Statutory Succession and Last Will – What is What?

Statutory Succession and Last Will – What is What?

Statutory Succession and Last Will

Many property owners as well as owners of other assets ask themselves whether it is advisable to make provisions for their own death, or whether it is better to simply leave succession to the (German) law.

Nevertheless, the ability to take such a decision in an informed manner requires knowledge of the rulings contained in the law. Only those who know the statutory mechanisms can achieve an optimum balance between the actual as well as the legal alternatives of the available structuring modalities. The structuring options are often complex and are not infrequently determined to a decisive extent by details.

Cases that appear similar at first glance can ultimately require completely different treatment, as the circumstances of the individual case are frequently decisive. Nevertheless, it is naturally that a private person cannot know all the details of (German) law of succession. Frequently however, half the battle is having a sense for any possible problems and then being able to ask an expert for advice if necessary.

German Inheritance Law

In terms of “being sensitive to the problem”, it is good to know that German inheritance law is based on the principle of universal succession. The consequence is that the statutory law of succession regulates succession as a whole. In this respect, the law of succession works on the basis of the so-called stirpes or also order system in terms of determining the statutory heirs.

The individual orders are designated one after the other. Initially, the first order based on the testator is designated, followed by the other orders in ascending order. Each order designated earlier excludes the later one. The single orders are defined as descendants of the testator (first order), parents of the testator and their descendants (second order), grandparents of the testator and their descendants (third order) etc. The surviving spouse is also designated as heir as a fundamental rule.

Nevertheless, the level of his/her inheritance depends on the presence of the various orders. In this respect, a registered (same-sex) partner that could be entered into Germany until October 2017 is placed on an equal level with the spouse.

The order system is also supplemented by the stirpes principle or by the law of succession by line. For the first order, this means for example that a closer descendant excludes his/her own descendants; these will therefore not come into consideration as heirs; they only replace the closer descendant in the case that the latter falls away. If, for example, the testator leaves a son and a grandson, the surviving son excludes the grandson. Equally close heirs are taken into account in equal shares within the stirpes (sharing of inheritance based on the number of persons).

Example case 1:

The only asset owned by the testator is a property and he dies without children. He leaves behind his mother. His father and his only sister have died. His sister has an illegitimate child. Nevertheless, he had no contact to this child during his lifetime as a result of family disputes.

Based on the statutory law of succession, the heirs to the property in this case are the testator’s mother and the illegitimate child of his deceased sister – despite the fall-out.

If, while alive, a person decides that the statutory law of succession should not apply, the possibility exists of making “independent rulings”. The regulatory instruments available are the will and the contract of inheritance. In principle the will and contract of inheritance are of equal value. Nevertheless, they differ in terms of the formal requirements for their drawing and partly in terms of their legal effects.

The so-called “handwritten will” is an unilateral declaration of intent, and the person drawing it up must write and sign it in his/her own handwriting in order for it to be effective. It should also include the date and place of drawing up, although this is not a prerequisite for being legally effective. In contrast to the contract of inheritance, it does not require authentication by a notary public.

The so-called “joint will” can only be drawn up by spouses as well as by registered (same-sex) partners. Other than with the handwritten will, a joint will is effective if handwritten by only one of the parties making the will. Nevertheless, it must be signed by both decedents.

At the same time, there is a need for caution in this context: the dispositions made in a joint will frequently could contain reciprocally binding effects and, in certain circumstances, can no longer be changed by the surviving partner following the death of the first to die. To avoid undesired legal consequences here (possibly at a later date), it is important to take great care when drawing up the will and to include clear rulings on binding effects etc., so as to avoid unintended consequences.

In all cases, a contract of inheritance will only be effective if authenticated by a notary public and, due to its contractual character, has a binding effect as a fundamental rule.

In addition to any rulings to be made concerning the estate, persons frequently wish to make gifts to family members or third parties while still alive, in order to control and clarify various situations during one’s lifetime. Nevertheless, consideration should be given to the fact that interests can frequently change over the course of time. If this has not been taken into account when formulating the gift and no corresponding precautionary measures taken, unpleasant surprises can frequently be the result later.

Example case 2:

The married couple and parents own a large item of real estate on which a single-family house has been built. The married couple have two adult children, a daughter and a son. The daughter is already married and has a child.

The daughter wishes to build a house on the parents’ real estate together with her husband, as the real estate is sufficiently large for this. To this end, the real estate is partitioned and the daughter receives half ownership of the original portion of the real estate as a gift. The gift agreement contains no other rulings. 10 months later, the daughter dies suddenly as a result of a traffic accident. The daughter has died without having drawn up a will.

