In Testamentary Succession after a Stepmother or a Stepfather, does the Tax Exemption of the Stepchild Last until the Death of its Parent?

In Testamentary Succession after a Stepmother or a Stepfather, does the Tax Exemption of the Stepchild Last until the Death of its Parent?

Authors: Tamara Drobnic and Gregor Simoniti, SELIH & PARTNERJI Law Firm

One year ago, the Supreme Court of the Republic of Slovenia (“Supreme Court”) by its decision X DoR 55/2018 allowed a revision to be filed due to the question whether the death of the stepchild’s parent results in the termination of the stepchild’s status with respect to the spouse of his parent (i.e. his stepmother or stepfather). The Supreme Court ruled upon this admissible revision with decision X Ips 29/2018 of 2 July 2019, by which it changed the decisions of lower instances in a manner that the appellant – the stepchild, who was an heir appointed by will after the second wife (her stepmother) of her late father (who died before his second wife) was exempted from paying the inheritance tax.

Upon receiving the decision on inheritance in the tax proceedings, the appellant demanded to be exempted from paying the inheritance tax, claiming that she was the stepdaughter of the decedent. The Financial Administration of the Republic of Slovenia did not exempt the appellant of such obligation, stating that such exemption was valid only until the death of the appellant’s father and not thereafter, as the relationship by marriage between the appellant and the decedent ceased to exist with the death of the father of the appellant (husband of the decedent who died before her), so at the time of the decedent’s death the appellant was no longer her stepdaughter. Such a decision was affirmed as correct by the Administrative Court of the Republic of Slovenia (“Administrative Court”) with judgment I U 941/2017, emphasising that tax exemptions, which are an exception, should be treated restrictively. The Administrative Court followed its previous decision I U 819/2015, in which, in the comparable factual and legal circumstances of the particular case, the stepson (the plaintiff) also was not exempted from inheritance tax.

In its judgment, the Administrative Court did not explain the meaning of the term “stepchild” within the provisions of the Inheritance and Gift Tax Act (“ZDDD”), nor did it explain why someone was considered to be a stepchild in relation to the spouse of his / her parent until the death of the latter. It can be concluded that the Administrative Court drew from Slovenian family law, which defines a relationship by marriage as the legal relationship of a spouse towards relatives of another spouse, and that this relationship ends when the marriage ends. The Administrative Court did not mention in its decision that the third paragraph of Article 53 of the Slovenian Constitution stipulates that the state protects family, motherhood, fatherhood, children and youth and creates the necessary conditions for this protection. Consequently, the Administrative Court did not interpret the concept of stepchildren in a constitutionally consistent manner. Namely, the decision offered by the Administrative Court binds tax exemption to the moment of the parent’s death, whereby, without a reasonable cause, it places in disparate position those testamentary beneficiaries whose stepmother or stepfather dies before their spouse and those whose stepmother or stepfather dies after their spouse (the parent of the testamentary beneficiary). Therefore, the Administrative Court did not explain why the death of a parent is a key circumstance that someone is (still) considered a stepchild or not, which it should do, considering that ZDDD does not stipulate that the exemption is dependent upon the chance that the stepchild’s parent survives the decedent (its spouse) or not.

The lack of arguments of the Administrative Court was recognised by the Supreme Court, which by its decision X DoR 55/2018 as of 6 June 2018 allowed the revision on the issue: whether in cases of testamentary succession after a stepmother (stepfather) the tax exemption of the stepchild lasts until the death of her (his) father (mother).

This question was later also dealt with by legal theory. In June 2019 dr. Jernej Podlipnik published an article in the journal Company and Labour 3-4 / 2019 / XLV: Inheritance and gift taxation: Influence of a parent’s death on stepchild’s tax exemption.

In its judgment X Ips 29/2018 of 2 July 2019, the Supreme Court explained that the ZDDD equated the treatment of first-order heirs and stepchildren. The law on inheritance does not allow stepchildren to inherit by law itself, but they can inherit only through the testator’s will, which the latter expresses with writing a will. This means that the legislator, when deciding upon the tax exemption of the stepchild, gave the decisive weight to this circumstance—the same as the law is with heirs of the first hereditary order. The composition of the will establishes the presumption that the stepchild (testamentary heir) is to the decedent what his descendants (if he has any, or if he had any) are to him according to the law. The will of the testator to whom he wishes to leave his property is thus the sole basis on which the stepchild’s entitlement to tax exemption rests. Whether the stepchild’s parent died before the decedent who is leaving his estate to the stepchild is, therefore, irrelevant. In fact, the Supreme Court explained that if the family relationship between the stepchild and stepmother or stepfather continues after the marriage between the stepchild’s parent and the decedent terminated, the termination of the latter has no effect on the already established relationship between the stepchild and the decedent which persists – much like there is a relationship between the decedent’s descendants and the decedent in the event of the death of the other parent.

