Mar 2017 | International Succession Planning Legal and Taxation Considerations in the context of the Global Citizen

International Succession Planning

Legal and Taxation Considerations in the context of the Global Citizen

 

Irish Tax Review

Issue 1, March 2017

 

16 January 2017

 

 

Aileen Keogan

Solicitor & Tax Consultant

www.aileenkeogan.ie

 

© Aileen Keogan 2017

All rights reserved

 

1. Introduction

No man is an island nor is our country an island in legal and taxation terms.  In the context of succession, Irish people should not isolate themselves by dealing only with the Irish aspects of succession planning. They need to consider international legal and taxation issues where

• They hold assets which are situate outside Ireland;
• They have ‘connections’, such as domicile, nationality or residency, outside Ireland;
• Their beneficiaries have similar ‘connections’ outside Ireland.

This article seeks to highlight issues that should be considered in the context of such international succession planning. When dealing with foreign aspects, it is important to get up to date legal and taxation advice from the relevant jurisdiction. A checklist is set out in the Appendix to assist in what should be initially ascertained to consider what is relevant for a client in the context of international succession planning.

2. Legal issues

In planning the estate, it is useful to assess the effect of death, the procedures and the rules of succession and whether these fit into the client’s wishes and needs. If there is then opportunity to adjust assets, in the method they are held, in the method they should pass on death, in the manner they are invested or indeed whether they should be divested now either through encashment and reinvestment elsewhere or through gifts, this can be considered once the client knows what would be the effect if the actions were not taken now.

Therefore a useful starting point in any estate planning could be to consider what would happen if the client were to die suddenly before any planning would take effect.  Where there is an international aspect to the client’s estate, the first issue in practical terms would be how to access the assets, then in seeking to put into effect the client’s wishes where the assets should pass, then the tax consequences. Accessing the assets can be crucial in allowing the estate be sufficiently liquid to meet payments required to be made prior to the grant of probate issuing, such as taxes[1] and debt repayments.

2.1 Accessing the assets on death – the grant

Where a person dies in Ireland holding Irish domicile, his estate generally would be administered first in Ireland, assuming there are Irish situate assets in the estate, by the extraction of a grant in Ireland. The Irish grant can only give authority to the executors to collect in the Irish situate assets. If the estate consists of non-Irish assets also, it is necessary for the estate to be administered abroad also, whereby a separate grant (or its equivalent in the relevant country) is required for the assets to be released to the executors.  This is a procedural matter but is relevant in the context of succession planning to consider what practical issues should be considered including the need to instruct local legal and taxation advisers.

For instance, it is relatively simple to extract an English/Welsh grant of probate to a Will already proven in Ireland (and indeed vice versa) but still this requires the filing of legal and tax papers with the English probate office. Similarly with Scotland, Isle of Man and the Channel Islands. When dealing with the European continental countries, it can be more difficult as the procedures are not as familiar to us and indeed can get ‘lost in translation’ – in fact typically formal translations are required for the documentation filed in court. Furthermore it may be necessary for a formal opinion (affidavit of law) to be furnished by an Irish solicitor setting out the Irish rules in relation to the entitlement to extract a grant. In some European civil law countries there is not a similar system of the grant, instead the heirs take direct.

The procedure for dealing with the release of assets across EU borders has been codified resulting in a more simple administration - a ‘certificate of inheritance’ can issue for the deceased who died habitually resident in one EU country which will be recognised by other EU countries. However this does not apply for Ireland or Denmark or the UK, all of whom opted out of the relevant Regulation[2].

For Australian, US or Canadian (non-Quebec) assets, as their legal systems have common law foundations, generally these operate on similar terms to the UK in relation to the issuance of the grant (and where no translation should be required), however an affidavit of Irish law may still be required in that country. For federal jurisdictions, the grant may apply on a state, not federal, basis; where there is not interstate recognition, formal grants may be required over a number of states, causing more delays and costs.

Whether a grant or its foreign equivalent will be ultimately required to allow payment to the executors for distribution should be considered in the succession planning stages for a client. Could a grant be avoided by prudent structuring during the client’s lifetime?