In the absence of a will by the daughter and/or any fall-back clauses in the gift agreement, the daughter’s husband and child inherit the portion of the real estate on the basis of statutory succession. The parents have lost the portion of the real estate, originally belonging to them, for ever, as they have not made any rulings to the contrary.

To avoid unintended consequences it always makes sense to ask an expert for advice. https://www.heuking.de/

Dirk W. Kolvenbach

Dirk Kolvenbach

Heuking Kühn Lüer Wojtek
statutory succession

Gerd Kostrzewa

Heuking Kühn Lüer Wojtek
Vera Niedermeyer

Vera Niedermeyer

Underestimating the Accrual of Inheritance with Foreign Assets: A Common Mistake

Underestimating the Accrual of Inheritance with Foreign Assets: A Common Mistake

Accrual of inheritance involving assets abroad often underestimated

An international accrual of inheritance is given when for example a German testator holds assets abroad or vice versa a foreign testator holds assets in Germany. Due to the different national regulations in each country the international assets of e.g. Germans involve significant civil and fiscal-law risks if not structured carefully. Therefore it is advisable to concern oneself with this subject during one’s lifetime and to take corresponding measures if possible.

The complexity of international accrual of inheritance is frequently underestimated. As a fundamental rule, accrual of inheritance with a foreign connection and thus an “international accrual of inheritance” is given as soon as a German testator holds assets abroad (e.g. a finca in Spain), or upon the death of a foreigner holding assets in Germany. The international assets of Germans involve significant civil and fiscal-law risks if not structured carefully.

The reason lies in the fact that, as a fundamental rule, the national law of succession in each country regulates who will become an heir, the level of inheritance shares or compulsory portions, which formal regulations apply to wills and the manner in which heirs can prove their rights. The national regulations of the individual countries are very different in this respect. These differing regulations can mean that the same accrual of inheritance is assessed and treated differently from country to country. In addition, certificates of inheritance from one country are in part frequently not accepted in other countries. As a result, it may be necessary for heirs to make parallel applications for certificates of inheritance in various countries.

Which substantive law (of succession) is applicable in the event of international accrual of inheritance (given the absence of precautionary measures while still alive) is a matter that frequently cannot be clearly ascertained, as this question is based on the respective private international law (IPR) of the country concerned.

Example case 1:

A French national has her last place of residence in Germany and leaves behind (just) a substantial bank balance in Germany.

Under German IPR, French law of succession is applicable; from the perspective of French IPR, German law of succession applies.

The reason for this lies in the differing connecting factors used to determine the applicable law in the individual countries. While German IPR is based on nationality as a fundamental rule, French IPR uses the connection of the testator’s last place of residence to determine the applicable law regarding the movable property.

Nevertheless, the question of applicable law is of elementary importance as shown above

Example case 2:

The married couple Hartmut and Anita both have German nationality. They have movable and immovable assets in Germany, Switzerland and Spain. They have their regular place of residence in Switzerland. The married couple have a common daughter with whom they have, however, fallen out, with the result that the married couple have drawn up a joint will (without a notary) in which they disinherit their daughter.

From a German perspective, German law of succession would be applicable in the event of the death of one of the two spouses; from a Swiss perspective, Swiss law of succession would apply. This has far-reaching consequences, as Swiss law fundamentally does not recognise joint wills drawn up “uno acto”, meaning that from a Swiss perspective – not from a German one – the daughter has not been effectively disinherited and could claim her statutory share of the inheritance.

To avoid such collisions between the differing legal systems, it is advisable to concern oneself with this subject during one’s lifetime, and to take corresponding measures if possible. https://www.heuking.de/

Dirk W. Kolvenbach

Dirk W. Kolvenbach

Heuking Kühn Lüer Wojtek
statutory succession

Gerd Kostrzewa

Heuking Kühn Lüer Wojtek
Vera Niedermeyer

Vera Niedermeyer

How to protect and spread your wealth optimally

How to protect and spread your wealth optimally

Showing ways and solutions to the High Net Worth Individuals to protect and optimise their assets. Wealthy people – the so called High Net Worth Individuals – keeping their property on a foreign account are currently under a general suspicion of tax evasion. The case involving Uli Hoeneß appears to prove the opinion of all those who see a close correlation between a growing bank account and declining moral standards.

