Life insurance: be careful not to disinherit your heirs!

Life insurance
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Life insurance allows you to transfer capital outside the inheritance. However, if the amount of the premiums is “manifestly exaggerated” at the time of their payment, in relation to the age and the property and family situation of the subscriber, the heirs of the latter can challenge the life insurance contract. reintegrate it in the succession.

40.5% of households have at least one life insurance contract and their ownership is constantly growing (“The composition of household wealth changes shortly after the health crisis”, Insee, Première n ° 1899, May 2022). Second preferred investment with the Livret A, that is, if it occupies a privileged place in the patrimony of the French, who appreciate the investment and transmission tool, but who can ignore some precautions, in particular as regards their heirs.

Life insurance: a transmission not included in the inheritance

When the beneficiary of a life insurance contract receives capital or annuities from a contract, this transmission takes place outside the inheritance. This principle is enshrined in art L. 132-13 of the Insurance Code : “The lump sum or the annuity due in the event of the death of the contractor to a specific beneficiary are not subject to the rules of the succession report, nor to those of the reduction for damage to the reserve of the contractor’s heirs”.

On the civil level, these amounts are not accounted for in the inheritance assets shared between the heirs of the deceased. They “escape succession”, and therefore do not necessarily belong to the heirs. This mechanism therefore makes it possible to guarantee transmission to non-heirs, such as the spouse, cohabitant, PACS cohabitant or any other unrelated person who is not intended to inherit. The subscriber is free to designate the beneficiary or beneficiaries of his choice, among his heirs or not.

Forced heirs are not interested

Unlike life insurance, the inheritance belongs, at least in part, to the heirs, private persons and / or designated by will. According to’article 912 of the civil code, the children (and in some cases the surviving spouse, and in their absence the parents) are protected by the inheritance reserve, a share of the parent’s assets being reserved for them. In the presence of a child, he is entitled to half of the estate. In the presence of two children, each child is entitled to one third of the deceased parent’s estate. From three or more children, the hereditary reserve corresponds to three quarters of the estate. The part not reserved for them is called the available quota. The deceased can dispose of it freely: assign it to one or all of these heirs, or arrange for his will to be transmitted to a third party, a foundation, a spouse, etc. This available portion is determined on the basis of the inheritance reserve, in turn determined on the basis of the number of reserved heirs.

The taxation of life insurance in the event of death

From a tax point of view, this rule means that the beneficiary (or beneficiaries) therefore does not pay inheritance tax. This does not mean that life insurance is not subject to any taxation. Conversely, it has specific taxation, more favorable than inheritance tax for non-relatives (except for PACS spouses and partners who are exempt from inheritance tax).

The taxation of life insurance in the event of death depends on the age of the subscriber at the time of payment of the premiums.

For premiums paid before the subscriber turns 70, the capital and capitalized interest are subject to a specific deduction of 20% on the part collected by the beneficiary exceeding 152,500 euros. This reduction is valued per beneficiary, for all contracts stipulated on the life of the same insured. It is carried out directly by the financial institution. As with inheritance tax, the surviving spouse and partner linked to the deceased by a PACS are exempt from this 20% levy. The 20% deduction is not due when, on the date of signing the contract, the subscriber has his tax domicile outside France.

For premiums paid after the age of 70, the sums are subject to inheritance tax for contracts concluded after November 20, 1991 and starting from € 30,500. To assess this threshold of 30,500 euros, all the contracts stipulated by the same insured must be taken into account.

An exception to protect the heirs

This principle provides for an important exception, provided for by artarticle L. 132-13 of the Insurance Code himself: “These rules do not even apply to the sums paid by the contractor as a premium, unless these have been manifestly exaggerated in consideration of his faculties”.

Indeed, there is no doubt that life insurance leads to disinherit the heirs. The law protects them. Therefore, if the use of the life insurance contract leads to emptying the inheritance of its substance and injuring the obligated heirs, the life insurance becomes reportable to the inheritance. In other words, its value is fictitiously reintegrated in the estate of the deceased and is considered the object of a donation.

This is the case in the presence of manifestly exaggerated rewards. To find out if the premiums paid on the life insurance contract are manifestly exaggerated, it is necessary to ask at the time of their payment, regarding the age and the assets and family situations of the subscriber and the usefulness of the contract for the latter. Justice has just had occasion to recall this principle, which is assessed on a case-by-case basis.

In a recent case (Cass. 2And civ., June 16, 2022, n ° 20-20544), Ms A, widow, died on 25 November 2010, leaving behind her two daughters, Ms B and Ms C. Ms A had taken out a life insurance policy which designated as beneficiaries Ms C and her two children.

Mrs B sued her sister before a tribunal de grande instance for the purpose, in particular, of referring to the estate the premiums paid under this insurance. The money held by the deceased at the time of taking out this life insurance policy amounted to approximately € 150,000, a sum corresponding to the deceased’s account on 1is January 2015; he also owned his home and plots of land.

The Douai Court of Appeal rejected the request for a report on insurance premiums (CA Douai, June 18, 2020, chapter 1, section 1). The court found that their amount had been paid at the opening of the life insurance contract on 11 March 2006 by means of four checks for a total amount of 30,500 euros. The ruling specifies that the manifestly excessive nature of the premiums paid must also be assessed with regard to the financial situation of the insured, which is undisputed that the liquidity held by the deceased at the time of signing this insurance contract amounted to approximately € 150,000, which he owned his home and plots of land and that, in light of these elements, it does not appear that the premiums paid on the insurance contract were manifestly exaggerated compared to the subscriber’s income and assets at the date of signing the contract.

The Court of Cassation overturned the appeal ruling considering that the judge had not “ascertained even if, as regards the age, the family situation of the subscriber and the usefulness of the contract for you present here, the premiums paid by you were manifestly exaggerated with respect to his faculties “.

Evaluation criteria

The first criterion taken into consideration to measure the excessive nature of the premiums is the level of income and / or assets of the deceased. Bonuses should not be disproportionate to the earnings during the payout period. In the case of a single bonus, the amount of this bonus will be related to the annual income.

On the “usefulness of the contract”, the judges examine for example the age of the deceased at the time of signing the contract. Therefore, the subscription in old age is likely to be perceived as useless given the life expectancy of the subscriber.

And then ? The action of the heirs

Heirs who think they have been wronged can act on the basis of thearticle 920 of the civil code : “Donations, direct or indirect, which affect the reserve of one or more heirs, can be reduced to the amount available at the time of the opening of the succession”. Their action will therefore consist in having the life insurance contract reclassified as a gift and in affirming their rights as obligatory heirs. The action will affect all the funds of the life insurance contract in the inheritance, and not just a part. This action can be implemented by the children when the contract has been entered into for the benefit of a third party to the family. It can be entered into by only one of the heirs when the contract benefits only another heir. The sums thus reintegrated are divided among the heirs. They are subject to inheritance tax under the conditions of common law.

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