The Tontine Clause in an SCI : Protecting a surviving partner

The tontine clause in an SCI

A tontine clause - a clause d'accroissement - written into the articles of an SCI (société civile immobilière) is a way for two people, most often unmarried partners or PACS partners, to arrange that when one of them dies the survivor takes all the shares and the deceased's heirs take nothing. It is a deliberate device for a couple who own their home or an investment property through an SCI and who want the survivor, rather than the children or family of the first to die, to end up with the whole of it. This guide sets out how the clause works inside an SCI, the strict condition on which it must be built into the original articles, the validity requirement of a genuine element of chance, the tax that falls due at death, and the significant drawback that comes with it.

The clause answers a specific problem. Where partners are not married, the survivor has no automatic inheritance rights over the other's estate, and the deceased's shares would ordinarily pass to their heirs. A tontine clause reverses that outcome for the SCI's shares: the survivor is treated as having owned all the shares from the start, so there is nothing in the deceased's estate for the heirs to claim. That is a powerful result, and the law surrounds it with conditions - it must be original to the company, it must rest on real uncertainty about who dies first, and it locks the partners together for as long as they both live.

What a tontine clause does in an SCI

Where partners intend that the survivor should receive all the shares and exclude the heirs of the member who dies first, the tontine clause is the instrument they use. Inserted into the company contract, the clause has the effect of treating the surviving member as having owned all of the predeceased member's shares from the origin. On the death of one member, the other automatically becomes the owner of the entirety of the shares covered by the pact.

The mechanism works through two linked conditions. The survivor holds all the shares subject to the suspensive condition of surviving, and each member owns their own shares subject to the resolutory condition of dying first. When one member dies, the suspensive condition on the survivor is fulfilled and the resolutory condition on the deceased is triggered, both with retroactive effect. Because the suspensive condition operates retroactively, the predeceased member is deemed never to have owned the shares they held during their life. The consequence for the family is direct: there is nothing to transmit through the deceased's estate, because in the eyes of the law those shares were never theirs, and the heirs of the first to die can claim no right over them.

This is why the clause is chosen by partners without the protection that marriage gives. A surviving spouse has inheritance rights and specific protections over the family home; unmarried partners and PACS partners do not have the equivalent automatic rights, so without a device of this kind the deceased partner's share of the property would pass to their own heirs, leaving the survivor exposed. The tontine clause built into the SCI's articles secures the whole of the shares for the survivor and keeps the property out of the reach of the deceased's family.

The clause must be built into the original articles

A tontine clause in an SCI is only effective if it is provided for when the company is formed. Where the pact is inserted into a company contract, it must be agreed at the constitution of the company. This is not a matter of preference but of validity: a survivorship arrangement bolted on after the shares have already been acquired is treated as a prohibited pact on a future succession.

The point has been decided. A clause d'accroissement agreed four years after a property had been bought in indivision was held to constitute a pact on a future succession - an agreement the law forbids (CA Versailles, 4 December 1997). By contrast, where the pact is original to the arrangement, the asset is deemed never to have figured in the estate of the member who dies first, so there is no pact on a future succession: the retroactive effect means the shares were never in the deceased's patrimony to begin with. The line the courts draw is therefore between a clause present from the outset, which is valid, and one added later, which is void as a forbidden succession pact.

The practical lesson is that a tontine clause cannot be a later fix. A couple who want the survivor protected must decide on the clause and write it into the articles at the formation of the SCI. If the SCI already exists without such a clause, adding one by an amendment to the articles does not achieve the same result, because it is no longer original to the members' acquisition of their shares. Survivor protection through a tontine is a decision to be taken at the start, with the articles drafted accordingly.

The validity condition: a genuine element of chance

Beyond being original to the company, a tontine clause must rest on a real element of chance. When they set up a tontine company, the members must satisfy the fundamental condition for the validity of a clause d'accroissement: the existence of an aléa - genuine uncertainty resting on the lifespan of the member who dies first, a question left to the assessment of the trial judges. The whole basis of a tontine is that neither party knows who will survive; where that uncertainty is absent, the arrangement is not a true survivorship pact but something else.

The courts police this closely. A difference in age between the parties, or a state of health at the time of the purchase suggesting that one of them is likely to die soon, are factors used either to invalidate the tontine pact or, more often, to have it requalified as an indirect gift (Cass. civ., 1re ch., 16 July 1992, no. 90-19797). In one case, a member of an SCI who alone financed the capital of a tontine company, when their age and state of health made their death before that of their co-member probable, was held to have made an indirect liberality to the other: the clause was devoid of the required element of chance (Cass. civ., 1re ch., 10 May 2007, no. 05-21011). Where the uncertainty is missing, the survivor's enrichment is treated as a gift, with the tax and reserved-heirship consequences that follow.

