The ‘tontine’ clause in property sale contracts and the risk of disqualification.

This clause is sometimes used by (normally unmarried) couples to protect the surviving partner against the reserved inheritance rights of children. Without it the children (or other relatives) of the deceased inherit the property.

The "tontinier pacte" stipulates that the surviving partner becomes the full owner of the property, as if they had acquired it alone. There is, in effect, no division of the property.

This means that on first death no formality is necessary with the land registry. If the property is sold it is sufficient to simply to mention the first death and provide an extract of the death certificate.

As property is deemed never to have belonged to the deceased the heirs cannot contest their share of the property, as the property is not transmitted by inheritance and remains in the surviving estate.

As a by-product, the clause also means the property cannot be seized by creditors of the owners during their lifetime.

Disadvantages

There are, however, certain disadvantages, notably concerning children.

Where there are children from outside of the relationship, only those children of the surviving partner would have a right to the estate. The children of the first deceased are therefore disenfranchised from the inheritance, although there are various permutations of the clause that can be used. Notaires are sometimes unwilling to use the clause where there are children from another relationship.

In addition, in the case of a disagreement or separation, the clause can have complex consequences as it cannot be revoked, except by mutual agreement of the partners. In the absence of agreement, all that remains is to wait for the death of one of the parties.

Obtaining a mortgage on a tontine is almost impossible as the name of the actual owner cannot be known until after first death.

As the tontine is considered by the tax authorities as a gift between cohabiting partners it is taxed accordingly, i.e. up to 60% inheritance tax. This applies only between two unrelated couples, as there is no inheritance tax between married couples or those in a civil partnership. An exemption from inheritance tax is provided for if the value of the property is less than €76,000, provided the dwelling was indeed the common main residence of the two owners.

To avoid inheritance tax, it is possible to include a tontine clause in the articles of association of a real estate company (SCI) owning the property in question. In this situation, the surviving partner will only have to pay registration fees of 5.09% on the death of the first partner.

Another option to consider would be to take out a life insurance policy (assurance vie) to assist the surviving partner with any taxes that may be due.

Disqualification

The clause requires careful consideration as it is potentially subject to a successful legal challenge where, for instance, there is a large age difference between the partners, significant disparities in their financial contribution, or if one of them suffers from serious health problems.

There are a host of cases where the clause has been thrown out by the courts. In one recent case, a couple had bought an apartment and entered into a tontine agreement, triggering complications during the division of the estate after the death of one of the spouses.

The deceased's children from a previous union argued that the acquisition of the apartment constituted a disguised gift. The property had been purchased two months before the death of the husband, who was seriously ill and had a short-term life-threatening prognosis.

The judges reclassified the agreement as a disguised gift in favour of the surviving spouse. Like any gift, it was presumed to be an advance on the share of the estate and must therefore be included in the inheritance and taken into account during the division of the estate.

The courts have adopted similar reasoning in other cases where a tontine agreement has been reclassified as a disguised gift due to a significant difference in age and state of health between cohabiting partners.