• If the assets are in joint names possibly in that jurisdiction the asset might pass on to the beneficiary in a manner similar to what happens in Ireland - where the assets pass outside the Will of the Deceased to the survivor without the need for a grant. This applies in the UK for instance.
• The grant might also be avoided if some other equivalent to joint ownership is structured around the asset (such as in the case of France and ownership ‘en tontine’).
• Also the client might consider whether the asset could be nominated to a beneficiary in a manner that is acceptable for that jurisdiction, whether the asset could then once again pass outside the terms of the Will.

Such structuring however may result in a transfer to a person to whom the client does not wish his assets to pass – does he want the particular surviving joint tenant to inherit if that person is a business, not a family partner? One simple but very effective way of avoiding the procedures is to hold assets through a nominee company which does not compromise who can then inherit the assets. If going this route, it is then important to consider where the nominee company is situate as the grant would be required for the jurisdiction where the company is registered. This route should be considered in the context of share and managed fund portfolios to easily avoid the need to take out grants in multiple jurisdictions depending on where the registrars of the shares or the domicile of the managed fund are based to avoid the costs and delays in doing so.  Often locating the nominee company in Ireland or indeed in an offshore common law jurisdiction can simplify the procedures and still be looked through for the client’s ongoing taxation purposes as it would be a mere nominee company.

Of course it is also possible that the assets may be of sufficiently low value to allow a financial institution release the asset they manage on foot of the original Irish grant and an indemnity from the executors. The threshold would be determined by the institution in each case but generally is relatively low. It is relevant to consider this in the planning stage to ensure that the location of the asset in the procedural sense is not ‘over planned’. Furthermore clients may take the view that there is no need to plan on these aspects should it be likely that the asset would be disposed of in the short to medium term, albeit other international assets may be then acquired in other jurisdictions. The use of nominee companies in such cases can be very useful to allow the portfolio change without having to consider the location of each underlying asset in terms of the procedures to release those assets on death.

2.2 Where the assets should pass

While a client may have particular views as to how he wishes his assets to pass on his death, the freedom of testation is not unrestricted and the level of restriction differs from country to country. In estate planning the client must therefore take account of these restrictions.

2.2.1 Forced Heirship, Clawback; Conflicts of law

In Ireland, the legal right share of the spouse is well known. A testator cannot effectively ‘cut out’ his spouse under his Will and if he does not make any provision for his spouse or provides for a legacy of less than the full estate, the surviving spouse is entitled to take a statutory share of the estate[3] or elect to take the statutory share instead of the legacy provided under the Will.  This is known as a fixed ‘forced heirship’ share. Furthermore in Ireland a child has a right to make a claim against his parent’s estate in certain circumstances[4] and the Irish courts can provide for the child to then take from the estate in a manner it thinks just before the provision under the Will of the testator. This is known in legal terms as a discretionary ‘forced heirship’ share.

Similar forced heirship provisions apply in many jurisdictions throughout the world and this can affect how the client can pass his assets in that jurisdiction or indeed other assets, depending on his connection with that other jurisdiction. Common law countries tend to do this by the application of court discretion, such as in England and Wales, whereas generally civil law countries allocate fixed percentages of the estate to children, parents and usually (though not always) a spouse^[5]. Often the beneficiary has a right to elect if there are separate rights given under a will of the deceased.  There are broadly two categories of jurisdictions which apply forced heirship rules:-

• Countries, e.g. France, Spain which operate a system of strict forced heirship; and
• Countries, e.g. Germany, which confer rights on certain family members who are entitled to a minimum statutory share, which, if they do not receive under the will or by gift beforehand, may claim against the deceased heirs.

Clawback provisions often feature in forced heirship regimes.  These provide that where a statutory heir is not able to received his correct share on the death of the deceased because the assets are eroded by lifetime gifts, assets given away during the deceased’s lifetime can be brought back into account for the purposes of calculating the share of the statutory heir.  We would be familiar with this in Ireland [6] where assets divested by the deceased within 3 years of his death may be deemed to form part of the deceased’s estate if the court is satisfied that the disposal was made for the purposes of defeating or substantially diminishing the legal right share of a spouse or the intestate share of a spouse or children or of leaving any child insufficiently provided for.

