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Thursday, April 4, 2013

New EU Rules on Cross-Border Inheritance

For new laws and regulations governing cross-border issues the European Union is really leading the way.  Here are 27 member states with their own sovereign territories and long long histories trying to build something together that they all can live with to mutual fun and profit.  The process is slow because there are so many actors, so much diversity, and so many interests.  Negotiations over EU proposals can take years before they finally come to fruition.  What they come up with is worth watching because their solutions could be a model for other regions wishing to form more closer unions and could have an impact on international law and even other countries' domestic laws.  No area is untouched:  education, voting rights, immigration, taxation, contracts and even family law.

On July 4th, 2012 after 7 years of negotiations, the European Parliament and the Council of the European Union passed a new law to manage cross-border succession (inheritance) in EU countries.  The purpose here is to manage conflicts of law that arise when a deceased person, who may or may not have been living in his country of citizenship, had an estate located in multiple countries.  In those cases, which are becoming more and more common, the outstanding questions were:  Whose law prevails and do individuals have any say in how they wish their cross-border estates to be managed and distributed after death?  It was to answer this that the EU passed what is commonly known as the EU Succession Regulation or Brussels IV.

Regulation (EU) No 650/2012 on "jurisdiction, applicable law, recognition and enforcement of decisions and acceptance and enforcement of authentic instruments in matters of succession and on the creation of a European Certificate of Succession" is now EU law for 24 of the 27 member states (the UK, Ireland, and Denmark opted out) and member states have three years to bring their domestic legislation into compliance.  What's in it?  What does it mean for individuals whose lives span multiple countries?  And are there any inheritance issues not covered by this regulation?

Let's start with the situation prior to this regulation.  There was much variation in inheritance laws among the 27 member states.  France alone has some very complex and strict rules that many foreigners discover to their horror when they follow in the footsteps of Peter Mayle and retire in the French countryside.     Angelique Devaux, a French attorney who wrote a very good paper about the new EU regulation, describes what this meant in practical terms for a mobile European with one foot in the UK and the other in France when he passed on:
"For instance, a French citizen, married with 3 children, was living in UK where he died. He owned one property in Paris, France and one property in London, UK, one bank account in France and one bank account in UK. Both France and UK currently apply the division system. French law will only be applied on the French property and the British law on the rest of the estates (movable French estates and British movables and immovables). If the deceased had made a will in totally favor of his surviving spouse, his wishes could not be entirely applied on the French property because of the French forced share rule. This typical example creates an imbalance in the succession and it does not respect the last wills of the deceased."
According to EU Justice Commissioner Reding, "There are around 4.5 million successions a year in the EU, of which about 10% have an international dimension. These successions are valued at about €123 billion a year."So when the EU looked at how to better manage that 10% they had three objectives in mind:   Encouraging the free movement of persons within the EU,  harmonization of succession regimes and the avoidance of conflicting inheritance laws, and respect for the wishes of individuals.  
"The proper functioning of the internal market should be facilitated by removing the obstacles to the free movement of persons who currently face difficulties in asserting their rights in the context of a succession having cross-border implications."
So how do the new rules achieve this?

Unity of Succession:  One law/one jurisdiction will be applied to the entire estate regardless of how many EU countries are involved and what kind of assets are involved (movable or immovable).  But how to determine which law to apply?

Habitual Residence:  The EU looked at three possibilities for whose laws would prevail in a cross-border succession where the deceased had not expressed a preference prior to passing on:  citizenship, domicile and residency.  The EU went with residency.
"...this Regulation should provide that the general connecting factor for the purposes of determining both jurisdiction and the applicable law should be the habitual residence of the deceased at the time of death. In order to determine the habitual residence, the authority dealing with the succession should make an overall assessment of the circumstances of the life of the deceased during the years preceding his death and at the time of his death, taking account of all relevant factual elements, in particular the duration and regularity of the deceased’s presence in the State concerned and the conditions and reasons for that presence. The habitual residence thus determined should reveal a close and stable connection with the State concerned taking into account the specific aims of this Regulation."
So I interpret this to mean that if a German citizen who is a long-term resident of Spain with property and bank accounts in that country and in the home country gets hit by a car in Barcelona and dies unexpectedly without expressing his wishes in advance, his entire estate in Germany and Spain would fall under Spanish inheritance law.   It would seem to exclude those who simply have a vacation home in another country and only spend a few months there every year.  Sounds simple enough and yet I think we can all come up with situations where it would not be so clear which means that there will be some sort of arbitration involved to determine the closeness of the connection.  