Protecting and spreading the wealth in an optimum manner within the framework of legal regulations

There are several substantial reasons for having one or more accounts abroad. Risk-diversification spreading of wealth, corporate and financing strategies, holding companies, family or succession planning, alternative life planning are aspects that are equally as valid as the differing taxation in the various countries. And last but not least: keeping costs as low as possible is the main aim of most companies. This also applies to the building up of wealth. More precisely this point includes the minimising of tax burdens within the statutory framework and making use of admissible forms of creative leeway.

The current debate

The current debate does not consider the fact that, in all countries outside of Germany, the taxes paid are those required by the corresponding state. For example, a person buying an apartment in New York may have the transaction processed via a US company with its headquarter in the Cayman Islands. This case the purchase money is invested legally and in an optimum manner from a tax perspective and future rental income fed into the fiscal cycle.

People buying a ship with taxed money may possibly operate it under a foreign flag – e.g. Malta or Cayman Islands –and channel the purchasing price and the operating costs via these countries, as social insurance charges, taxes etc. are cheaper under these flags than with a German or Swiss flag. Do you know of a cruise ship operating under a German flag?

In the same way as every citizen looks for favourable purchasing prices in the internet, internationally operating companies utilise competition between tax systems. This means tax optimisation within the limits of applicable law.

Also allowed is complying with one’s own wish for discretion and investing one’s money outside Germany. People living in small towns who have built up wealth or acquired wealth through the sale of their company, do not necessarily wish to keep the whole of the large amount with the local savings bank. Keeping one’s private old-age provision from taxed assets in countries with lower taxes than in Germany is likewise a rational approach. Additionally, the euro is no longer the first choice currency of many people with respect to long-term investments. Diversification is the solution.

People should also give consideration to controls on capital transactions. In Europe, nobody must reckon with a repetition of the common practice of the 1950’s to 1980’s. Capital interrelations are too strong to allow this. Nevertheless, measures aimed at limiting the daily amounts of money available at cash dispensers or for bank transfers can no longer be fully excluded. The only protection in such cases is an internationally diversified portfolio.

Spread the wealth in an optimum manner

Of course, there will always be those who wish to avoid the charges completely and who therefore evade tax. This has always been the case and this is clearly not our aim. However, the overwhelming majority aims to use the above perspectives to spread their wealth in an optimum manner, protect it and ensure their liquidity. They pay tax on their wealth but reduce the tax burden with the approval of the legislators. As long as there is competition between tax systems, as long as global income is not recorded and taxed everywhere, it will be legal and correct to apply the rulings created by the law and to diversify. That too is globalisation. https://www.heuking.de

Dirk W. Kolvenbach is a German attorney at law and Senior Partner with HEUKING KÜHN LÜER WOJTEK in Zurich and Dusseldorf. Further, he is the head of the Practice Group “Private Clients” and a renowned specialist in all Private Clients matters (e.g. succession, asset protection and transaction).

Dirk W. Kolvenbach

Dirk W. Kolvenbach

Heuking Kühn Lüer Wojtek

heuking.de

statutory succession

Gerd D. Kostrzewa

Heuking Kühn Lüer Wojtek

heuking.de

Why To Incorporate Philanthropic Giving Into Your Estate Plan?

Why To Incorporate Philanthropic Giving Into Your Estate Plan?

Philanthropic giving can reduce the percentage of Inheritance Tax that must be paid on the estate and is therefore an important part of estate planning.

There are many reasons why the inclusion philanthropy into an estate plan can create financial advantages, not only for the charitable beneficiaries, but also for the owner of the estate and their heirs.

People who are eligible to pay Inheritance Tax can cut this tax bill quite drastically by leaving a percentage of their estate to charity.

Incorporating philanthropic giving into an estate plan can reduce or eliminate liability for paying Inheritance Tax when done according to the proper regulations. Employing the services of a financial adviser or professional estate planner helps to ensure that both the charities and the other beneficiaries of a will are able to make the most of this legacy.

Dr Edgar Paltzer works as an attorney-at-law in Switzerland and counts estate planning among his specialist areas of expertise.

Charitable Giving Tax Benefits

Anyone who has a sizeable estate is in many jurisdictions liable to pay tax on the ‘net’ estate – that is, the value of the estate minus the debts. Any money gifted to a charity in a will is exempt from the taxable value of the estate it comes from.

In most jurisdictions, the percentage of Inheritance Tax that must be paid on a net estate can be reduced if the benefactor chooses to leave money to a charitable cause or causes.

This may mean the beneficiaries end up with slightly less money, but the overall tax bill can be reduced (and a charitable cause can also benefit, rather than the taxman). The specific rules for this can be complex, so it is always worth seeking the advice of a professional.

