Modifying prenuptial agreements before deathbed

Modifying prenuptial agreements shortly before the deathbed of one spouse: is this tax evasion or avoidance? Read the article below to find out.

Tax evasion and tax avoidance

When understanding tax evasion and tax avoidance, one often finds oneself in a gray area. The boundaries of what is and is not allowed by law and therefore whether it is tax avoidance or tax evasion are not sharp.

These boundaries are frequently explored by means of so-called “estate planning” in order to pay the least amount of inheritance tax on an inheritance. On Feb. 16, 2024, the Supreme Court ruled that changing or drafting a prenuptial agreement both before and during the marriage does not immediately affect the amount of gift tax to be paid. Even if the modification involves an asset distribution where the surviving spouse obtained a significantly higher percentage in the asset distribution than the deceased.

The wealth shift that occurs when the deceased spouse shares the lowest percentage in the community can only be seen as a gift in specific cases, according to the Supreme Court. Does the Supreme Court now approve of tax avoidance at intestation and with this ruling make elaborately thought-out “estate planning” more interesting?

Pursuant to the Inheritance Tax Act 1956, gift tax is levied on every asset acquired ‘by virtue of inheritance’, including assets received from an inheritance. This also applies to gifts obtained 180 days prior to the donor’s death.

Case study

A marriage was concluded between the couple in question in 2015. There was initially a 50/50 split when they got married. A 10/90 division was entered into in October 2017 using prenuptial agreements, after which the testator died with a 10 percent share within two months of being drafted in December 2017. So that is within the aforementioned 180 days.

According to the tax inspector, this was reason to conclude that the surviving spouse had received a gift. After all, the spouse received an additional 40 percent over the previously 50-50 distribution. And that, according to the inspector, could not remain untaxed. That made the surviving spouse take the suit to the highest court. To everyone’s surprise, the Supreme Court overturned the tax inspector’s position and held that entering into a prenuptial agreement does not constitute a gift even if the change or arrangement falls within the 180-day period set forth in the law.

‘Disambiguation of law’

Nonetheless, according to the Supreme Court, in exceptional cases there can still be ‘law evasion’ under the following conditions:”(i) the avoidance of inheritance tax [has] been the decisive motive, and moreover (ii) it would be contrary to the purpose and purport 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 therefore the case when it is already known to the couple when the prenuptial agreement was concluded that the one who has the least share in the community will die first.

In the case before the Supreme Court, the Supreme Court ruled that prenuptial agreements have a practical meaning. This was because there was no expectation that the deceased would die anytime soon after this adjustment. As a result, there was no reason to believe that tax avoidance alone was the motive behind the modification in the prenuptial agreement. Therefore, the Supreme Court overturned the tax assessment on the surviving spouse. This got rid of the levy imposed by Supreme Court inspector. The surviving spouse was then taxed only for the asset transfer of the 10 percent rate set in the prenuptial agreement.

Conclusion and questions?

Conclusion: amending the prenuptial agreement shortly before the deathbed of one spouse: is this tax evasion or avoidance? No, not necessarily!

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