A recent ruling by the European Court of Justice has emphasised the importance of succession planning and the single law applicable to it, especially for wealth planners and those working with private clients.
And we are not talking tax optimisation, but the international legal effects concerning the transfer of wealth following a person’s death, which are often overlooked in the holistic analysis within succession planning, writes Nicola Alvaro, chief legal and wealth structuring officer at Generali Luxembourg.
The case in question examined the interpretation of EU rules on successions – regulation 650/2012 – following the refusal by a Lithuanian notary to approve a dual succession request of a Lithuanian citizen whose mother had passed away.
She was also Lithuanian; and her Will was made, and her assets located, in the country.
But she was domiciled, and died, in Germany.
The dual request asked the notary to start succession procedures and to provide a European succession certificate, but since the beneficiary’s mother was a German resident, the notary refused the application.
What the EU law says
Even though the European regulation on cross-border successions states that the procedures should be initiated by the member state to which the deceased has closest ties, the Lithuanian solicitor took a very cautious approach.
The decision was appealed several times, making it all the way up to the Lithuanian supreme court, which referred the matter to the European Court of Justice for pre-judgement.
The crux of the issue here is whether there is a “cross-border” component to the son’s case or not, and if there is, which member state should be responsible for administering the succession, in this case Germany or Lithuania.
The EU rules do not provide some fundamental and necessary definitions when it comes to the matter.
The main two are the ones regarding “cross-border succession” and “habitual country of residence”, because they are not explicitly defined in the European guidelines.
In this instance, the concept of cross-border succession is paramount in order to understand whether it applied to the Lithuanian case.
A matter of definitions
According to the EU judge, to determine whether there is a cross-border element there are several issues to establish.
The geographical location of assets, beneficiaries, inheritors or other family members and relatives of the deceased, and the deceased’s nationality must all be taken into consideration.
Therefore, unless the habitual residence of the deceased is established, it is not possible to determine whether a succession is domestic or a cross-border one.
In light of all this, a succession can be deemed “cross-border” if one or more elements that are part of the succession process are located in a different member state from the one where the deceased was residing habitually.
But how is “habitual residence” established?
According to the attorney general’s conclusions, there can only be one habitual country of residence; the authority looking after the succession process is the one tasked with the determination of the country of residence; and there must be a strong and stable link between the succession and the member state concerned.
This led the European judge to consider all the elements involved in the case, including the fact that one of the potential beneficiaries was in Germany, the other beneficiary and the assets to be inherited were located in Lithuania, and that the mother was a German resident, which makes it a cross-border succession.
Far-reaching consequences
This case shows the implications that can arise during cross-border successions if they are not planned in detail.
Considering the novelty of the matter, the lack of proper planning could become frustrating for all those involved, including the beneficiaries, who will need to deal with the negative consequences of such a situation, which could result in family conflict, litigation, the involvement of the courts, on top of grieving the loss of a loved one.
This is why wealth planners should strongly encourage their clients to take provisions when the time is right.
Such measures could also include a rearrangement of a client’s assets and estate to avoid any uncertainty when it comes to establishing their habitual residence.
Succession planning is the only certainty as it stands, considering the highly uncertain legal framework that regulates it.
This article was written for International Adviser by Nicola Alvaro, chief legal and wealth structuring officer at Generali Luxembourg
