Making or amending prenuptial agreements during the marriage is an option that allows couples to adjust the financial relations between them to changing circumstances or insights. This process requires careful consideration and expert guidance, as such changes not only affect the relationship between the spouses, but can also affect the distribution of assets in the event of dissolution of the marriage through divorce or death. Want to know more? Read the full contribution here.

Before making or amending prenuptial agreements, it is important that both partners are fully informed about the implications of the new or amended conditions, not only from a legal point of view, but also with regard to possible tax consequences. This step can strengthen financial security and independence within the marriage, but requires a considered approach and consultation not only with legal advisers such as a specialised family and inheritance lawyer, but also with tax and financial advisers to avoid unintended negative consequences.

Prenuptial agreements a disguised gift?

A recent Supreme Court ruling of 16 February 2024 (ECLI:NL:HR:2024:239) highlights this once again. That ruling focused on the question whether entering into prenuptial agreements shortly before the death of one of the spouses could be considered a gift within the meaning of the Inheritance Tax Act 1956, and whether this resulted in a taxable acquisition for inheritance tax purposes. In other words, did the surviving spouse have to pay inheritance tax on what she acquired by entering into the prenuptial agreement? This case set an important precedent in the field of inheritance tax.

The crux of the dispute was whether the division of the common assets, as agreed in the prenuptial agreement, whereby the surviving spouse would receive a larger share of the common assets, could be classified as a gift. This was important because it potentially led to a higher inheritance tax assessment.

The facts:

The woman and her husband, with whom she had been in an affectionate relationship for 33 years, were initially married in community of property in 2015. They then entered into prenuptial agreements on 19 October 2017, agreeing that the husband was entitled to 10% and the wife to 90% of both debts and assets in the community. The husband died shortly after entering into these terms in December 2017 and the wife was his sole heir. This led to the question of whether this distribution should be seen as a gift with the corresponding tax consequences. After all, had they not made the prenuptial agreement, the wife would have inherited 50% of the joint assets, while she now only inherited 10%.

The court had previously ruled that there was fraus legis, or abuse of law, with the aim of avoiding inheritance tax. The Supreme Court had to assess whether this act indeed qualified as a donation and whether the prenuptial agreement applied was fiscally acceptable within the framework of the Inheritance Tax Act 1956.

Supreme Court ruling: only in exceptional cases law evasion

In the first place, the Supreme Court ruled that entering into a prenuptial agreement does not in itself constitute a donation, as it does not yet constitute a unilateral asset transfer characteristic of a donation. However, this does not mean that entering into prenuptial agreements can never constitute law avoidance. In fact, in exceptional cases it can, according to the Supreme Court. Such an exceptional case arises if:

1. avoiding inheritance tax was the decisive motive, and
2. . it would be contrary to the object and purpose of the Inheritance Tax Act if the transfer of assets between the spouses and the subsequent death of one of them would not be regarded as an acquisition under inheritance law.

.

The latter is the case if, at the time the prenuptial agreement was drawn up, it was virtually certain that the spouse who thereby became entitled to the smallest part of the joint assets would die before the other spouse.

According to the Supreme Court, the court had applied an incorrect standard by focusing on the equal life and death chances of the spouses at the time of entering into the prenuptial agreement instead of the correct standard: was it as good as certain that the testator would die earlier than the surviving spouse, thus causing the asset shift to take place with the avoidance of inheritance tax as the main objective? According to the Supreme Court, no facts and circumstances were presented by the Tax Inspector to the Court that could lead to the conclusion that on 19 October 2017, it was as good as certain that the husband would die before the wife. The Supreme Court therefore finds that there is no reason to speak of an acquisition under inheritance law applying fraus legis in this situation.

Proper advisers of utmost importance::

This ruling has important implications for the practice of family law, inheritance law and tax law. It highlights the need for couples to carefully consider the implications of entering into prenuptial agreements, especially in situations where the health of one of the partners may play a role in the future distribution of joint assets. This judgment also illustrates how case law can intervene in cases where attempts are made to circumvent the law to gain tax advantages.

For lawyers and advisers in family and tax law, this ruling underlines the importance of working closely together on estate planning, taking into account both the legal and tax implications of prenuptial agreements. It also provides guidance for assessing similar cases, with the motives behind entering into prenuptial agreements and the expected longevity of the spouses central to assessing whether there is an attempt to avoid inheritance tax.

Are you thinking of creating or amending prenuptial agreements? Or would you like to have your current prenuptial agreement checked? Then feel free to contact Angelique van den Eshoff, specialised family and inheritance law lawyer at SPEE advocaten & mediation, for expert advice and support in drawing up good prenuptial agreements. We also have a good network of advisers with other relevant disciplines, so that an integral approach is among the possibilities.