If relevant the client may also need to consider whether a state recognises cohabiting or same sex relationships and if a foreign divorce is valid in accordance with the law applying the forced heirship in determining who benefits under the forced heirship provisions and how the principle of private international laws will apply to determine which jurisdiction’s law is to apply. When cross border issues arise in determining succession law, private international law (PIL) rules for each country are applied. These are known as conflict of law rules which apply to decide if rules of succession, generally arising as forced heirship rules, will affect the distribution of the estate.

When it comes to ascertaining what law should apply to the estate of a deceased, confusingly PIL rules differ between jurisdictions with different jurisdictions looking to different connecting factors and applying their laws according to whether the deceased fits into such factors. The connecting factor for Ireland, as with many common law countries, is the domicile of the deceased and then the rules spit, depending on the assets involved.  Irish law provides that the lex domicilii determines the succession of moveable property whereas the succession of the immoveable property is determined by the law of the country where the property is situate (the lex situs). In other jurisdictions, particularly many civil law countries, either the habitual residence or the nationality of the deceased determines the succession of moveable property and in some countries this factor also determines the succession of immoveable property. Even if a state recognises the law of another state it may only recognise the internal law and not the PIL of that state. The Doctrine of Renvoi then steps in as a process to determine which jurisdiction should apply when either both or neither country wishes to apply its succession laws to all or part of the estate of a person with double or indeed multiple connecting factors. The courts in one state might not recognise a decision made by the court of another state or it might consider the other court to be more appropriate yet the other court might refuse to take jurisdiction. The doctrine is challenging and not satisfactory so the matter may not be entirely clear for the client with cross border issues as to which succession law applies.

 

Where the deceased died domiciled in Ireland or there are Irish assets, the Irish courts will apply Irish law in determining whether Irish law or foreign law should apply.  Subject to an election of nationality under Regulation on Succession (Brussels IV) in the case of participating member states, discussed below, the following issues arise in Ireland.

• When, following the application of the Irish PIL, it is decided that a foreign law governs the matter, e.g. where the deceased died not domiciled in Ireland and the assets in Ireland are moveable, the decision is made as to whether to apply the domestic law of the foreign country and send the matter to that jurisdiction on the basis it will accept it, e.g. if the deceased died domiciled in Scotland, the Scottish court would accept the jurisdiction as it also applies succession rules that moveables are dealt with by the lex domicilii. 

• Alternatively where the Irish court applies the law of the foreign country it also should apply its PIL rules too.  In such a case the foreign country’s rules of conflict of laws may refer the matter back (renvoi) to the law of Ireland.  For example where the deceased died domiciled in France but habitually resident in Ireland and held moveables, Irish courts would apply French law as the deceased died domiciled in France. However French law looks to habitual residence for moveables and applies the Irish law.  If so, the Irish courts must decide whether to accept the renvoi and so apply Irish law or otherwise deal with the matter.  Usually if the matter has been referred back to the Irish courts, it will accept the renvoi.

It is more complicated when a connection also arises in a third country, e.g. the asset is situate in a country not of the deceased’s domicile, habitual residence or nationality, and depending on whether each country distinguishes between moveables and immoveables in determining succession.

Given the potential conflicts, Brussels IV – the EU Regulation on Succession^[7] - has sought to harmonise matters. Crucially Ireland, Denmark and the UK opted out of this regulation, yet the Regulation will have an effect on how Ireland will deal with signatory states and how signatory states will deal with Ireland. The Regulation provides that in all EU Member States (other than Ireland, Denmark and the UK):-

• Habitual residence is the connecting factor to determine which jurisdiction would deal with wills and succession for both moveables and immoveables;
• The Doctrine of Renvoi is abolished other than in the case of third party states;
• Testators can designate the law of their nationality as applying to the whole of their estate;
• There is now a uniform European Certificate of Inheritance (i.e. grants mentioned above).

