Cross-border law on inheritance : towards new solutions
Determining the law (and taxes) applicable to cross-border inheritance estate can be somewhat complex. Inheritance of a deceased person is, for instance, considered cross-border if a person domiciled in a country dies in another country, or if such person owned estate assets in another country.
Basic rules are complex
In most countries, the basic principle is that a person’s estate is governed by the law of the country where such person resided permanently, at the time of his/her death.
This rule can of course have drawbacks :
- Uncertainty for people who often change work or residence, or who have domiciles in more than one country
- Difficulty to organise estate planning (it is not easy to know, in advance, where we will be domiciled in a number of years, for example when we retire. In addition, for those people who have taken out life insurance policies or made gifts or donations, it is difficult to know how these contracts or gifts will be treated under a foreign law)
This rule is rendered even more complex in the light of international private law applicable in each country. In France, for example, the basic rule for a person who lives outside of France and who owns assets in France, is that his/her inheritance will be governed by French law but only as far as his/her real estate assets located in France are concerned, and that inheritance will be governed by the law of the country of his/her last residence for all other assets (« personal property »).
In this case, two inheritance processes will be necessary in two different countries (and possibly more, if other real estate assets are owned in other countries).
Things are even more complex when we get into details : determining whether certain types of assets are real estate assets or personal assets can prove technical (e.g. shares of companies which hold real estate assets), and will require specialised legal advice (in consideration, notably, of the law applicable in each country, as well as international bilateral tax treaties).
Avoiding these rules, which few people understand, although they can have significant impact, was impossible : depending on the applicable law, transmission rights (who inherits ? to what extent ?), the amount of inheritance duties (calculation method and taxation basis) may indeed considerably vary.
The American wife of a person residing in Brussels, owner of an apartment in Paris, may for instance understand with difficulty that the will signed by her husband in the USA, whereby she is awarded his wealth, is likely not to fully apply in France, the Paris apartment being, under French law, subject to French Civil code rules (the ownership of the apartment will be divided between all heirs as joint owners, i.e. the wife and all children).
European law now offers alternatives
It is today possible to plan things and make a choice : Since 17 August 2015, French law (in furtherance of European Union regulation No. 650/2012 of 4 July 2012), now allows to choose, as an alternative to the law of one’s last domicile, the law of one’s nationality, even outside European Union.
This will not only allow estate planning (and to choose, for instance, inheritance law of a country which better complies with one’s will, in favour of certain persons), but will also simplify the entire inheritance process, which can be subject to one single law, even if assets are held in different countries.
New regulations have numerous advantages
Choosing applicable law (« Professio Juris ») can have significant advantages and considerably simplify heirs’ task.
As an example, a Franco-American citizen resident of France is now able to choose American law to govern his entire estate. Such choice can be made through a simple will.
People with more than one nationality can even have more favourable choice.
Besides, the nationality which can be chosen is the nationality at the time the will is signed, or the one at the time of death (which seems to allow people to change nationalities in the meantime).
Do not confuse civil and tax laws
One should however be careful : the Professio Juris choice only applies to civil law (inheritance rules), and not tax law (inheritance duties and taxes). Inheritance can therefore be governed by a foreign law, further to Professio Juris, but the real estate part located in France can be taxed in France.
In other words, the choice only applies to civil aspects of inheritance process, being ; who inherits, to what extent, which formalities are necessary, powers granted to heirs and trustees, liabilities of heirs, partition rules, etc.).
Depending on each country, inheritance duties might be payable in several countries, even if one single law is applicable to inheritance (in France for example, inheritance duties are payable if the deceased person was domiciled in France or if one of his heirs resides in France).
Double taxation is usually sorted out through tax credit schemes, in accordance with existing bilateral tax treaties.
It is important to note that any choice of law should be made in consideration of other matters such as the existence of a wedding contract, potential donations, life insurance contracts or potential wills.
Who do these new rules apply to ?
The EU regulation applies to anyone (including non-EU nationals) living, at the time of his/her death, in an EU member state (United Kingdom, Ireland and Denmark excepted).
As an example, the inheritance of a French citizen who lived in Spain at the time of his death will be governed by Spanish law (both countries being EU member states and part to the regulation). This citizen can now choose that his inheritance will be subject to French law. If this person happens to also be a Lebanese citizen, he can choose that Lebanese law will rule his entire estate.
Second example : A Chinese citizen who lives in France can choose, in his will, that his inheritance estate will be governed by Chinese law, as opposed to French law which would normally apply.
It is therefore important to consider your wealth, legal and fiscal situation with your counsel, in particular if you reside abroad and own assets in France, before making a choice. In case no choice is made, basic principles will apply as before.
AZAM-DARLEY & ASSOCIES