Ultra-high net worth individuals (UHNWIs) inevitably have cross border aspects to their affairs. They own assets in and/or have connections to multiple jurisdictions around the world and as such, in advising them, an awareness of international succession law is vital. An individual’s ability to determine to whom their assets pass upon their death will depend upon the laws of the relevant jurisdictions and in turn, may have international estate tax implications. Where more than one jurisdiction is involved, principles of Private International Law (PIL) come into play.
In this article, we look towards Europe and highlight some of the key developments in PIL relating to succession and how these changes may impact international estate and succession planning over the next decade. We also offer our perspectives on the potential implications of these new laws.
Private International Law
The rules on international succession are governed by private international law, sometimes known as ‘conflict of laws’ rules. For example, in England and Wales, PIL is part of the law which deals with cases that include a ‘foreign element’. A ‘foreign element’ simply means, “contact with some system of law other than England & Wales”. To determine which country or jurisdiction’s law the English courts should apply, the rules of English PIL need to be considered. The law of every country or jurisdiction will include their own PIL rules.
Why does PIL matter in the context of succession? Different jurisdictions have different testamentary freedoms. English law gives individuals testamentary freedom to pass their estate to whomever they wish (subject to providing for those whom are financially dependent upon them). In contrast, Germany and many civil law jurisdictions have ‘forced heirship’ rules, which prescribe that compulsory shares of a testator’s estate must be inherited by certain surviving relatives. Where no Will is left by the deceased, PIL will also determine which country/jurisdiction’s intestacy rules will apply to the succession of their assets.
Wills should be regularly reviewed to ensure that they meet your wishes in terms of how your assets will pass after your lifetime. If you have more than one Will to cover assets in different countries/jurisdictions, it is important to ensure the Wills do not “revoke” (cancel) the others leaving some of your assets passing under fixed intestacy rules.
European Union (EU) Succession Regulation
The EU Succession Regulation (of 4 July 2012– also known as ‘Brussels IV’) applies to deaths after 17 August 2015. The regulation was introduced to minimize the complexities and contradictions arising from the interaction of the different systems of succession law within the EU. It enables individuals owning assets in signatory member states to choose and be certain of the law that will govern the succession of those assets -- minimizing the risk of a conflicting laws arising.
The general rule under the regulation is that the law of the place of ‘habitual residence’ of the deceased at the date of death is the law that will govern the succession of their estate. The habitual residence can be displaced by an election made in an individual’s Will for the law of their nationality to apply. Where an individual has dual nationality, they can choose one or the other of those nationalities. The law of any country/jurisdiction of which the testator is a national may be chosen and it need not be an EU member state.
If your Will was prepared before the EU Succession Regulation was introduced, you may now be able to make an election for the succession law of your nationality to apply. Depending on the countries/jurisdictions involved, this may give you a greater freedom over how your assets may pass, and may result in your being able to qualify for certain tax reliefs/exemptions which were previously unavailable.
The UK, even while an EU member state, did not ratify the regulation. How the regulation applied to the UK and whether the UK was a ‘third state’ was, until recently, a grey area. Now that the UK has left the EU the position has become clearer. The UK is clearly a ‘third state’ to which the regulation does not prima facie apply. However, the regulation does affect the way that the PIL rules in the UK interact with the rules of the EU member states where it does apply.
Monaco and Switzerland
Perhaps keen to ensure their country/jurisdictions are no less attractive to foreign nationals, following the EU Succession Regulation coming into effect, certain countries/jurisdictions geographically proximate to the EU have considered the implementation of similar succession law principles.
Monaco (a civil law jurisdiction with forced heirship rules that make it impossible to disinherit children) adopted its new Code on Private International Law in July 2017. Monegasque residents became entitled to choose the law of their nationality to apply to their worldwide estate free from the Monegasque rules. In the absence of an express choice in favour of their national law, the law of their country/jurisdiction of domicile (as defined under Monegasque law, where domicile is broadly akin to habitual residence) will apply.
Switzerland is another civil law jurisdiction with forced heirship rules which vary according to the relevant canton in question. Currently, foreign nationals living in Switzerland (‘domiciled’ there for Swiss purposes) can choose that the succession of their assets be governed by the law of their nationality. This avoids application of Swiss law to their estate, including the forced heirship rules. Reform to Swiss international succession law is currently being undertaken with draft legislation published in March 2020. These reforms aim to change the compulsory proportions afforded to certain heirs under the forced heirship rules and reduce the risk of conflicts of country/jurisdiction in cross-border succession, in particular with the EU, through harmonization of the more standardized system under the EU Succession Regulation.
If you have a connection to Switzerland/Monaco through residency, domicile or location of assets, you may wish to consider reviewing your Wills in light of the introduced or proposed reforms to ensure your Wills are drafted in accordance with your wishes and current law.
As we learned in the first article of this series, the United Arab Emirates (UAE) has also recently changed its succession laws. Time will tell which other global jurisdictions will follow the lead set by the EU, Monaco, Switzerland and the UAE. What is clear is that, in an increasingly globalized world, it is imperative that UHNWIs with any international aspect to their affairs take specialist advice on the relevant succession laws and how those laws interact. Only then can a plan be made to enable them to achieve not only their wishes in relation to the succession of their estate, but also to manage their global exposure to estate taxes.