 

Trusts were not dealt with at all in the Regulation, and the Regulation does not affect assets passing by survivorship or under matrimonial contracts. It does not affect the tax that may arise in a member state (other than to the extent the assets pass a certain way, this might affect how the tax is calculated).

There is however an opportunity for Irish nationals to apply the Regulation. The Regulation allows a testator to formally elect in writing to apply his nationality to govern the succession of his estate so that the habitual residence rules do not need to apply if the testator has assets or other connections with participating member states. There is no requirement that the nationality be one of the signatory states. This leaves room for Irish nationals to seek to apply Irish law to foreign assets situate in a signatory member state and will no doubt prove a significant comfort for Irish testators. However in making such an election, care should be taken to emphasise to the client that the matter of taxation is not covered so, for instance, the provision of a property in a European country to pass under an Irish trust may trigger significant taxes in that country which may penalise the use of a trust in taxation terms or deem certain beneficiaries to have taken the assets by looking through the trust for tax purposes.

By way of example an Irish national testator domiciled in Ireland and habitually resident in Spain according to French law owns immoveable property in France. He might consider providing for Irish law to apply to the French property by way of election under his Will.  Since 2015 the law of the forum (France, where the property is situate) applies the law of the habitual residence i.e. Spanish law.  An election of nationality (Irish) would allow Irish law to apply to the French property even though it is immoveable property and so the entire of the property (moveable and immoveable) would be governed by Irish law for simplicity purposes. It is expected that the Irish courts will in the case of an election apply Irish internal law to treat the election as effective and so apply Irish law to the French property.

2.2.2 What is in the estate?

Again, while a client may have particular views as to how he wishes his assets to pass on his death, the assets themselves may already be restricted so that they will not form part of the estate of the client in the first place.

We are familiar with this in the case of assets held on a joint tenancy basis where the survivor will take the asset in full on the death of the first joint tenant irrespective of the terms of the Will of the deceased[8]. It also arises where assets such as life assurances have been nominated to pass to a particular named person and the terms of that nomination apply rather than the Will. Any assets already settled into a trust will not likely pass back to the estate of the client, so for instance property held by the client for himself and his spouse for life and then to his children will not pass under his Will and can only be dealt with through the trust itself. 

In many civil law countries even if a client owns title to assets, they may be subject to a matrimonial regime whereby the surviving spouse is entitled to rights in the property. A typical regime may provide for the property acquired by the spouses prior to the marriage, property connected with their profession or business and property received by way of gift or inheritance to be treated as separate property of the spouses.  Any property acquired during the marriage may be treated as common or community property and the spouses usually own a one half share of such community property.  In France, Luxembourg, Spain and certain states in the USA the division of property is limited to marital gains.  In South Africa and the Netherlands the entire estate of both spouses may be treated as community property, including assets acquired before the marriage. Marriage contracts can also change these provisions. Such matrimonial property regimes limit and possibly exclude the need for a spouse to be protected from the other spouse’s power of testamentary disposition.  In such cases usually any forced heirship restriction is then only in favour of descendants.

Irish estate planning must therefore account for these restrictions in the context of assets situate in these countries and where the client has connections with these countries. The balance between these distinct systems can be upset within one state if another state’s law becomes applicable.  The law of succession is determined at the date of death whereas the law relating to matrimonial property may have been determined much earlier.  Problems arise where the deceased moved from a jurisdiction having community property such as Denmark and certain States in the US, to a jurisdiction, such as Ireland, having a separate property regime, and vice versa. In such a case the question of what jurisdiction should apply will need to be determined based on the principles of applying private international law to each stage.

3.Taxation Issues

All of the above relates to how to access assets for distribution and where to distribute these assets. The tax effect of the distribution needs consideration also in the context of planning.

Irish inheritance tax arises on a benefit taken

• From a disponer who is resident or ordinarily resident in Ireland at the date of the disposition under which the successor takes the inheritance;
• In the case where the successor (beneficiary) is resident or ordinarily resident in Ireland at the date of the inheritance; or
• In respect of property situate in Ireland at the date of the inheritance.