Angelique Devaux takes exception to this decision to use habitual residence as the default and argues in favor of nationality being the determining factor.  I think she's wrong and greatly underestimates the prevalence of dual citizens in the EU.  It could be just as complicated to decide which nationality is dominant in such cases.  Residency has the advantage of being concrete and provable and it avoids conflicts between states over who has primary sovereignty over the deceased person and, by extension, the estate.  The regulation also allows for nationality to be used as one factor in cases where there is a real doubt about residency.  But she does make a very valid point that the heirs might look at at the two (or more) different regimes under which the estate could fall and, wishing to have the one most favorable to them applied, might provide a distorted view of the "facts" that prove or disprove residency.  

Professio juris (choice of law):  And here is where the new EU law is something of an innovation.  A way to avoid the application of the habitual residence principle is simply to declare in advance what regime one wishes one's estate to fall under.  This means that a person living in the EU can choose to have the estate fall under the inheritance laws of his country of nationality (no, one cannot decide simply to apply willy-nilly just any country's inheritance laws).  
"This Regulation should enable citizens to organise their succession in advance by choosing the law applicable to their succession. That choice should be limited to the law of a State of their nationality in order to ensure a connection between the deceased and the law chosen and to avoid a law being chosen with the intention of frustrating the legitimate expectations of persons entitled to a reserved share...
A choice of law should be made expressly in a declaration in the form of a disposition of property upon death or be demonstrated by the terms of such a disposition. A choice of law could be regarded as demon­strated by a disposition of property upon death where, for instance, the deceased had referred in his disposition to specific provisions of the law of the State of his nationality or where he had otherwise mentioned that law. " 
I'm assuming this means a will or other testament or contract prepared in accordance with the law of the state of nationality.  So a French person living in Italy can have a document drawn up that says that the division of his or her estate is to be done in accordance with French law, not Italian law.  What is very interesting about this choice is that it is not restricted to EU citizens - it also applies to EU residents and foreigners owning property in an EU member state.  So, in theory, I, a U.S. citizen, could have a will drawn up in accordance with the laws of Washington State in the U.S. (which pretty much says I can leave my assets to anyone I wish)  and it would have to be taken into consideration.  However where my wishes might be contrary to the "the legitimate expectations of persons entitled to a reserved share..." (which is the case under French law) this probably wouldn't fly.  Nonetheless this option opens up all kinds of new possibilities for multi-country estate planning and if done properly can greatly simplify cross-border succession.

European Certificate of Succession and Will Database:  To help keep matters simple and efficient, the new regulations provide for a certificate of succession, "a standard form certificate designed to enable heirs, legatees, executors or administrators to prove their legal status and/or rights" that can be written up in one member state and used in another.  There is also a project called IRTE which would connect all the European will registers so one could file a will and testament with one country's authorities and it could be easily located wherever the person happens to be when he or she dies.

That grosso modo is what the new succession law is all about.  What is not covered under this law?  Trusts, matrimonial regimes, gifts, taxation and a few other things.  It also does not completely resolve conflicts when they come up against a non-EU state's laws.  Angelique Devaux gives this example:
"For instance, a Belgian was living in the US, died with immovable assets both in Belgian and USA. American law will govern the succession Law as the habitual residence of the deceased. What does the American conflict of law’s say? American law applies the lex situs rule to immovables. Such consequences are that the American property will be governed by the American law while the Belgian property will be governed by the Belgian law. In that case, there is a revival of the division’s principle."  
So the law isn't perfect but since "le mieux est l'ennemi du bien" (perfect is the enemy of good),  I'd call it a very satisfactory start.  We'll see how it plays out as it is translated into each member state's domestic legislation.

If you are in a situation where you face a cross-border succession either as a person with a multi-country estate or as an heir to one, my best advice is to do some research into this (please do not take my word on all of this as I am not an attorney) and then go talk to a competent professional.  "Easier" does mean "completely straightforward and anyone can DIY (do it yourself)."  A very good place to begin is this website run by the EU called Successions in Europe.  Available in 23 languages, it gives an good overview of the inheritance laws of all 27 member states. 

As usual I have been a bit wordy.  I will end this post with a short video by Commissioner Reding about the new law and the website.  


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