Specific Legacies, Interaction between Civil Law and Tax Law
Specific legacies are an important and commonly used form of testamentary disposition. It is of great importance that a testamentary disposition – such as a specific legacy – is valid and has the effect intended by the testator. Guus Boelens defends his thesis on September 29, 2015.
It should be borne in mind that unlike legal acts among the living, testamentary dispositions, which are only operative after death, cannot be altered. In this light clarity is desirable regarding the limitations civil law imposes on what a specific legacy may provide for. In many cases they serve a purpose purely civil-law in nature (ensuring that a certain item of property or amount of money will accrue to a certain individual), but specific legacies can also be used to create all manner of tax-related structures. This study is an investigation into the question whether specific legacies still play a role of significance in state planning under the totally revised Inheritance Tax Act 1956 (Successiewet 1956) which came into force on 1 January 2010 and whether this is desirable. Since specific legacies with tax-related objectives always raise questions relating to the limitations of this form of testamentary disposition under civil law, a substantial part of this study is devoted to civil law.
This study’s strength hopefully lies in its synthesis of civil law and tax law approaches to issues relating to specific legacies. Tax-related legal devices involving specific legacies raise questions relating to civil law. Answering these questions has taken not only tax law, but also civil law a step further. In this context it is important to realize that the absolute boundary of the successful use of tax-related structures lies in the validity of those structures under civil law. Within this absolute boundary, tax legislation can shift the boundaries by tackling structures which are valid under civil law but fiscally undesirable.
In connection with using a specific legacy to avoid paying inheritance tax, under the old Inheritance Tax Act 1956 it was uncertain whether the intended effect would ultimately be achieved, because, for example, it was not always clear to which cases Article 10 of the Inheritance Tax Act 1956 might apply. This Article was a danger because the property which was supposed to be acquired tax-free might later nevertheless have been subject to inheritance tax on the ground of a legal fiction. The State Secretary’s aim was for the Inheritance Tax Act 1956 to counter avoidance tactics. One might wonder if the State Secretary has not gone too far in the revised Inheritance Tax Act 1956 – an Act which has traditionally been attuned to civil law – in tackling tax-related legal devices which do in fact have a solid foundation in civil law. For everyday practice it is very important to examine and clearly document the current scope of Article 10 and other provisions of the revised Inheritance Tax Act 1956 in order to ascertain what use can be made of specific legacies with solid foundations in civil law under the revised Inheritance Tax Act 1956. In addition, the findings of this study are important in relation to perception of the law: the Inheritance Tax Act is the most hated tax legislation in our society. The legitimacy of this ‘death tax’ is frequently a topic of social debate. Levying tax upon death is a sensitive issue, partly because the sentiment prevails among heirs that the same assets are being taxed again, since the testator has already paid tax on those assets during their lifetime. Moreover, support for this legislation is undermined if the idea arises that ‘the wealthy’ are trying – en masse – to avoid paying inheritance tax through various legal devices. This was one of the main reasons for the State Secretary’s decision to change the inheritance tax legislation. The evaluation of that revised legislation in this study results in recommendations to the legislator for improving the legislation, which may increase the degree of social acceptance of the Inheritance Tax Act 1956.
Therefore, the goal of this study has been to define in terms of civil law when something is acquired by virtue of a specific legacy or another inheritance law device, and what the size is of such acquisitions by virtue of inheritance law. Acquisition through inheritance law provides the basis for levying inheritance tax. In connection to this, recommendations are made for simplifying the taxable basis as defined in the Articles 1, 5, and 20 of the Inheritance Tax Act. Insofar as there cannot be said to be any acquisition through inheritance law, it is examined whether current tax legislation justifiably subjects certain acquisitions to inheritance tax by characterizing the ‘acquisition’ as a fictional acquisition through inheritance law. Attention has been given in particular to applications – that are sound under civil law – of specific legacies, that ensure a future estate is reduced in size without causing any hindrance in life to the future testator. If inheritance tax is consequently avoided in the future, the legislator is right to take action against this via legal fictions, provided that the legislator does not (fictionally) subject anything more to taxation than that with which the future estate has been reduced. Current legislation fails to satisfy this last criterion, however, and therefore a recommendation is made in this study to add a new legal fiction (Article 10a) to the Inheritance Tax Act. In my view, after all, the legislator is not free to (purposefully) ignore an ‘overkill’ of inheritance tax in the case of a will that is sound under civil law.