Amending marriage contract shortly before passing away: pay inheritance tax or not?

On 16 February 2024, the Dutch Supreme Court ruled that entering into a marriage contract at or during the marriage does not result in a (taxable) gift. This is also the case if spouses are entitled to unequal shares of the marital community property (in Dutch: huwelijksgemeenschap), according to the Supreme Court. Only in exceptional cases should an amendment of the marriage contract be considered a taxable gift.

What was the case?

On 2 September 2015, a woman and a man married after a 33-year affectionate relationship, in full community of property. The woman and her husband are each entitled to 50% of both debts and assets in the matrimonial community of property. On 19 October 2017, the marriage contract was amended, with the husband entitled to 10% and the wife to 90% of the community property. At the time of amending the marriage contract, the husband was seriously ill, but it was unclear how long the illness would last. Within two months, the husband passed away, and the wife inherited as the sole heir.

The inspector imposed an inheritance tax assessment on the wife, assuming an equal division of the marital community (50%/50%), without taking into account the marriage contracts agreed in 2017. The 40%-point ‘extra’ entitlement of the wife to the community was thus taxed with inheritance tax by the inspector. The inspector invokes fraus legis because prenuptial agreements were concluded with different percentages for the division of the community, as there was no somewhat equal life and death chances.

The Amsterdam Court of Appeal upheld the inspector’s position, stating the drafting of marriage contracts under these conditions should be considered a taxed gift, with inheritance tax avoidance motives seen as being decisive.

Both the woman and the state secretary appealed.

Supreme Court ruling

The Supreme Court has ruled that drawing up marriage contracts is not considered a gift even if, according to these contracts, the spouses are unequally entitled to the assets of the matrimonial community of property.

Nevertheless, the Supreme Court rules that in exceptional cases, the drafting of marriage contracts does qualify as evasion of law. According to the Supreme Court such an exceptional case occurs if:

• Avoiding inheritance tax has been the decisive motive, and moreover
• It would be contrary to the purpose and spirit of the Gift and Inheritance Tax Act if the shift in assets between the spouses and the subsequent passing away of one of them were not considered an acquisition under inheritance law.

The Supreme Court has clarified in which situations such an exceptional case arises. If, at the time of drafting the marriage contract, it is virtually certain that the spouse who is thereby entitled to the smallest part of the joint assets (in this case: the husband) will die earlier than the other spouse (in this case: the wife), and therefore the shift of assets from one spouse to the other will take place.

Under such circumstances, it must be assumed that the shift of assets through the marriage contract could have no practical meaning other than avoiding inheritance tax.

The Supreme Court held that this was not the issue in this particular case. The assessment imposed on the woman is annuled.

Observations Atlas Tax Lawyers

In line with the Supreme Court ruling, an amendment of marriage contracts will only be considered a gift in exceptional cases. This is particularly true when, at the time of entering into the marriage contract, it is almost certain that the spouse with limited entitlement to the joint assets will die earlier than the other. As a result, there will be a shift of assets from one spouse to the other, resulting in this amendment qualifying as a gift.

As a result of this ruling, it remains possible to customise the entering into or amendment of marriage (or partnership) contracts with the necessary flexibility. Whether this ruling will prompt the legislator to take legal action remains to be seen.

Questions?

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