In summary…
The standard beneficiary clause protects the spouse but concentrates all unspent capital in their own estate. The split beneficiary clause corrects this flaw: the spouse freely disposes of the funds in quasi-usufruct, while the children hold a claim for restitution. Upon the second death, this debt is deducted from the estate. On a €600,000 contract, this means €600,000 is removed from the taxable base.
1. The mechanism: quasi-usufruct and claim for restitution
The clause designates the spouse as the usufructuary and the children as the bare owners of the death benefit. Since it concerns a sum of money, the usufruct becomes a quasi-usufruct within the meaning of Article 587 of the Civil Code: the spouse may consume, invest, or place the funds, with the obligation to return their value at the end of the usufruct.
Upon his death, the children become creditors of his estate. Articles 768 and 773-2° of the French General Tax Code (CGI) allow the deduction of this debt of restitution, provided it is proven.
2. Taxation upon the first death
For premiums paid before age 70, the capital falls under Article 990 I. The spouse is exempt. Children are taxed on the value of the bare ownership, determined by the scale in Article 669: the usufruct is worth 50 % up to age 70, and 40 % from age 71 to 80.
The €152,500 allowance per beneficiary is divided between the usufructuary and the bare owners in proportion to their respective rights. Therefore, the children may owe inheritance tax upon the first death, on the portion of the bare ownership that exceeds their share of the allowance.
3. Concrete example
Situation. A married couple with two children. The husband had a life insurance policy worth €600,000, funded before he turned 70. His wife was 75 when he died.
Issue. With a clause in favour of the spouse alone, the €600,000 not spent would have been fully included in the wife's estate, taxed according to the direct line scale for the children.
Strategy. The clause is drafted with a division of ownership: quasi-usufruct to the wife, bare ownership to the two children. The quasi-usufruct agreement is signed and registered upon commencement of the usufruct.
Result. Upon the first death, the wife pays nothing and receives the €600,000. Each child receives €180,000 in bare ownership, after a €91,500 allowance is deducted, resulting in €17,700 in inheritance tax. Upon the second death, €600,000 of restitution debt is deducted from the estate.
4. The condition that invalidates the deduction
The debt of restitution must be proven. Without a quasi-usufruct agreement with a fixed date, ideally registered, the tax authorities will dispute its existence or amount and refuse the deduction upon the second death.
Article 774 bis, which restricts the deduction of certain repayment debts, does not apply to split ownership clauses: the BOFiP (Official Bulletin of Public Finances) of September 26, 2024, confirmed this. The deduction remains available for this arrangement.
The wording of the clause itself matters: an imprecise designation of the bare owners or a silence on the quasi-usufruct opens the way to disputes between heirs.
5. For which couples
For married couples whose life insurance represents a significant portion of their assets, and who want to guarantee the surviving spouse free access to the capital without shifting the tax burden to the second estate, the age of the surviving spouse at the first death determines the value of the bare ownership: this is what determines the immediate cost to the children. The calculation is made before the clause is signed.
Frequently asked questions
Can the spouse spend the capital?
Yes. The quasi-usufruct gives him free disposal of the funds. The debt of restitution remains for the value received and is settled from his estate.
Do children pay inheritance tax upon the first death?
They may owe tax on the value of the bare ownership beyond their share of the €152,500 allowance. For example, with a spouse aged 75 and an income of €600,000 for two children: €17,700 each.
Is it necessary to register the quasi-usufruct agreement?
It must have a fixed date. Registration is the safest way to establish this and secure the deduction upon the second death.
Is your beneficiary clause still "my spouse, failing that my children"? Book a wealth management consultation: we will audit the clause and calculate the cost of the split version.
