Life insurance: focus on a very effective technique for reducing inheritance tax– Get a quote in minutes

As we know, life insurance has many advantages in terms of taxation, whether on the taxation of earnings or in the event of inheritance. But there are techniques to further reduce the note. Among them: the dismembered beneficiary clause, which optimizes inheritance rights, while ensuring the transmission of his assets to the right people.

As a reminder, a beneficiary clause is a document intended to indicate the persons to whom the funds housed in life insurance will return upon death. When it is dismembered, this means that this clause designates a beneficiary in usufruct, who can use the property made available and collect the income, and one or more beneficiaries in bare ownership, who will become full owners on the death of the usufructuary.

The subtlety is that the law considers that the usufructuary cannot dispose of the income from this capital without having it. As a result, the usufructuary can use the sums he collects as he sees fit. “We speak of“ quasi-usufruct ”, the powers conferred being greater than that of a conventional usufruct. For example, in terms of real estate, it is impossible to sell a dwelling of which there is only usufruct ”, explains Catherine Costa, director of the Heritage Solutions division at Banque Privée 1818. The only obligation of the quasi-usufructuary: to return, to upon his death, all the sums to the bare owners.

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Where this technique becomes interesting from a tax point of view is when it is used to pass on your wealth to your spouse and children. As a general rule, a dismembered beneficiary clause names the spouse as usufructuary, and children as bare owners. On the death of the insured, the sums are then transmitted to the spouse. Taxation is calculated according to a scale which depends on the age of the usufructuary. His share can range from 90% if he is under 21 to 10% if he is over 91, the rest being allocated to bare owners.

The big advantage is that the spouse's share is entirely exempt from inheritance tax. The tax is therefore due only on the children's share. And on the death of the usufructuary (here, the spouse), the sums initially transmitted are considered to be a “recovery claim”, recoverable by the bare owners from the usufructuary. This receivable is deductible from the estate assets and is therefore not taxed. Clearly, this sleight of hand made it possible to pay no tax at all on the spouse's share!

Taxation on inheritance which can be halved

This scheme is in fact much more interesting than a conventional tax transmission. In the event that the amounts housed in life insurance were first transmitted to the spouse, then secondly to the children, they would have been taxed in full upon transmission to the children, after the death of the spouse.

The benefit conferred can be extremely significant, as demonstrated by a practical case that we asked of the 1818 Bank (see below for details). He takes the example of a person who died in 2017, holding a contract worth 1.8 million euros (the sums having been paid before age 70), having designated his 65-year-old wife as usufructuary and her 2 children as bare owners. The overall taxation reaches 179,400 euros with a dismembered profit clause, against 365,924 euros with a conventional transmission. Or 2 times less!

Be careful though, the tax benefit of this technique is only valid for large assets: for example, people whose life insurance contract does not exceed 152,500 euros per beneficiary will de facto be exempt from tax when succession.

In addition, this dismembered beneficiary clause involves risks. Indeed, the usufructuary can very well squander the sums collected, since he can freely dispose of them. It is therefore better to have a non-confrontational family environment. To avoid this kind of inconvenience, it is also possible to supervise the quasi-usufructuary, by obliging him to provide a deposit, even by including a clause for the reuse of sums.

Other precautions in the drafting of the clause must be taken. “Make sure to include a clause providing for the assumption of the tax by the usufructuary. Otherwise, the administration would be justified in seeing it as an indirect donation, ”said Catherine Costa. Also remember to recommend to the beneficiaries to “materialize” the claim for restitution via an authentic deed (drawn up at the notary) or a deed under private signature (to be registered with the tax authorities). This will prevent the administration from contesting the deduction of this claim. For all these steps, do not hesitate to be accompanied. You can, for example, take a look at the independent wealth management advisers (CGPI) participating in our competition …


1. Life insurance with dismembered beneficiary clause: transmission to the usufruct spouse and children in bare ownership

Pierre Durand, aged 60, took out a life insurance contract in 2003 for 1,300,000 euros. The dismembered beneficiary clause specifies that his wife Marie Durand is beneficiary in usufruct and his 2 children are beneficiaries in bare ownership.

Mr. Pierre Durand died in January 2017. His wife was then 65 years old. Value of the contract: 1,800,000 euros (social security deductions). Given the age of the surviving spouse, the usufruct is fixed at 40% of full ownership. Mrs. Marie Durand's share is therefore 720,000 euros. As a surviving spouse, she is exempt from tax.

The children's share is 1,080,000 euros. They benefit from a reduction of 152,500 euros each, on the basis of their share, then are taxed at 20%. Or a total tax of 179,400 euros. After payment, Marie Durand receives the tax net capital of 1,620,600 euros. The bare owners will have a restitution claim to assert on the death of Mrs. Marie Durand.

To simplify the example, we consider that in Mrs. Marie Durand's estate we only find the sums from the capital paid by the insurance company, ie € 1,620,600.

Assets: € 1,620,600

Liabilities (refund claim) € 1,620,600


Taxable assets 0 €

On death, the children therefore recover 1,620,600 euros, or 810,300 euros each.

2. Life insurance with classic beneficiary clause: transmission to the spouse, then to the 2 children upon the death of the spouse

Value of the contract on death: 1,800,000 euros (social security contributions deducted). The insurance company pays 1,800,000 euros to Marie Durand without tax since the spouse is exempt.

To simplify the example, we consider that in the estate of Mrs. Marie Durand we only find the sums from the capital paid by the insurance company, ie 1,800,000 euros.

Assets: € 1,800,000

Liabilities (refund claim) 0 €


Taxable assets € 1,800,000

½ of which for each child € 900,000

Direct line allowance € 100,000


Taxable 800,000 €

Death duties due / child € 182,962

Or together € 365,924

On death, the children therefore recover 1,434,076 euros, or 717,038 euros each.