In this article, Barry Adamson, a partner at the City paraplanning firm of Berkeley Law, considers some new rules from the European Union that govern the way high-net-worth individuals can pass on their wealth.

In the middle of August, the European Union came up with a new regime that changed the ways in which people can elect to choose jurisdictions for the purpose of making a will. On the face of it, the legislation seems to expand the estate-planning choices of individuals, the better to fit in with their increasingly international lives. The Devil, however, is in the details.

The Regulation (EU) No 650/2012 (the “Succession Regulation”) has been many years in the making but finally came into force on 17 August.

What is the purpose of the Succession Regulation?

The inheritance conundrum

Inheritance-related questions become more difficult to answer if the person who died had resided in one country but owned assets in (or been a citizen of) another or if that person’s estate comprises assets that are situated in more than one country.

It is not possible for someone to know who is going to inherit a particular asset until he knows the law on the subject. It is easy to know this when only one country is involved. Such knowledge becomes less simple in relation to a cross-border estate, however, as this exercise calls for an exploration of the private international law rules (also known as “conflict of law” rules) of each relevant country.

Once the inquirer has considered the private international law rules of each country involved, he must then find out how all these rules interact. Unfortunately, such interaction is often complicated and the outcome unclear. This means that the relatively simple question of who is entitled to inherit when a person dies can be frustratingly difficult to answer.

A conundrum no more?

The Succession Regulation is intended to cut through this “Gordian Knot” by simplifying the ways in which a lawyer can identify the applicable inheritance law in relation to those estates that the regulation governs.

What estates does the Succession Regulation govern?

The Succession Regulation governs the estate of a person with a connection to any one or more of the EU's “member-states”. A person will have a “connection” with a member state if, at the time of death, they were resident or a national of, or owned assets in a member-state.

The Succession Regulation does not come up with a definition of the term “member-state” for its own purposes, but should include those EU countries that have signed up to it. Nobody knows whether those countries (United Kingdom, Ireland and Denmark) that have not signed up to the Succession Regulation will be regarded as “member-states” or “third states”, which are referred to but not defined in the Succession Regulation. This means that nobody knows what effect the Succession Regulation will have on the UK, Ireland and Denmark.

How does the Succession Regulation apply?

Habitual residence v nationality

The primary purpose of the Succession Regulation is to standardise the ways in which countries identify the laws that will govern the inheritance to a person’s estate. This so-called “uniform approach” dictates that his will be either:

• the succession law of the deceased’s nationality if the deceased has so elected – being either the deceased’s nationality at the time of such election or at the time of death; or

• if no such election has been made, either (i) the country (undefined) in which the deceased was habitually resident at the time of his death; or (ii) the country with which the deceased was manifestly more closely connected than the country where the deceased was resident at the time of death (for example if the deceased had only recently left a country where he had been settled shortly before he died and had not established an habitual residence elsewhere).

The law determined by the above process will be the applicable law for the purposes of the Succession Regulation even if it is not the law of an EU state. Accordingly, in countries where that regulation applies, the default position is that the law of a person’s final habitual residence (or, if none, the country with which that person was most closely connected) will govern the succession to that person’s estate. Countries to which the Succession Regulation does not apply will continue to apply their respective private international law rules.

Habitual residence

Although it is vital for the estate-planner to determine a client’s “habitual residence” if the Succession Regulation applies, that term is not defined in the regulation.

The concept of habitual residence has been considered in a number of EU law cases, however. It is understood that the amount of time spent is not the sole factor that one must take into account when assessing where a person is habitually resident and it is necessary to identify the place where the person had established a “fixed basis”, i.e. their “permanent or habitual centre of interests”. More guidance from the courts is necessary, however.

Choosing law of nationality

Although a person can choose to override the default position that the law of his habitual residence (or of the country to which he is manifestly most closely connected) governs the inheritance to his estate, his choice is limited. He can make an election by will or codicil of the law of any country of which he is a “national” either at the time of the election or at death. For example, a British citizen can choose to apply the law of the jurisdiction within the UK (England & Wales, Scotland or Northern Ireland) with which he is most closely connected.

The election of the law of nationality extends only to that law’s succession rules and the private international legal provisions of that jurisdiction are to be ignored. There are a number of advantages, or so some think, in making such a choice:

• it removes any uncertainty that might creep into the job of having to determine the person’s final habitual residence;

• the question whether any previous choice of law was validly made;

• it might enable someone to override the forced heirship rules incorporated in the law of the person’s last habitual residence if the law of the nation allows testamentary freedom; and

• the Succession Regulation does not apply in the country of a person’s residence and that country’s private international legal rules have the effect that a different law governs the inheritance to that person’s estate with either unwanted or unexpected results.

