Do you own a second home in France, Spain or elsewhere in the European Union ("EU")? Or perhaps you have assets located in several EU countries. Alternatively are you likely to inherit assets of any kind located within the EU but outside England and Wales? If so, then the legal provisions relevant to so-called cross-border or international estates may be of concern. Such estates can be complex (and expensive) to administer because they often involve more than one legal system. And in some cases this complexity may also make it more difficult to achieve certainty in planning succession arrangements.
The European Commission in Brussels has started to address the problems of crossborder estates. An important further step towards this was taken in October 2009 with the adoption by the Commission of a proposal in the form of a draft regulation aiming to simplify the rules on international successions within the EU. The regulation will become applicable only following further negotiation between the Member States and agreement of the regulation in its definitive form. This is likely to take some years.
The kind of problem which the proposed regulation is designed to resolve arises at present where, for example, a deceased individual, resident of an EU Member State, dies leaving assets in one or more other Member States. Difficulties arise not only because the rules about succession vary between Member States, but also because the rules which determine which of two or more potentially applicable, yet conflicting, legal systems are actually to govern a given case (the conflict of laws rules) may also lead to different results. There may also be conflicting rules between Member States about which country's courts are to have jurisdiction to rule on succession issues.
Such problems may arise where the deceased has died intestate. They may also arise where there is a will but, for example, its provisions are inconsistent with mandatory succession rules (often known as "forced heirship" rules) applicable in the state where it is to take effect or where there is otherwise disagreement about the meaning and effect of a will.
Forced heirship (or similar) rules apply in many of the civil law jurisdictions, including France, Spain, Germany and other European countries. There are different (stronger or weaker) versions of forced heirship systems and they all contain exceptions (which may vary between jurisdictions). The basic idea, however, is that a set portion of a person's estate should go to certain family members (particularly children, for example). Under some forced heirship systems lifetime gifts may be set aside following death if they have contravened the forced heirship principles. If applicable the forced heirship rules may also in some situations override the provisions of a will.
The proposed EU regulation would not attempt to impose uniform rules of succession, but rather would simply determine which state's succession rules are to apply to crossborder estates in the EU and/or which country's courts are competent to rule on succession questions. Thus, English and Scottish substantive rules of succession would remain unaffected. So if an individual makes his will under English law, and if under the regulation English law applies, then the will would be unaffected by the choice of law rules under the regulation.
All of this sounds sensible, but where does the UK stand in relation to these developments? The fact is that it is not so easy simply to sign up to a single regulation intended to apply in the same way in all Member States. This is especially so for the UK where the system relating to succession and administration of estates (which gives almost complete testamentary freedom), at least in England and Wales, in certain respects differs from the systems applying in many of the other EU Member States.
UK opt out – only for the time being?
The UK has decided to opt out of the proposed regulation (as announced by written ministerial statement on 16th December 2009). This announcement follows a Ministry of Justice consultation which ran from 21 October until 2 December 2009 and which identified a number of issues, some of them regarded as significant, which would have been problematical for the implementation in the UK of the regulation in its present form.
The UK Government intends to remain engaged with the ongoing negotiations as to the final form of the regulation, on the basis that eventually a decision may be made to opt in to its provisions once certain issues have been resolved. So despite the UK Government's recent decision to opt out, we are unlikely to have heard the last of the Commission's draft regulation on succession and wills. So when eventually adopted, what would be the effect of a regulation in the form of the current draft? In what follows we sketch out some relevant pointers for private clients and their lawyers; for a more comprehensive understanding, a review of the draft regulation itself and its accompanying notes is needed.
Proposed solutions under the draft regulation for cross-border estates
Broadly speaking the draft regulation in its current form aims to address the problems arising from cross-border estates in five ways.
- First, there would be a consistent rule for determining which
system of law should govern succession in cases in which more than
one system is potentially applicable. As mentioned above, this
would be relevant if the deceased in a particular case had died
intestate or if, for example, the provisions of a will were
inconsistent with any mandatory succession rules of the state where
it was to take effect. The regulation says that the law of the
deceased's "habitual residence" at death would apply
to govern succession to his estate. But if the deceased is a
national of a different state at the time of his death then he
would be permitted to select the law of that state as the law
governing succession.
By way of example, if a British national had retired to France, becoming habitually resident there, then under the draft regulation French, rather than English law would apply to govern the devolution of his estate. This might be important because of the applicability under French law of the forced heirship rules, mentioned above, and which might be relevant even if the deceased had made a will. If the individual in question did not want French law to apply, and assuming that he had retained his British nationality, then under the draft regulation he would be able to choose English law to apply. - Secondly, the proposed regulation would provide a consistent
rule to answer the question of which country's courts should
have jurisdiction to deal with questions of succession. At present
there may be cases in which the courts of more than one country
might potentially have jurisdiction (or indeed there could be other
cases in which no court has jurisdiction). Under the regulation it
would again be the courts of the Member State where the deceased
had last been habitually resident which would have jurisdiction to
rule on questions of succession.
