The beginning of the end for the EU Succession Regulation?

Recent developments in France and Germany have undermined the certainty and uniformity in cross-border estate planning introduced by the EU Succession Regulation (the Regulation).

Why was the EU Succession Regulation introduced?

As families and assets become more international, the issue of ‘conflict of laws’ becomes more important. The conflict of law rules of a particular jurisdiction determine which country’s laws apply in cross-border situations. This is particularly important in the context of estate planning and succession.

The problem is that each jurisdiction has its own conflict of law rules and they can, and do, conflict with each other!

Some countries insist that both ‘movables’ (which includes investments, insurance policies and other intangible assets as well as physical property) and immovable property, such as real estate, must be inherited according to the same rules. Other jurisdictions treat moveable and immovable property in a different way.

Example

In the UK:

• succession to immovable property is governed by the jurisdiction where the property is located; and
• succession to moveable property is governed by the domicile (under UK law) of the deceased.

This may result in the investments and real estate of an individual passing to completely different people.

By way of contrast, under Swiss law, the connecting factors are nationality and residence. So succession to the estate of a Swiss national who dies resident in Switzerland is governed by Swiss law. Swiss law applies to both moveable and immovable property even if the property is located abroad. The estate of a foreign national who dies resident in Switzerland is in principle governed by Swiss law although a foreign national can elect that his or her national law applies instead. A Swiss national who is resident outside Switzerland has their succession governed by the appropriate law under the conflict of law rules of the state of residence.

There is also the troublesome issue of ‘renvoi’: where the conflict of law rules of one country apply the law of another country, will that country ‘accept the renvoi’ and apply their own law or will they refer it back to the law of the original country, or on to a third country?

The bottom line is that the rules are complicated and the answer to the question ‘who will inherit my estate?’ depends on where you ask the question.

What does the EU Succession Regulation do?

The EU Succession Regulation (the Regulation) also known as ‘Brussels IV’ came into force on 17 August 2015. It applied in all EU member states except for the UK, Ireland and Denmark which opted out.

The purpose of the EU Succession Regulation was to simplify all these complicated rules so that the regime for determining what law applies to the inheritance of a person’s estate was uniform across all participating states. It applies to property located in the EU even if the owners or beneficiaries of that property are resident elsewhere. The Regulation does not change the domestic law in participating states but determines which jurisdiction’s rules apply.

The default position is that the law of the country of an individual’s habitual residence applies.

An individual can elect that the law of his nationality applies instead.

There is an important difference. Where habitual residence is the governing factor, that means the law of that jurisdiction, including its conflict of law, rules which could result in a reference to another country’s law. Where, by election, the law of nationality applies, it means the domestic succession law in that country.

Example

Assume a UK domiciled and habitually resident individual owns real estate in Italy.

If the law of habitual residence applies, in principle, UK law would apply to the land in Italy but UK law would then refer the question of succession back to Italian law as that is the location of the real estate.

If the individual had elected for his national law, UK law, to apply, only the UK succession rules would be relevant. That would mean that the individual could leave the Italian real estate to whoever he liked even if that was in breach of the Italian inheritance rules.

So far so good.

What are the recent developments?

There is a divide between the approach to inheritance in common law and civil law jurisdictions.

Common law countries such as the UK, the US (most states), Australia and Canada tend to start from the position that an individual is free to leave their assets as they wish on their death.

Most civil law countries, including most of Europe, operate a system of ‘forced heirship’ which means that certain relatives have fixed rights to a certain share of a deceased’s estate. In most cases, the children of the deceased (along with other relatives) are entitled to compulsory shares of at least half the estate.

The Regulation enables a resident of a civil law state who is a citizen of a common law country, or a national of a common law country with assets in the civil law jurisdiction, to avoid the forced heirship rules by electing that the inheritance laws of their country of citizenship apply.

Recent legislation in France and a recent German Supreme Court case (Case No. IV ZR 110/21) undermine the uniform application of the Regulation.

