The tontine clause (tontine pact) included in the act of buying real estate can be advantageous, if you buy together. It avoids the risks of joint ownership and guarantees ownership of the entire property, to the survivor. In the long term, the pact is dissolved and the capital of the account or the property is transferred to the beneficiary who is still alive.
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This is a kind of long-term investment, which may be aimed at preparing for retirement or passing on savings or real estate.
Note: The tontine is old. In 1844, the director of the Polytechnic school created the Associations mutuelles Le Conservateur. Since then, the insurance group Le Conservateur has remained the tontine specialist. The Conservator manages more than 25 tontine associations. The tontine is now defined by the articles of the Insurance Code.
How to create a tontine?
Tontines can relate to a building as well as to a joint capital. Their purpose is that the money paid, the products, the interest or the buildings bought, belong to the last survivor.
It is possible to subscribe to a tontine with an insurance company.
The tontine is like a collective association of long-term investors. Prior to the term, it is impossible to recover the invested capital. At the end of the tontine association, the accumulated capital is distributed. If one of the savers dies before the end of the term, his share goes to the other members of the association. It is also possible to combine the association with a death insurance. The insured will then have to pay a provident premium according to his age and the insured capital. Therefore, the heirs will receive a capital equivalent to the initial investment.
Note: The tax regime for death insurance defined in the Insurance Code provides that the capital for death insurance is not part of the assets and does not become part of an inheritance. However, the premium for the last year will be taxed after an allowance of 152,500 euros per beneficiary. Another scheme applies for premiums paid after age 70.
Regarding a real estate purchase, the tontine clause can be inserted directly into the deed of purchase.
A tontine can have different purposes:
- build up capital,
- obtain additional capital upon retirement,
- pass on a heritage
Careful, as tontine may not be suitable for your situation and can at times turn into a real trap.
As a "random" contract, a tontine purchase must respect hazard conditions. The buyers must all finance part of the property and have a similar life expectancy. Otherwise, the tontine purchase can be requalified as a donation.
How does tontine work?
There are two kinds of tontines:
- the real estate tontine,
- the financial tontine.
Real-estate tontine (annuity scheme)
During the lifetime of the buyers:
The risk: You always need unanimity to take action; If the buyers no longer get along (or wishes to separate), they can decide to sell the property or agree that one of them will buy the other's share. Unanimity is required in this case, because, unlike what happens in a joint ownership, the buyers cannot induce partition in court, or even ask for selling the home. Indeed, the old saying "nobody can remain undivided" is not applicable.
On the death of one of the buyers:
The predeceased person is declared never to have bought, only the surviving purchaser is considered as the owner, right from the start. The heirs of the deceased therefore have no right on the property (the property is not part of the heritage of the deceased). However, the surviving purchaser must pay inheritance tax, calculated on the degree of relationship he has with the deceased and the value of the share he receives (free between spouses and civil union partners, 60% between cohabiting partners after a reduction of 1594€). However, there is an exception to this rule. When the property makes up the main residence of the purchasers at the time of death and its value is less than 76,000€, the survivor only pays transfer duties against payment (i.e. the maximum legal rate of 5.81%).
Financial tontine (annuity scheme)
The financial (or investment) tontine consists of pooling savings through a savings association. Payments from annuity scheme individuals who died before the end of their term increase the capital of the survivors. The tontine is created for a period fixed in advance.
Please note: Management fees can be high when the association is incorporated. They are to be taken into account in the duration of the engagement and in the expected return. Moreover, the tontine company does not commit to any guaranteed return or capital. Indeed, the return will depend on the prices of the financial markets. During the life of the tontine, savings are managed by a manager.
Payments made to a tontine can be:
- a single premium,
- periodic bonuses.
Note: If the saver stops supplying the tontine after a minimum commitment period, it will be reduced, which means,, that at maturity, the saver will obtain a reduced capital according to the duration of payments.
Savings are blocked until the end of the tontine. At the end of the tontine, the manager of the company liquidates the invested assets (for example, shares) and transfers them to the beneficiary (ies) still alive.
The tontine thus makes it possible to benefit at the end of the contract from a certain sum of money supplementing a retirement or which helps to carry out a project.