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By means of an accrual clause, parties, often partners, can protect each other against gift and inheritance tax in relation to jointly acquired property or property held jointly in undivided ownership. The condition is that both parties have an equal chance of obtaining the other's share.
One has to be careful, however, especially when it comes to the optional accrual clause.
What is an optional accrual clause?
An optional accrual clause is an agreement in which parties who jointly own an undivided estate agree that, upon the death of one, the surviving spouse has the option to have the deceased's undivided share pass to him or her (accrual) and become the full owner of it.
Some caution is required with such an optionally formulated accrual clause, as was shown by a judgment of the Bergen Court of Appeal of 16 January 2019.
Agreement for a consideration (pecuniary interest) or a mutual gift?
The facts
A married couple concludes an optional accrual clause for five bank accounts, for which they hold joint ownership for each half. They agree that their respective undivided share in that particular asset will be transferred to the other on the condition that the latter lives longer. On the death of one of them, the undivided share of the first of them to die will ‘accrue’ into the undivided share of the longer living partner, whereby the latter becomes the owner of the entire property.
Position of the tax authorities: mutual gift
After the death of her husband, the wife decided to exercise the accrual (the money in the bank accounts). The Walloon tax authorities considered that the optional accrual clause was, in fact, a reciprocal gift between the spouses,however, and levied a gift tax of 3.3%, which is the tax rate for a moveable donation between spouses in the Walloon Region.
The appointed notary submitted an application for the return of these paid gift taxes, but it was rejected. The woman then went to court.
First instance: agreement for a consideration
At the first instance, the court ruled that the accrual clause between the spouses could only qualify as a reciprocal gift if the tax administration could prove that the accrual clause did not constitute an agreement for a consideration.
The Walloon tax administration had to prove that, at the time the clause was concluded, the chances of profit or loss (full ownership of the property) were unequal,and that there was an impoverishment without consideration on the part of one of the spouses. And the tax administration had to also prove that the acceptance of this imbalance, whether it exists or not, was made with an endowment purpose or animus donandi (intention of making a gift).
The court did not consider this evidence, however, and considered the accrual clause to be an agreement for a consideration.
After all, the couple had an equal life expectancy at the time the contract was concluded. Given their family history, their current state of health and their lifestyle, they both had an equal chance of survival. Moreover, they had both made an equal contribution at the moment of concludingthe contract: they were both owners of 50% of the various bank accounts.
Appeal to higher court: mutual gift
The Mons/Bergen Court of Appeal broke the judgment and considered the accrual clause between spouses not to be an agreement for a consideration but, like the tax authorities, a reciprocal gift. The court argued as follows:
Because of the optional nature of the accrual clause, there is uncertainty at the time of conclusion of the contract as to whether there will be an impoverishment without consideration on the part of one of the spouses. After all,upon the death of the other, the surviving spouse can choose whether or not to exercise the accrual clause and whether or not to enjoy a profit. According to the Court of Appeal, this optional character takes away any onerous nature. Furthermore, the Court of Appeal was of the opinion that accrual clausesbetween spouses usually arise from a donation motive or animus donandi.
Strict, but also fair?
In previous decisions, the Flemish Tax Administration has never seen any harm in optionally formulated accrual clauses. But the federal tax administration takes a different view in this case. And that view is followed by the Court of Appeal in Mons. A strict attitude that is open to discussion in every way.
If you would like more information on the (optional) accrual clause, please do not hesitate to contact our advisors. They will be happy to look into your personal situation.