How to Incorporate Philanthropic Giving in a Will

There are two main ways in which philanthropic giving can be incorporated into a will. The benefactor can specify a charity or charities themselves, or, in some jurisdictions, they can simply specify an amount and allow the decision to be made by the trustees of the will.

Giving to charities through a will may include:

  • Donating cash sums;
  • Gifting a particular asset or property; or
  • Leaving the whole or a share of what is known as the residuary estate (everything left over after costs, tax and specified gifts to other benefactors).

It should be noted that when gifting assets or properties, questions of valuation may arise and that the types of assets you choose to leave to charity may require research and depend on which charity you want to benefit – some are set up to be able to receive and utilise more sophisticated assets such as real estate or privately-held securities, while others may only be able to accept cash sums. Some charities may even refuse to accept objects and properties, if these require maintenance or out-of-pocket expenses.

Specifying Use of the Gift

Some individuals who choose to incorporate philanthropy in their will prefer to be able to specify where and how their legacy will be used. If this is the case, it is best to organise this directly with the charity in question before death to ensure those wishes are reasonable and viable.

There have been previous cases of charities having to return gifts left to them in a will as they are unable to comply with the restrictions or specific conditions regarding how the gift can be used. In this regard, it is therefore again advisable to employ the services of a professional estate planner. https://www.paltzerprivateclientslaw.ch/en/

Dr. Edgar Paltzer works as an attorney-at-law in Switzerland and counts estate planning among his specialist areas of expertise.

Edgar Paltzer

Edgar Paltzer

Paltzer
Can I Create Trusts Under Swiss Law?

Can I Create Trusts Under Swiss Law?

Switzerland does not have a law relating to trusts (yet). However, it ratified the Hague Convention regarding trusts and agreed therefore to recognize trusts that are created in accordance to the convention.

Switzerland, as a civil law country, does not have a law relating to trusts. The creation of a trust under Swiss law is, therefore, not possible. It is noteworthy, however, that in 2018 the Swiss parliament mandated the Federal Council to create the legal basis for a Swiss trust and since then an expert group has been drawing up corresponding proposals for regulations.

Nevertheless, at the time of writing it is too early to say whether Switzerland will implement a law relating to trusts in the foreseeable future and how this law might look like. Thus, in the following it is described what Swiss alternative to the trust is available to a descendent under existing law and how he or she might arrange for the establishment of a trust to be governed by the law of another jurisdiction.

The Swiss Usufruct

The so-called usufruct, a limited right in rem that can be created for a maximum term of 100 years, is the closest that Swiss law comes to the concept of dual property rights as recognised in common law jurisdictions. The beneficiary of the usufruct is entitled to possess, enjoy and use the property during his or her lifetime. The right of disposition, however, is restricted in so far as it would affect the rights of the owner of the bare property.

Recognition of Foreign Trusts

Switzerland has ratified and put into force per 1 July 2007 the Hague Convention on the Law Applicable to Trusts and on their Recognition of 1 July 1985. Even though Swiss law still does not provide for trusts to be established under Swiss law, the Hague Convention permits to create a trust choosing a law—other than Swiss law—which recognises the trust. A trust created in this way is – as consequence of the ratification of the Hague Convention – also recognised in Switzerland.

As a second consequence of the ratification of the Hague Convention and in order to codify the concept of property separation between trust and trustee property in Swiss law, Switzerland made the corresponding amendments to the Swiss Debt Collection and Bankruptcy Act. Thus, trust property will be protected from personal creditors of the trustee.

However, Swiss succession law and especially the provisions protecting the compulsory portion of statutory heirs may conflict with the settlement of assets into a trust. The heir whose rights to a compulsory portion are infringed can file an action in court for reduction.

The Foundation of a Trust in a Last Will or Contract of Succession

Even though trusts that are created in accordance with the Hague Convention are recognized in Switzerland, it is controversial whether a testator can provide for the constitution of a trust in a last will or in a contract of succession. The common advice is to establish a trust during lifetime with a nominal trust fund and to bequest additional funding by testamentary dispositions.

Switzerland recognizes Trusts

Switzerland does not have a law relating to trusts but recognizes trusts that are created in accordance to the Hague Convention on the Law Applicable to Trusts and on their Recognition. Nevertheless, due to the controversy around testators providing for the constitution of a trust in a last will or in a contract of succession and the additional possibilities the Swiss usufruct offers, it is advisable to address the subject in good time and seek the advice of a professional. https://www.paltzerprivateclientslaw.ch/en/ 

Dr. Edgar Paltzer works as an attorney-at-law in Switzerland and counts estate planning among his specialist areas of expertise.

statutory succession

Edgar Paltzer

Paltzer