How to handle multijurisdictional planning

Clients’ increased mobility and globalization of their assets are making it much more common for them to own property in, or have connections to, several jurisdictions. These foreign connections can impact succession of property on death.

This article explores a few special succession issues that need to be factored into the estate planning process if more than one jurisdiction is involved.

The client’s family background, habitual residence, citizenship, domicile and intended beneficiaries.

Determining which law(s) governs succession to property is critical. But the legal rules are complex, confusing and unpredictable in how they will be applied to assets in multiple jurisdictions. With many succession issues, most common law jurisdictions, such as the U.K., apply the law of the deceased’s domicile to non-real estate assets and the local law to real estate.

Other countries may apply the law of the country of nationality (where a person holds legal citizen status), habitual residence (often interpreted as the place where one has one’s principal home with certain permanence) or domicile (the place of one’s permanent home), each determined by different legal tests.

Moreover, many jurisdictions allow for a choice of law in the will or trust agreement. For clients with connections to participating EU member states, it’s important to consider the impact of the EU Succession Regulation, which is in effect for deaths post- August 17, 2015. Among other matters, the Regulation provides harmonizing rules to determine which country’s law will apply to a deceased’s estate for both real and personal property, and can allow a person to choose the law of her nationality to govern certain succession issues (for more, go to advisor.ca/EUestate).

Matrimonial regimes that limit the ability to transfer property on death.

Family law rules in specific jurisdictions may affect or limit the transfer of a client’s property on death. Many civil law jurisdictions and several U.S. states, such as California, follow these rules. For example, if one of the applicable matrimonial regimes is a community property regime (i.e., spouses’ property and earnings are considered community property during marriage and are divided equally between them on marriage breakdown), your client may be limited as to what property she may dispose of by will.

Will the foreign law affect the terms of the client’s will?

Check to see if the client’s will offends the local law of the foreign jurisdiction. For example, most civil law jurisdictions, such as France and Germany, do not recognize the concept of a trust, nor do they allow for complete testamentary freedom. Instead, they impose a required distribution of property on death among specific family members (i.e., forced heirship). For example, in France, if a deceased leaves one child, 50% of her estate can be freely disposed of, whereas if she leaves three or more children, only 25% of her estate can be freely disposed of.

Tax treatment of the inheritance of the client’s intended beneficiaries in the beneficiary’s home tax jurisdiction.

Clients should seek advice on how to best structure their will and beneficiaries’ inheritances to minimize tax implications for their beneficiaries. For example, many countries have an inheritance tax, such as France and Ireland. Many clients are unaware of the significant taxes that may be paid, and it is important to consider in a client’s will whether or not the client’s estate should ultimately bear the burden by including a provision that provides for payment of inheritance tax, or that states whether the beneficiary should be solely responsible.

Tax consequences for the client and her estate in each foreign jurisdiction.

Planning strategies to address taxation implications that arise based on a client’s citizenship, nationality or residence, or other affiliations should be considered. For example, in preparing a will for a Canadian-resident, U.K.-domiciled spouse who owns a U.K. home, it will be important to consider U.K. inheritance tax and whether there are any deferral opportunities, such as spouse rollover relief, in the U.K.

The application of possible probate-avoidance techniques.

Explore the possible restructuring of assets so they do not pass through the deceased’s personal representative on death. This will help streamline the administration of the estate, as well as minimize probate fees and multiple estate administration proceedings. Strategies can include designating beneficiaries for life insurance policies, using inter vivos trusts, joint tenancies and corporations.

Multijurisdictional and separate situs wills

Clients and their advisors should also consider whether it makes sense to use a multijurisdictional will or multiple separate situs wills to dispose of assets on death in multiple jurisdictions.

A multijurisdictional will is a testamentary document that governs the succession of assets in several different legal jurisdictions. A separate situs will, on the other hand, is a distinct testamentary document concerning assets located in a particular legal jurisdiction (or situs) and is typically executed in accordance with that jurisdiction’s laws. A separate situs will is used in conjunction with a principal will that deals with all of the client’s other assets.

Depending on your client’s assets and the jurisdictions involved, as well as her own personal circumstances, there can be strategic, practical and legal advantages for using a multijurisdictional will or separate situs wills. Here are some of the advantages.

• Either option ensures the client’s documents will be valid and her intentions are effected in each jurisdiction. For example, some jurisdictions have special form and execution rules for wills, such as requiring more than two witnesses to the signing of a will (typically required in most jurisdictions with systems based on English law).
• Administration of the client’s assets upon death will be more efficient. Through separate situs wills, the administration of the local estate can be restricted to a smaller and identified group of assets, creating greater efficiency. The administration of the estate can proceed without delay because a separate situs will can usually be submitted directly to probate without waiting for a will to be probated in the client’s home jurisdiction first, and then trying to have it admitted in the second jurisdiction—a two-step process.
• There will be better clarity by using local language and form. The use of local language avoids the need for translation and can avoid interpretation issues regarding local legal terms. Using local form ensures that the court process and administration of assets in the jurisdiction will proceed efficiently.
• The client can avoid unnecessary probate costs. Separate wills for each jurisdiction can avoid local probate fees that are charged on a client’s worldwide estate. They also avoid duplication of probate fees that are paid in several jurisdictions on the same assets.
• The client can minimize conflict and unintended results. Well-drafted multijurisdictional and separate situs wills can minimize interpretation issues for key and critical terms that may differ between jurisdictions. And, having these wills helps create a unified whole when addressing and apportioning tax liabilities and other creditor claims.

While well-drafted multijurisdictional and separate situs wills are powerful planning tools, proper preparation is necessary to realize their benefits. Most cross-border succession issues can be avoided by preventative and proactive preparation of estate plans. Careful planning and drafting by experienced professionals with broad, cross-border expertise is critical.