The relevant circumstance of the present case was the death of the biological parent, so the Supreme Court focused only on the issue described above. In doing so, it made it clear that the decision whether the stepchild would be exempt from inheritance tax could not depend on the coincidence whether the stepchild’s parent survived the decedent (his spouse). Therefore, if the stepchild’s parent dies before the stepmother or the stepfather who, with a will, leaves her / his estate to the child of his deceased spouse, the testamentary beneficiary is considered a stepchild within the meaning of the ZDDD and should be exempt from paying the inheritance tax.

In a separate affirmative opinion to the mentioned judgment, Supreme Court judge dr. Erik Kersevan presented that within the scope of settling this case the Supreme Court could have also decided whether the testator’s will would have the same decisive effect in cases where the marriage between the father (mother) and the decedent is terminated due to divorce (and not the death of the parent). The Supreme Court’s position in this direction would certainly be welcomed, as this dilemma remains (for the time being) unresolved, but it must be borne in mind that the procedural rules of civil law require that the Supreme Court tests the judgment which is the subject of revision only regarding those specific legal issues regarding which it has allowed a revision. The question, which was allowed in the present case, as explained, (merely) touched on the circumstances of the death of the testamentary beneficiary’s parent.

In his separate opinion, dr. Kersevan took the view that the concept of the stepchild, within the meaning of ZDDD provisions, should be interpreted in such a way that it includes anyone who was once a stepchild in the family community of his parent and his parent’s spouse (stepmother or stepfather). One can agree with the explanation of dr. Kersevan, who states that if on the basis of testamentary inheritance it is shown that the authenticity of the relationship between the stepmother or stepfather as decedent and the stepchild as heir exceeded the termination of this community, it is completely irrelevant why this community (due to death or divorce) ended before decedent’s death. If the testator does not change his will after the divorce from the stepchild’s parent or even makes the stepchild as his heir after the divorce, then he gives a clear message that he considers the stepchild equal to his descendants (if he has or would have any). The will of the testator and the relationships that are established between the decedent and the child of his former spouse go beyond the absence of marriage and must, therefore, be decisive in determining whether a person is treated as a stepchild in accordance with the provisions of the ZDDD. For example, such a position has long been established in German case law.

Authors: Tamara Drobnic and Gregor Simoniti, SELIH & PARTNERJI Law Firm

One year ago, the Supreme Court of the Republic of Slovenia (“Supreme Court”) by its decision X DoR 55/2018 allowed a revision to be filed due to the question whether the death of the stepchild’s parent results in the termination of the stepchild’s status with respect to the spouse of his parent (i.e. his stepmother or stepfather). The Supreme Court ruled upon this admissible revision with decision X Ips 29/2018 of 2 July 2019, by which it changed the decisions of lower instances in a manner that the appellant – the stepchild, who was an heir appointed by will after the second wife (her stepmother) of her late father (who died before his second wife) was exempted from paying the inheritance tax.

Upon receiving the decision on inheritance in the tax proceedings, the appellant demanded to be exempted from paying the inheritance tax, claiming that she was the stepdaughter of the decedent. The Financial Administration of the Republic of Slovenia did not exempt the appellant of such obligation, stating that such exemption was valid only until the death of the appellant’s father and not thereafter, as the relationship by marriage between the appellant and the decedent ceased to exist with the death of the father of the appellant (husband of the decedent who died before her), so at the time of the decedent’s death the appellant was no longer her stepdaughter. Such a decision was affirmed as correct by the Administrative Court of the Republic of Slovenia (“Administrative Court”) with judgment I U 941/2017, emphasising that tax exemptions, which are an exception, should be treated restrictively. The Administrative Court followed its previous decision I U 819/2015, in which, in the comparable factual and legal circumstances of the particular case, the stepson (the plaintiff) also was not exempted from inheritance tax.

