To this end, the policy subscriber designates the beneficiary or beneficiaries of the capital in the event of his or her death before the term of the policy. Life insurance benefits from a favourable fiscal framework, particularly in inheritance matters. By law, therefore, the sums paid out to a designated beneficiary upon the death of the insured party do not form part of the insured party's estate and are not, in principle, liable for inheritance tax.

A policy taken out for the benefit of the surviving spouse is completely exempt from inheritance tax. This exemption is subject to certain limitations, however, especially when children are designated as beneficiaries.

The specific case of subscription to a life insurance policy for the benefit of the surviving spouse

A life insurance policy is often taken out by one spouse for the benefit of his or her partner as a form of additional financial protection, with the premiums being paid out of the couple's joint funds.

If the beneficiary is the first spouse to die, the policy is not liquidated and the insurer is not required to pay out the capital stated in the life insurance policy. On a legal basis, as the conjugal community of property is dissolved upon the death of the beneficiary spouse, the surrender value of the life insurance policy on the date of death constitutes common property, half of which is accounted for in the estate of the deceased spouse. 

A new doctrine favourable to savers

This highly controversial position adopted by the tax authorities was finally abandoned on 23 February of this year (in the Ciot Ministerial Response).

For cases of succession arising since 1 January 2016, on the fiscal level, "the surrender value of a life insurance policy taken out with joint funds, and not liquidated on the date of death of the spouse designated as the beneficiary of such policy, shall not be included in the assets of the conjugal community of property when it is liquidated and shall not therefore constitute a component of the estate assets for the calculation of inheritance tax for which the pre-deceased person's legatees shall be liable".

The inheritance tax on the policy shall therefore only be due at the time of the liquidation of the contract upon the death of the second spouse, under the conditions of ordinary law applicable to life insurance.

N.B. This change of fiscal doctrine does not affect the civil rules which remain unchanged.

The previous "Bacquet" fiscal doctrine

For the calculation of inheritance tax, since June 2010, the French tax authorities (in the "Bacquet" ministerial response), in line with legal analysis, considered that the surrender value of a life insurance policy formed part of the assets of the community of property, half of which were subject to inheritance tax (except for the share destined for the surviving spouse, which was exempted).

This position led to legatees other than the spouse (in particular, the children of the deceased) being liable for inheritance tax on this amount even though they did not possess the corresponding capital.

Sources used in the article: Bacquet Ministerial Response of 29 June 2010; Ciot Ministerial Response of 23 February 2016