One point cuts the other way and is worth stating clearly. The validity of a clause d'accroissement is not undermined merely because the acquisition was financed mainly by one of the parties (Cass. civ., 1re ch., 14 December 2004, no. 02-11088). An imbalance in funding, on its own, does not destroy the clause. It is the combination of an unequal contribution with age or health making one death predictable that removes the element of chance and exposes the arrangement to requalification. A well-advised couple whose ages and health are comparable can use a tontine even where one funds more than the other; a couple where one is markedly older or seriously ill cannot safely rely on it.

Is a tontine clause right for you?

Pick the description closest to your situation - the check shows whether a tontine clause fits, and what it would mean.

The tax at death: the 5% share duty, not gratuitous-transfer duty

The tax treatment of a tontine written into an SCI's articles differs from that of a tontine placed in an ordinary joint purchase, and the difference is favourable. When a tontine pact written into the articles of a civil company unwinds on a death, it gives rise to the registration duty of 5% calculated on the value of the shares at the date of death. The reason is technical but decisive: Article 754 A of the General Tax Code, which treats clauses d'accroissement as gratuitous transfers, cannot apply to a statutory provision, because the clause is not contained in a joint-acquisition contract. So the transfer of the shares to the surviving member on the death excludes any gratuitous-transfer duty, and the 5% share-transfer duty applies instead.

The contrast with a direct joint purchase is instructive. Where an unmarried couple buy a property directly in indivision with a tontine clause in the acquisition deed, the assets received under the clause are, for tax purposes, deemed transmitted gratuitously to the beneficiary of the accrual and taxed as a succession according to the kinship between the parties, at the rates in force at the date of death (CGI Art. 754 A). Between unrelated partners that is the heaviest scale of succession duty. There is a narrow exception where the jointly acquired property is the couple's common principal residence with a value below €76,000, in which case the accrual is taxed at the transfer-on-sale duties, or, on the survivor's option, at succession duties (CGI Art. 754 A, al. 2). A surviving spouse or PACS partner is in any event exempt from gratuitous-transfer duty (CGI Art. 796-0 bis).

The consequence is that holding through an SCI changes the tax character of a tontine at death. In a direct purchase the survivor faces succession duty measured by kinship - punishing where the partners are unrelated, neutral where they are a surviving spouse or PACS partner who is exempt. In an SCI, the statutory tontine instead attracts the flat 5% share-transfer duty on the value of the shares. Which is preferable depends on the parties: for unrelated partners the 5% SCI route is usually far lighter than the gratuitous-transfer scale, while a PACS partner who would be exempt on a direct purchase must weigh the 5% cost of the SCI route against that exemption. This is a calculation to run before choosing the structure.

What a valid SCI tontine clause must satisfy

A tontine clause fails if any one of its conditions is missing. Pick the point you want to test - the check shows what the law requires.

The main drawback: it binds the members together

The tontine pact carries a significant disadvantage that has to be understood before it is adopted: it binds the members definitively. As long as they are both alive, neither signatory to the pact can dispose of their shares without the concurrence and consent of the other. The clause that protects the survivor also removes each member's freedom to act alone. Neither can sell, give or otherwise deal with their own shares unilaterally; every disposal requires the agreement of the other party to the pact.

This is the price of the survivorship result. Because the retroactive mechanism treats the survivor as the sole owner from the origin, the arrangement cannot tolerate one member unwinding their position on their own - that would defeat the pact for the other. For a stable couple who intend to hold the property together for life and want the survivor fully protected, the constraint is acceptable and even reassuring. For partners who may separate, whose plans may change, or who want to retain the ability to sell their share, the loss of individual freedom is a serious drawback, and the tontine may be the wrong instrument.

Where the binding effect is unwelcome, there is an alternative that protects a survivor without locking the partners together in the same way. Unmarried partners can hold their home through an SCI using a crossed dismemberment of the shares: each holds their own shares and, in dismembered form, the usufruct over the other's shares, so that the survivor keeps the lifetime use and administration of the property without prejudicing the heirs of the first to die. This crossed-usufruct structure achieves a protective result by a different route, and for some couples it is preferable to the tontine precisely because it does not bind them as absolutely. Which device fits depends on the couple's intentions, their family situation and the tax comparison - a decision to take with advice at the outset.

Tontine in an SCI, tontine in a direct purchase, and the alternative - at a glance

Frequently asked questions about the tontine clause in an SCI

This article is for general information only and states French law as published in the sources available at the date shown above. It does not constitute legal or tax advice. Whether a tontine clause is valid and suitable depends on the couple's situation, the age and health of the parties and the drafting of the articles. Always seek qualified legal advice before adopting a tontine clause.