In its judgment, the Administrative Court did not explain the meaning of the term “stepchild” within the provisions of the Inheritance and Gift Tax Act (“ZDDD”), nor did it explain why someone was considered to be a stepchild in relation to the spouse of his / her parent until the death of the latter. It can be concluded that the Administrative Court drew from Slovenian family law, which defines a relationship by marriage as the legal relationship of a spouse towards relatives of another spouse, and that this relationship ends when the marriage ends. The Administrative Court did not mention in its decision that the third paragraph of Article 53 of the Slovenian Constitution stipulates that the state protects family, motherhood, fatherhood, children and youth and creates the necessary conditions for this protection. Consequently, the Administrative Court did not interpret the concept of stepchildren in a constitutionally consistent manner. Namely, the decision offered by the Administrative Court binds tax exemption to the moment of the parent’s death, whereby, without a reasonable cause, it places in disparate position those testamentary beneficiaries whose stepmother or stepfather dies before their spouse and those whose stepmother or stepfather dies after their spouse (the parent of the testamentary beneficiary). Therefore, the Administrative Court did not explain why the death of a parent is a key circumstance that someone is (still) considered a stepchild or not, which it should do, considering that ZDDD does not stipulate that the exemption is dependent upon the chance that the stepchild’s parent survives the decedent (its spouse) or not.

The lack of arguments of the Administrative Court was recognised by the Supreme Court, which by its decision X DoR 55/2018 as of 6 June 2018 allowed the revision on the issue: whether in cases of testamentary succession after a stepmother (stepfather) the tax exemption of the stepchild lasts until the death of her (his) father (mother).

This question was later also dealt with by legal theory. In June 2019 dr. Jernej Podlipnik published an article in the journal Company and Labour 3-4 / 2019 / XLV: Inheritance and gift taxation: Influence of a parent’s death on stepchild’s tax exemption.

In its judgment X Ips 29/2018 of 2 July 2019, the Supreme Court explained that the ZDDD equated the treatment of first-order heirs and stepchildren. The law on inheritance does not allow stepchildren to inherit by law itself, but they can inherit only through the testator’s will, which the latter expresses with writing a will. This means that the legislator, when deciding upon the tax exemption of the stepchild, gave the decisive weight to this circumstance—the same as the law is with heirs of the first hereditary order. The composition of the will establishes the presumption that the stepchild (testamentary heir) is to the decedent what his descendants (if he has any, or if he had any) are to him according to the law. The will of the testator to whom he wishes to leave his property is thus the sole basis on which the stepchild’s entitlement to tax exemption rests. Whether the stepchild’s parent died before the decedent who is leaving his estate to the stepchild is, therefore, irrelevant. In fact, the Supreme Court explained that if the family relationship between the stepchild and stepmother or stepfather continues after the marriage between the stepchild’s parent and the decedent terminated, the termination of the latter has no effect on the already established relationship between the stepchild and the decedent which persists – much like there is a relationship between the decedent’s descendants and the decedent in the event of the death of the other parent.

The relevant circumstance of the present case was the death of the biological parent, so the Supreme Court focused only on the issue described above. In doing so, it made it clear that the decision whether the stepchild would be exempt from inheritance tax could not depend on the coincidence whether the stepchild’s parent survived the decedent (his spouse). Therefore, if the stepchild’s parent dies before the stepmother or the stepfather who, with a will, leaves her / his estate to the child of his deceased spouse, the testamentary beneficiary is considered a stepchild within the meaning of the ZDDD and should be exempt from paying the inheritance tax.

In a separate affirmative opinion to the mentioned judgment, Supreme Court judge dr. Erik Kersevan presented that within the scope of settling this case the Supreme Court could have also decided whether the testator’s will would have the same decisive effect in cases where the marriage between the father (mother) and the decedent is terminated due to divorce (and not the death of the parent). The Supreme Court’s position in this direction would certainly be welcomed, as this dilemma remains (for the time being) unresolved, but it must be borne in mind that the procedural rules of civil law require that the Supreme Court tests the judgment which is the subject of revision only regarding those specific legal issues regarding which it has allowed a revision. The question, which was allowed in the present case, as explained, (merely) touched on the circumstances of the death of the testamentary beneficiary’s parent.

In his separate opinion, dr. Kersevan took the view that the concept of the stepchild, within the meaning of ZDDD provisions, should be interpreted in such a way that it includes anyone who was once a stepchild in the family community of his parent and his parent’s spouse (stepmother or stepfather). One can agree with the explanation of dr. Kersevan, who states that if on the basis of testamentary inheritance it is shown that the authenticity of the relationship between the stepmother or stepfather as decedent and the stepchild as heir exceeded the termination of this community, it is completely irrelevant why this community (due to death or divorce) ended before decedent’s death. If the testator does not change his will after the divorce from the stepchild’s parent or even makes the stepchild as his heir after the divorce, then he gives a clear message that he considers the stepchild equal to his descendants (if he has or would have any). The will of the testator and the relationships that are established between the decedent and the child of his former spouse go beyond the absence of marriage and must, therefore, be decisive in determining whether a person is treated as a stepchild in accordance with the provisions of the ZDDD. For example, such a position has long been established in German case law.