Life insurance: Adapting your beneficiary clause for intergenerational transfers
Article up to date as at 1 June 2021, written in accordance with French legislation in force and applicable to individuals whose tax residence is in France.
Life insurance is a means of transferring your liquid assets in favourable conditions to the beneficiaries of your choice. To do this you need to carefully word the beneficiary clause and update it on a regular basis in line with your personal objectives. A number of solutions exist for passing on your wealth to more than one generation.
A flexible scheme for remunerating the beneficiaries of your choice
When it comes to estate planning, life insurance offers a lot of flexibility. Provided the premiums paid are not “manifestly excessive”*, i.e. disproportionate to the policyholder’s circumstances, the death benefits will be granted to the persons designated in the beneficiary clause, and who may not necessarily be legal heirs. Irrespective of kinship, the same tax treatment applies for payments made from 13/10/1998 and before the policyholder’s 70th birthday (allowance of €152,500 per beneficiary and taxation of 20%, then 31.25% over and above €700,000). This is a more favourable than the inheritance tax scale (marginal tax bracket of 45% for direct-line heirs, 60% among third parties - the scale that applies to premiums paid after 70 years of age, net the total allowance of €30,500). In all cases, the spouse or civil partner (under the French PACS civil union contract) is exempt from transfer duties.
With life expectancy increasing and children inheriting from their parents later and later in life, how can you make the most of the freedom offered by the beneficiary clause?
Naturally, you can simply include your grandchildren as beneficiaries of your life insurance policies and add to the number of tax allowance available. But there are other ways to fully exploit this powerful tool and remunerate several generations.
The double-barrelled transfer approach: splitting ownership
One solution is to separate the beneficiary clause’s attributes of ownership. While this is widely used to designate the spouse as the usufructuary of the death benefits and the children as the bare-owners, it is also possible to split ownership in a way that allows multiple generations to successively benefit from the capital. For example, usufruct for children, who can enjoy the death benefits without limit for the remainder of their lifetime (principle of quasi-usufruct), and bare ownership for grandchildren. Both generations are therefore eligible for more favourable life-insurance taxation upon the policyholder’s death, and according to the value of their respective rights. At the end of usufruct, the quasi-usufructuary will be responsible for returning its estimated value on the restitution date. Accordingly, there will be no additional taxation upon the usufructuary’s death, as the transfer to the grandchildren will have been accounted for.
In such cases, a quasi-usufruct agreement should be drawn up by private agreement and filed at the tax office, or by notarially recorded deed. This is to set out the rights and duties of each party with respect to these sums of money, and to determine the amount (and possibly an escalator clause) of the bare-owners’ receivable amount from the usufructuary’s estate asset.
It is important to have a clear understanding between usufructuary and bare-owner(s) before splitting ownership under the beneficiary clause.
To involve the different generations in a family undertaking, you can also stipulate a reinvestment clause under which usufructuaries and bare-owners must co-invest the split capital into other assets, the ownership will also be split: real estate or financial assets, such as endowment contracts or, in the interest of more efficient and centralised management, the capital of a family-owned company.
Intergenerational transfer upon the policy’s settlement
It is also possible to give the beneficiary of your life insurance policy the option of waiving the death benefits in favour of their own descendants. In this case the easiest solution would be to draw up a policy for each family line and individually designate:
• As first-ranking beneficiary, one of the children of the policyholder;
• As second-ranking beneficiary, the children of the child concerned (the primary beneficiary).
Upon the policyholder’s death, each child can either:
• Accept in whole the proceeds of the death benefits;
• Waive the proceeds so that the death benefits are passed over to their own children, i.e. the second-ranking beneficiaries under the policy.
It is the beneficiary’s decision whether or not to accept the death benefit, which in itself is does not constitute a gift or donation. Should the death benefits be subject to inheritance tax (for premiums paid over the age of 70), the tax rate will depend on the degree of kinship between the policyholder and the beneficiary.
An alternative solution that encourages intergenerational transfer is to draw up an option-based beneficiary clause. This kind of clause introduces more flexibility than the previous waiver option, as the beneficiary can choose to ring-fence their share of the capital to a number of available options. The balance will then be left to the second-ranking beneficiary. Even if the Minister's response of 22 September 2016 to Senator Malhuret appears to confirm the validity of option-based clauses, they remain infrequently used because of the complexity of their wording, as well as the reservations held by some insurance companies. It is recommended, therefore, to draw up and file this kind of clause with a notary.
The importance of carefully wording the beneficiary clause
The beneficiary clause may be amended at any time, either by formal amendment, a private agreement, or a notarially recorded deed. The policyholder has two options to ensure its conservation and therefore application:
If the chosen clause is straightforward and follows a template that poses no problem to the insurance company, it can be filed directly with the latter;
If the wording of the beneficiary clause requires specialised drafting and, where applicable, reinvestment obligations, it should be drawn up separately in the presence of a notary who will file it and give notification thereof to the insurance company.
Filing the clause with a notary will also link it to France’s central registry of wills (Fichier central des dispositions de dernières volontés - FCDDV), so that heirs are informed of the existence of the policies upon the settlement of the estate.
Generally speaking, second-ranking beneficiaries should systematically be included by noting in the beneficiary clause "à défaut, à mes héritiers” (failing that, to my heirs). In the event of the first-ranking beneficiary’s untimely death, this will prevent the capital from being integrated back into the estate, thereby subjecting it transfer duties on gifts.
In conclusion, you would be well advised to review your life-insurance policies on a regular basis to ensure that the beneficiary clauses are still consistent with your needs in terms of protecting your family and transferring your wealth.
Our experts at Societe Generale Private Banking work alongside your wealth advisors to assist you in making these decisions.
* article L132-13 of the French Inurance Code
WARNING
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