How new EU rules for cross-border estates impact Canadians

When a client dies leaving assets in more than one country, conflict of laws rules (also known as private international law or PIL rules) step in to help determine which country’s law should govern succession of the estate.

These rules are often complex and challenging to navigate.

To achieve more clarity and certainty, the European Union passed a law known as the Succession Regulation in July 2012. It will be fully operational in all EU member states as of August 17, 2015 (except in Denmark, the U.K. and Ireland, which decided to opt out).

The Succession Regulation can significantly impact Canadians with assets in, or other ties to, a participating EU member state. So, advisors must understand how the Succession Regulation operates and can be used by their clients.

Read: Understanding cross-border estate rules

How the Succession Regulation works

Rather than codify a uniform law to apply to all EU states, the Succession Regulation provides rules to determine which country’s law will apply, with the intention that only one country’s laws apply to an entire estate (both personal property and real estate).

The rules will apply to estates of people dying on or after August 17, 2015—whether with or without a will.

Under the Succession Regulation, a deceased person’s last habitual residence will usually determine which jurisdiction’s laws apply. There is an exception to the “last habitual residence” rule, however, if the deceased was “manifestly more closely connected” to another jurisdiction through his or her vital interests such as personal presence, family and, to a lesser extent, business and economic interests.

For example, if a French citizen with assets located in France moves to Germany and dies shortly after moving, French law will most likely apply to the succession of the deceased’s estate based on the closer connection rule.

Read: Get clients compliant with the IRS

A feature of the Succession Regulation of particular note to Canadians is a person can choose to apply the law of her nationality if it is different from her place of habitual residence. She would make this designation in her will. If your client has dual or multiple nationalities, she can choose any of them to apply to her estate, even if it’s a non-EU member state.

Some likely scenarios in which the Succession Regulation may apply to clients include:

• Canadian nationals resident in a participating EU member state;

• Canadian nationals resident in Canada with assets in a participating EU member state; and

• Canadian nationals resident in a non-participating EU member state (e.g., the U.K.) with assets in a participating EU member state.

Avoid forced heirship rules

An Alberta resident with a vacation property located in Spain, for example, can state in his will that Alberta law should apply to the estate in Spain, including Spanish real estate.

If correctly done, Alberta rules should apply to the Spanish real estate on his death if he dies on or after August 17, 2015. This change is significant: before, Spanish law had to be applied to Spanish land. Spain’s internal laws incorporate “forced heirship” rules, which an Albertan resident may wish to avoid with respect to his Spanish property. Forced heirship laws—present in a number of EU member states—often provide a mandatory distribution scheme among a person’s spouse and children.

In the Canadian estate planning context, the ability to apply a Canadian jurisdiction’s laws to succession of property will help ensure forced heirship rules do not apply.

Read: Advise clients about potential forced heirship

Consider also a Canadian national living in France and habitually resident there, but who has not chosen Canadian law to apply to her estate. French law will apply to her worldwide assets, including assets outside of France. If there is real estate located in Ontario, the property falls under Ontario rules and is subject to Ontario law, but it can be brought into account in the French administration.

With respect to the property, the applicable law determined by habitual residence brings into play France’s forced heirship rules—which is potentially unintended or unwanted. However, the new rules permit the Canadian (assume she’s domiciled in Ontario) to choose her law of nationality prior to death. Ontario’s internal law would apply if the Canadian is considered domiciled in Ontario for property purposes, given that property matters fall under provincial law, and French law will not apply.

These new European rules are a welcome and positive development in estate planning and administration, including for Canadian clients who increasingly have ties to many EU jurisdictions. In the Canadian context, it is critical to consider these rules when drafting a will for a client with connections to participating EU member states.