There would be some exceptions to the above rule. For example, if requested by one of the parties the matter could be transferred to a court in the country of the deceased's nationality if the deceased had chosen this as the law to govern succession to his estate (see the first point above) and if the court of the deceased's habitual residence considers that the court of the deceased's nationality is better placed to rule on the succession matter in question. This might be appropriate where for example the deceased had lived for a while in a Member State other than that of his nationality (but for long enough to become habitually resident there) and his family had remained in the deceased's Member State of origin. - The third measure under the draft regulation provides for any decision by a court of a Member State on a succession issue to be recognised in any other Member State without any special procedure (provided, however, in cases where a party fails to appear before the court, that the decision does not contravene any rule of public policy of the state where it is to be recognised). There are some exceptions, for example, in certain situations where the decision for which a party seeks recognition is irreconcilable with certain earlier decisions relating to disputes or causes of action between the same parties
- A fourth measure requires recognition between Member States of what the draft regulation refers to as "authentic instruments", which include notarial acts. This provision could therefore require the English courts to accept the ruling of a notary as to questions affecting succession, if the deceased had died whilst habitually resident in a state where notaries have jurisdiction to rule on these issues.
- Fifthly, the regulation inaugurates the so-called European Certificate of Succession ("ECS") the purpose of which would be to constitute proof of the capacity of heirs, legatees or personal representatives. Member States would be required to recognise the certificate, which would effectively create a presumption that the heirs and personal representatives named in it are entitled to the estate or to administer it.
Benefits of the draft regulation in the UK context
The UK Ministry of Justice in its recent consultation inviting comments on the draft regulation notes three principal benefits in the UK context of the proposed regulation. First, in simplifying the devolution and administration of cross-border estates it would indeed facilitate the free movement of individuals within the EU. Second, the regulation would provide for a single system of law to apply to all of the assets of an international estate within the EU. This contrasts with the current position under English law in which different systems of law may govern the same estate. For example, in relation to immoveable property (houses and land) English law, broadly speaking, applies the law of succession of the state where such property is located while the devolution of other property (for example, cash, jewellery, shares and non-land investments) is governed by the law of the deceased's domicile at death.
Thirdly, the regulation would provide some choice, albeit limited, to an individual concerning which law is to determine the devolution of his estate. An individual may thus choose that the law of his nationality, instead of the law of the state where he is habitually resident at death, should determine the devolution of his estate.
Drawbacks of the draft regulation in the UK context
Despite the potential benefits flowing from adoption of the regulation, the UK Ministry of Justice consultation document has also identified some concerns arising from the regulation in its present form. Two of these concerns the Ministry of Justice consultation ranks as potentially "significant" whilst there are a number of other issues "with the potential to cause difficulty".
The first of the potentially significant problems is what the consultation document refers to as the "clawback" issue. Under English law a lifetime gift is normally regarded as final when made and cannot be later undone (although there are some exceptions to this, for example, in some cases of insolvency, or in relation to financial provision on divorce). However, under systems with forced heirship rules, lifetime gifts can sometimes be clawed back in favour of close family members if the family members have been deprived by such lifetime giving of their entitlement under the forced heirship rules.
The problem described above can be illustrated by the example of an individual who, at a time when single and living in England, makes lifetime gifts but then by the time of death is married with children and living in France where forced heirship rules apply. If the law of France, as the country where the deceased was habitually resident at death, applies the forced heirship rules, the earlier gift might have to be set aside. This therefore increases uncertainty about lifetime giving, freedom of which in English law is currently largely taken for granted.
The lack of a definition of "habitual residence" in the regulation is seen by the UK Ministry of Justice consultation as a further potentially serious problem arising from the draft regulation in its current form. As has been seen, the concept of habitual residence is central to the functioning of the regulation as it is the law of habitual residence which is to govern questions arising in relation to succession to a deceased's estate (unless he had stipulated that the law of his nationality should apply). Furthermore the courts of the state of a deceased's habitual residence are to have jurisdiction to determine questions of succession to a deceased's estate. Not to have a clear definition of the core "connecting factor" which underpins the draft regulation arguably undermines the objective behind the regulation to create greater certainty in matters of succession to transnational estates.
Conclusion
It makes sense to try to simplify the rules relevant to succession and administration of cross-border estates within the EU by harmonising the relevant principles relating to the applicable jurisdiction and choice of law rules, as well as by providing for something like the European Certificate of Succession. However, practical issues involved in this project are themselves complex, as witnessed by the UK's decision, at least for the time being, to opt out of the regulation.
And the responses (not yet published at the date of this briefing) to the Ministry of Justice consultation may indicate further practical concerns arising from the draft regulation. It nevertheless seems that the UK Government is to remain engaged with the ongoing negotiations over the form of the regulation and it is to be hoped that the UK will ultimately sign up to it. However, both before and after any implementation of the regulation, it will be important to take care over structuring succession to international estates, whether on death or by way of lifetime giving, and to think carefully about choice of law issues.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