An individual is treated for these purposes as not being resident or ordinarily resident in Ireland if that individual is not Irish domiciled and has not been resident in Ireland for 5 consecutive tax years preceding the year in which the date of the inheritance falls.

There may also be a tax in the jurisdiction where the assets are situate; this may be an estate based type of tax, such as applies in the UK or the USA (federal), or a beneficiary/acquisitions based tax similar to Ireland, such as in Germany[9]. If there are taxes in more than one jurisdiction, the two treaties[10] on inheritance tax that Ireland has may be applied or, if the tax is from a country other than the UK or US, unilateral relief may be available.

One difficulty may be where both Ireland and the other country seek to tax a benefit situate in a third country. For instance a parent resident in Ireland dies holding UK property which passes to a child resident in Germany. Both Ireland and Germany will tax on a worldwide basis and the UK property will be taxed in the UK. While the UK tax may be relieved under the Irish UK Treaty and under the German / UK Treaty, and the unilateral credit in relation to the Irish tax may allow a deduction for the German tax on the UK property taken against the Irish tax on the UK property taken[11], it is understood that currently there is no similar deduction for the Irish tax on the UK property in calculating the German tax.

Similarly the application of the case re Blake[12] should be considered to seek to maximise the credits by providing for assets to be left specifically under the Will or providing for legacies to be paid out of particular parts of the estate situate in a particular country.

In providing for the law of Ireland to apply to EU situate assets, through election of nationality in the Will of the client, if a trust is included in the Will as a beneficiary of part of the residue, the testator should consider providing for the EU situate asset not to pass into the trust to avoid adverse tax implications in the local EU state should it not recognise the trust or seeks to tax it on an attribution basis or otherwise. For instance German corporation tax may apply to income received by a foreign trust from German sources, France has introduced inheritance/wealth taxes on assets in discretionary trusts, Belgium imposes fictitious legacy taxes and postpones these until distribution. Therefore if possible, if the election of Irish nationality is used, it would seem better to provide in the Will for the trust not to take the assets situate in these countries. This would be best done by granting the non-trust beneficiaries a specific legacy of the foreign assets, leaving the Irish assets to the trust. Otherwise, by leaving the foreign assets to fall into the residue, it would be necessary for the non-trust beneficiaries to appropriate these assets. There is a risk that the tax codes in the relevant country might not allow the Irish appropriation rules to apply to its situate assets and the other country may seek to apportion the foreign asset over all residuary beneficiaries including the trust.

In the overall, where a foreign connection arises, it is prudent to take up to date specific local taxation advice before undertaking any estate planning.

4. Conclusion

Estate planning can be complex depending on the profile of the client, his family needs, his wishes, his asset types. Where there is a non-Irish dimension, it gets more complicated and the legal and tax issues must be considered to ensure that the Irish plan is not foiled by foreign rules of succession or doubly taxed by foreign impositions. Also in practical terms the management of these assets now by placing them in nominee companies can make the implementation of the estate plan much easier later on and, in the complex world of cross border successions, anything that will ease the procedures should be welcomed!

Appendix

Checklist for initial consultation

• Where is client resident, ordinary resident, domiciled?
• Where is each beneficiary resident, ordinary resident, domiciled?
• Where is each asset situate?
• Is the asset held in sole name, joint name, partnership, subject to matrimonial contract?
• Is the asset held in a nomineeship?
• Is the client divorced or in a civil partnership or in a second relationship?
• Has the client children?
• What is the long term prospect for each foreign asset – is it to be sold or retained for inheritance later, could it be gifted now?
• Is the foreign asset to be allocated to a particular beneficiary or shared between beneficiaries?

Disclaimer

This article is based on our interpretation of current Irish tax law and Revenue practice. Reference to foreign law and taxation provisions is for general information purposes only and does not constitute legal, taxation or other professional advice. While every care has been taken to ensure that the information in this article is accurate and up to date, you should seek specific legal and/or taxation advice in relation to any decision or course of action. No liability whatsoever is accepted by Aileen Keogan, Solicitor & Tax Consultant for any action taken in reliance on the information in this article.