In France, an individual’s children are entitled to between half and three quarters of the estate, depending on the number of children living at their death.

The Civil Code was amended in August 2021 to provide that:

• if the deceased individual or at least one of his children is a national of any EU member state or habitually resident in any EU member state; and
• the applicable law of succession does not include forced heirship rights;
• a child who has received less that their compulsory share is entitled to make it up from property located in France.

Although the UK is no longer a member of the EU, the new French law can still affect those in the UK as well as those within and outside the EU.

Example

A UK domiciled and resident individual has a house in the UK and owns investments in a French company. One of their three children lives in Italy. The others live in the UK. As most UK people do, the individual leaves all of their estate to their spouse.

Under UK law, the law applicable to the real estate would be the UK and the law applicable to the French investments, being movables, would be the law of the individual’s domicile, that is, the UK.

As UK law does not include any forced heirship rules, the new provisions in the Civil Code would apply and it would appear that all the children, not just the child resident in Italy, could claim the French investments to satisfy their compulsory share under French law.

The German Supreme Court case concerned a UK national who had lived in Germany for many years. The individual made a will which disinherited his son and elected, in accordance with the Regulation for the law of his nationality, ie UK law, to apply.

This should have meant that UK domestic law applied and the will could validly leave the individual’s estate away from the compulsory heirs.

The Supreme Court held that the entitlement to a compulsory share was a matter of public policy (Ordre Public) and there was a violation of public policy if the applicable foreign law does not provide for compulsory shares, according to fixed rights and independent of need.

In this context, any rights which the disinherited son might have had under the Inheritance (Provision for Family and Dependants) Act 1975 did not count. Under that Act, the Court has a discretionary power to award funds out of the estate to certain family members who have not received adequate ‘maintenance’ under the will. This is, a discretionary procedure and there is no guarantee that an adult child would receive anything.

The German Court decided that English law did not apply in this case because it would have deprived the son of his compulsory share and this was a breach of public policy. Accordingly, German law applied, despite the deceased’s efforts to disapply it, and the son would receive his compulsory share.

The Court also decided that where an election had been made, the foreign law would only be disapplied if there was an ‘sufficient domestic connection’ to Germany.

The Court did not say what would constitute a sufficient domestic connection although they took into account the habitual residence of the deceased and the son before and at the time of death, the location of the estate and the citizenship of the son.

What now for the Regulation?

The German case and the French legislation appear to undermine the whole purpose of the EU Succession Regulation. They negate the intended uniformity of the conflict of law rules across the EU. They deprive testators of the freedom that the Regulation was intended to introduce to leave their estate according to the law of their citizenship.

The German case also creates uncertainty as to when public policy will override the provisions of the Regulation.

Is it sufficient if:

• a beneficiary lives in Germany but the deceased does not; or
• there is German real estate and neither the deceased nor the heir lives in Germany?

It remains relevant whether one is applying the law of habitual residence or the elected law of nationality.

Example

The deceased was a UK domiciled UK citizen who owned German real estate and was habitually resident in the UK:

• if the habitual residence rule applied, UK law would apply to the moveable estate, but UK law would refer succession to the German real estate to German law;
• if the individual had elected for UK law as the law of their nationality to apply, under the Regulation, that would mean domestic UK law (even in relation to the German real estate) and the individual could leave his estate as he wished; and
• if the ownership of German real estate on its own is sufficient to breach public policy, that would enable the deceased’s children, even if they were UK resident and domiciled UK nationals to claim compulsory shares in Germany.

These developments are worrying as they create uncertainty and may defeat the objectives of those carrying out estate planning.

In addition, it could create tax liabilities. In many jurisdictions, including the UK, gifts to a surviving spouse are tax free whereas gifts to descendants and others on death are taxable. If compulsory heirs can claim the estate in preference to a spouse, that could result in a large and unexpected tax charge which may or may not be eligible for double tax relief.

It is now more important than ever to get expert advice before embarking on cross-border estate planning. Contact our private wealth team to learn more.