If a choice of law has already been made

The private international legal rules of a number of jurisdictions (for example, Italy and Switzerland) permitted a choice of the succession law to apply to a person’s estate on death. Transitional rules exist and their effect is that any choice of law made before 17 August 2015 remains valid if such an election was either made in accordance with (a) the conditions prescribed by the Succession Regulation; or (b) the private international legal rules that were in force at the time of the election in the jurisdiction in which the person making it was either habitually resident or a “national.”

The reach of the applicable succession law

The law that applies for the purposes of the Succession Regulation will govern the question of who is entitled to inherit when a person dies. The aim is that a single law will govern the succession to a person’s estate (the “panacea,” as we might call it) – which might be achieved if all the countries where assets are owned at death adhere to the Succession Regulation.

Property covered by the Succession Regulation

The Succession Regulation applies only to property that forms part of a person’s estate which does not necessarily include all property passing on death. For example, the Succession Regulation has no relevance to those assets that the deceased jointly owned, if ownership passes automatically by right of survival. Furthermore, any applicable matrimonial “regime rules” ought to be checked as a preliminary step as these rules can determine whether assets form part of the estate of the deceased.

Ancillary matters

Although the purpose of the Succession Regulation is to determine which law will govern the question of who inherits when someone dies, it can also have a bearing on the following, which the estate-planner should therefore take into account when deciding whether or not to elect to choose the law of nationality as the applicable succession law, the better to make an informed choice.

The persons who are entitled to administer the estate. The applicable law will prescribe whether the administration of a person’s estate will be undertaken by any executors named for this purpose (a feature of common law jurisdictions such as England and Wales) or the beneficiaries themselves (as will be the case for many civil law jurisdictions).

Whether any claims can be made against the estate. Whether the applicable law as determined by the Succession Regulation incorporates forced heirship rules or allows testamentary freedom, it is possible that an inheritance dispute might arise and the Succession Regulation has no relevance in resolving any such dispute or the courts of which jurisdiction are entitled to decide it.

Taxation. The Succession Regulation does not itself determine how an estate is taxed. To the extent that the tax liability is determined by who inherits the estate, however, the Succession Regulation can have an indirect effect. Accordingly, if the operation of the Succession Regulation changes the way in which an estate will be inherited, this could alter (possibly significantly) the way in which that estate is taxed on death.

An illustration

Glenn and Jacqueline are both British citizens living in England, where they are domiciled. In addition to their English assets, they own a holiday home near Nice.

France is an EU member-state that has accepted the Succession Regulation. Although the UK is an EU Member State, it has not accepted the Succession Regulation. This leads to the following.

• English succession law will apply to their English assets.

• Unless an election of their national law is made, English private international law rules will apply to determine which succession law governs the devolution of the French property.

• The effect of these rules (and their interaction with French private international legal rules) is that the inheritance of the French property will be governed by French law, as the lex situs. Because of this, the forced heirship provisions of French succession law will be relevant.

• If, however, Glenn and Jacqueline elect in their wills to choose English succession law (the succession law of their nationality, they being linked more closely with England and Wales rather than Scotland or Northern Ireland), France should accept that election as permitted by the Succession Regulation.

• The effect of the election should be that English succession law will apply to the French property and so override the forced heirship rules. Whether France recognises an executor’s entitlement to administer the French estate is another matter! Any tax implications in France as a result of making the election should also be considered.

Panacea or palliative?

It is often difficult to determine who is entitled to inherit from a cross-border estate and any attempt to simplify this task is to be welcomed.

The panacea of one (easily identifiable) succession law governing the devolution of a person’s estate is rarely achievable if the estate contains property in more than one jurisdiction. The aim of simplifying the job of determining the succession law which applies in relation to those estates that involve EU countries only and therefore of avoiding the complexities that the interaction of private international law rules can often entail is laudable, but some significant questions require an answer.

One of these relates to the concept of “habitual residence” and the approach to be taken by (and the status of) EU countries that have not accepted the Succession Regulation. Guidance from the European Court of Justice would be welcomed!

In cases where the Succession Regulation does not apply, the identification of the governing succession law will continue to require an analysis of private international legal rules and the uncertainty this can cause.

At present, the Succession Regulation is more of a palliative than a panacea but, wherever it applies, it provides a mechanism allows the high-net-worth individual to identify the law to govern the question of who is entitled to inherit from him.

Practical considerations

Now that the Succession Regulation has come into force, it advisable that a will made by any person with a connection with an EU member-state by reason of the location of his assets, nationality or residence should be reviewed:

• to ascertain whether any existing choice of law is valid and continues to be appropriate; and

• to find out which succession law will now apply and whether it is necessary or desirable to make an election in accordance with the provisions of the Succession Regulation.

Generally speaking, it is imperative for the estate planner to obtain legal advice in relation to each jurisdiction that ought to be considered, the better to form a cohesive plan.

* Barry Adamson is available on +44 (0)207 399 0948 or at barryadamson@berkeley-law.com