A recent parliamentary question has highlighted the tax treatment of life insurance policies that include split-option beneficiary designation clauses.
These clauses allow a primary beneficiary to accept only part of the capital and, where relevant, choose between full ownership or a split between usufruct and bare ownership. Any unaccepted portion passes to a secondary beneficiary designated by the policyholder.
This flexibility raises important tax questions, particularly where part of the capital flows to a secondary beneficiary.
The Issue Raised
Senator Marc-Philippe Daubresse has requested confirmation that the position set out in ministerial response Malhuret No. 18026 (22 September 2016) applies to all option-based beneficiary clauses, whether in full ownership or involving a split between usufruct and bare ownership.
Specifically, the question concerns whether any inheritance tax due under Article 757 B of the French General Tax Code on the portion received by the secondary beneficiary should be assessed based on their relationship with the insured, rather than their relationship with the primary beneficiary.
The Central Tax Question
The issue centres on whether the primary beneficiary’s partial acceptance or refusal of capital could be treated as an indirect gift to the secondary beneficiary.
Such a recharacterisation would be fiscally disadvantageous and would undermine the intended tax treatment of the arrangement.
A Practical Response to this Tax Uncertainty
The way to avoid this tax uncertainty is to ensure that there are no split options in the beneficiary clauses when subscribing for a life policy.
Consider the following example where there is no split option beneficiary clause.
- Mr Martin subscribes a French unit linked life insurance policy.
- The beneficiary clause states that on Mr Martin’s death, Mrs Martin is entitled to the usufruct, and their child is entitled to the bare ownership of the death proceeds.
- Mr Martin dies when the policy is worth €10 million.
- Based on Mrs Martin’s age, the usufruct is valued at 30% of the death benefit. For French tax purposes, the value attributed to Mrs Martin is therefore €3 million. As the surviving spouse, she is not liable to tax on the usufruct.
- The value of the bare ownership of the policy received by the child is valued at €7 million.
- In practice, Mrs Martin receives cash of €10 million but she also assumes a tax liability of €2 million, due to the child as bare owner. The insurer, therefore, pays €8 million to Mrs Martin.
- The child has a debt of €8 million against Mrs Martin.
- This debt is fully deductible from Mrs Martin’s estate for French inheritance tax purposes.
If the above example included a split option beneficiary clause (for example, if Mrs Martin could choose to receive 100% of the usufruct, 100% property or part in usufruct and part in full property), uncertainty could arise as to whether the reimbursement claim relating to the €8 million debt could pass to the child free of inheritance tax on Mrs Dupont’s death.
Patrimonial Context in 2026
Split beneficiary clauses remain fully relevant following clarification in the BOFiP update of 26 September 2024.
This confirmed that Article 774 bis of the French General Tax Code does not apply to standard split beneficiary clauses in life insurance policies. It also confirmed that the bare owner’s restitution claim remains deductible from the usufructuary’s estate.
However, this clarification applies to standard clauses where the allocation between usufruct and bare ownership is fixed at the outset.
Introducing an option mechanism creates uncertainty where the beneficiary of the usufructuary participates in determining the rights and amount ultimately received.
Therefore, there is a risk that the tax administration could take a more restrictive approach.
In practice, that risk may be mitigated by a strict reading of article 774 bis of the French General Tax Code. It remains to be seen whether this interpretation will be confirmed by the tax authorities.