A tangled web
Official statistics suggest that over 450,000 cross-border successions occur in the EU every year, representing a value estimated to be worth more than €120 billion. Given these figures, it seems staggering to think that each and every cross-border case will be confronted with the same costly and hugely time consuming legal issues, due largely to the different and often conflicting laws which can apply to an estate's assets.
These additional burdens on a cross-border estate apply both at the planning stage and after death, where expensive disputes over which country's laws should apply to which assets are sadly commonplace.
A new dawn…sort of
For over a decade, talk has rumbled on at the European Council about improving the status quo. Finally, in July 2012, the Council passed new legislation colloquially known as "Brussels IV", in the hope that this would be the panacea for Europe's cross-border woes.
UK nationals and residents should note that the UK has opted out of Brussels IV, along with Ireland and Denmark (due largely to a perceived incompatibility between legal systems, rather than political squabbles). But all is not lost, since the Regulation affects all assets in states which have implemented the Regulation, regardless of the place of death or the citizenship of the deceased, even if they have no connection to those states or to Europe at all.
It is therefore crucial that anyone with property in Europe understands the new Regulation and what planning steps need to be taken now in order to take full advantage of the, potentially considerable, benefits afforded by the Regulation.
Brussels IV in a nutshell
The revolutionary step under Brussels IV is to unify the succession law which applies to an estate, rather than allowing any number of succession laws to (possibly) apply to different assets in different circumstances.
For states that have implemented the Regulation, the default position under it is that the law of the country in which the deceased was 'habitually resident' will apply to his or her succession. This law applies unless the deceased was "manifestly more closely connected" with another state, in which case the law of this latter state would apply instead. Precisely what "manifestly more closely connected" means is not entirely clear, but it is anticipated that this latter test will only be applied in exceptional circumstances.
Crucially, the law applied under these initial tests can be overridden by an express election (usually in a Will) for the law of the individual's nationality to apply. If the individual has more than one nationality, he or she may choose between nationalities (for example, a UK resident non-domiciliary who has taken UK nationality could choose to apply either UK law or the law of domicile). In theory, this election will enable an individual to succession plan with complete certainty over which laws will apply to the estate.
This is, potentially, a significant relief for individuals who own property on the continent and are also nationals of countries which do not have a forced heirship regime, such as the UK or the US. For these individuals, electing for the law of their nationality to apply will allow them to circumvent the forced heirship provisions prevalent in the majority of European civil-law jurisdictions (whereby certain individuals must receive a pre-determined share of the estate, potentially resulting in additional unnecessary tax exposure).
Care will still need to be taken to consider similar provisions in the law of nationality, such as the Inheritance (Provision for Family and Dependants) Act 1975 in the UK.
There are some important complications in the Regulation, the most important of which pertains to the issue of renvoi. Renvoi is a concept of private international law which has relevance when a court must decide which jurisdiction's laws apply in a specific cross-border scenario. In a situation where one state believes the law of another state should apply, it may refer the case to that other state to determine. If that other state's conflict of law rules take a contrary view (i.e. that the correct law to determine the issue is that of the originating state or of a third state), the decision may be referred back to the originating state or on to that third state. This referral back to the originating state or on to a third state is known as renvoi.
In earlier drafts of the Regulation, the possibility of renvoi was to be abolished in its entirety; however, in the final draft, this approach was watered down and renvoi may still be permitted where:
- the law of succession is determined by habitual residence (i.e. no election had been made);
- that law of habitual residence is the law of a third state outside the Regulation; and
- the private international law of that third state would make a renvoi to the law of a state that has implemented the Regulation.
It is therefore important to consider whether an election should be included in a will to avoid reliance on the habitual residence test and to ensure certainty of succession.
The Regulation also deals with the question of which (Member State) country will have jurisdiction to administer the estate. This part of the Regulation has been designed to ensure that, wherever possible, jurisdiction follows the applicable succession law. This is a sensible approach, since it should help limit the amount of time spent by the courts of one country deciding matters under the laws of another. The Regulation will not directly affect the courts of third party states which will continue to have jurisdiction over assets located in their respective territories.
What should I do now?
Although the Regulation came into force in 2012, the provisions will not apply until 17 August 2015. That said, wills can be prepared and executed now which take advantage of the Brussels IV provisions, and we would strongly advise anyone with assets abroad to review their existing estate plan sooner rather than later to ensure that any planning is in place by the time the Regulation takes effect. For many clients an express election in a will may be desirable.
Notwithstanding the progress made by Brussels IV, planning for cross-border estates remains a complicated area and it is important that the circumstances of each client are reviewed carefully by an advisor experienced in this work.