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

Family Offices – What investors should know about them

Family Offices – What investors should know about them

The Family Office can help if the private wealth has become extensive and complex. Finding a suitable partner is essential. To enable successful, i.e. profitable, management of assets, Family Offices must meet specific quality requirements such as personal integrity, high professional standards and service orientation. Due to increasing complexity and internationalization, advice from independent external legal advisors is indispensable in order to guarantee high-level expertise. Mandating large law firms can be advantageous for liability reasons.

The Family Office concept

Depending on the context in which it is used, the term “Family Office” can have very different meanings. Some talk of it in a quite derogatory manner as “butler of the rich”, others as “high-level secretarial services”.  It is true that Family Office services are rendered in the context of mostly large fortunes. Here, the term Family Office should be understood as an organizational unit in which all services relating to the management of private wealth will be managed externally in a business structure.

Nowadays, Family Offices are in operation all around the world. Previously, Family Offices were common particularly in the United States and Europe. Today, Family Offices are also gaining increasing importance in Asia (Hong Kong, Singapore). In Europe, Switzerland must be regarded as the centre of Family Offices alongside London. Although there are no precise figures, 300 to 500 Family Offices are supposedly engaged in the Family Office business in Switzerland.

One assumes that all over Europe there are about 4,000 firms each with assets of at least 100 million USD under management. Of these, approximately 750 are organized as Single Family Offices, i.e. as corporations set up to render services for one particular family. The remainder are so-called Multi Family Offices, i.e. units in which the services are bundled for the assets of several individuals.

Where does the concept of Family Offices come from?

The stewardship itself is not a phenomenon of modernity. Rather, the roots date back to the 6th century when the major-domo took over the management of the assets for his dominion. The modern concept of Family Offices was developed in the 19th century. In 1838, the family JP Morgan founded the House of Morgan for the administration of the family’s assets. In 1882, the Rockefeller family set up a comparable entity.

Why have Family Offices enjoyed such a boom in recent years?

A major reason for this is the general increase in the concentration of wealth, followed by all needs arising from this in terms of the protection and growth of a large fortune.

At the same time, many wealthy investors had very negative experience with conventional investment advice from their banks during the last financial crisis. Consequently, they have been looking for independent investment advice and have found an option in the concept of Family Offices.

Additionally, this form of organization meets the increasing need of most investors for discretion. Not only externally, but also vis-à-vis the banks involved and investment providers, they do not want to disclose their financial circumstances fully and in detail. Here, a Family Office offers a shielding or at least filtering effect.

Finally, the legal and administrative requirements for investors have increased enormously in recent years. Firstly, because investors are increasingly focusing on real assets whose management is more complex than the mere holding of an indirect investment through a financial product. Secondly, this is a consequence of the generally increasing internationalization of investments.

What services offered by Family Offices can investors benefit from?

Classically, professional Family Office services include aspects such as asset planning, asset management, asset controlling, asset protection as well as legal and tax compliance.

The range of possible supplementary services is extremely wide and limited only by the individual needs of the asset owners. Such services can comprise administrative support, providing personnel, managing selective private matters, through to the complete lifestyle management of the asset holder.

At what point does a Family Office make sense?

In simple terms, working with a Family Office is always worthwhile if the private wealth has become so large and complex that neither the time nor the know-how for its self- administration are available.

However, the operational costs of running a Family Office can be significant. The reason is that the team of specialists is kept exclusively for the purpose of the asset owner. Therefore, as a general rule, the establishment of a Family Office only makes sense economically for really large fortunes. Fixed limits can hardly be defined, since the individual needs of the asset holder and the individual demands resulting from the asset structure vary to a large extent. As a basic rule, however, one can say that in Switzerland a fortune of between 400 and 500 million CHF is considered to be the minimum amount for setting up a Single Family Office.

But even without the full exclusivity of (and control over) a Single Family Office, wealthy investors can benefit from Family Office services by pooling their interests in Multi Family Offices. This form of pooling may include benchmarking, better investment terms or access to investment opportunities / high-profiling networks through higher investment volumes. In Europe, Multi Family Offices serve an average of 10 to 15 clients with total assets under management of some 25 to 50 million USD.

However, the success of this type of bundling depends to a crucial extent on the assumption that the specific client profiles are comparable to each other. Managing assets that are mainly invested in Asian financial market instruments will hardly generate synergies for managing European real assets.

Success factors – what makes a Family Office a good Family Office?

The decision in favour of a Family Office – whether a Single or a Multi Family Office – is a significant and mostly far-reaching decision. There are numerous companies that offer Family Office services. The problem is that “Family Office” is not a protected term and thus anyone can offer Family Office services without having any specific qualification or experience.

Based on the demands in terms of the successful, i.e. profitable, management of larger assets, the following skills are of particular importance.

  • Personal Integrity: A Family Office is not only an asset manager but also a close intimate of the client with a deep insight into highly personal matters. Thus, personal integrity and confidentiality are indispensable.
  • High Professional Standards and Expertise: Decisive for the quality of the consulting services is a high level of competence on the part of the Family Office employees such as attorneys, tax consultants, asset managers etc.
  • Service Orientation: One of the major reasons for holders of considerable assets to mandate a Family Office is severe time restraints. Given this situation, they expect a very high degree of flexibility from their advisors. Whether or not the collaboration turns out to be successful depends very much on each advisor’s ability to comply with the client’s needs and preferences.
  • Network: The quality of the services rendered also depends on how well the Family Office is networked to experts advising within comparable settings. Consequently, it is most helpful to have a network comprising advisors of other Family Offices, thus enabling the advisors to benefit from each other’s expertise or networks.
  • External Expertise: Mainly because of the increasing complexity and internationalization of investments, it is important that the Family Office consultants realize when it is advantageous or even necessary to mandate an external consultant. Smaller entities in particular cannot afford to employ several specialists within the same department.  In legal departments, for example, it would be very difficult for one single person to constantly monitor legal changes in all relevant fields and to react proactively to future changes. Here, large law firms that provide highly specialized services can be of assistance, especially those focused on private clients. These teams can offer all required legal advice on civil law, corporate law, tax planning, asset protection etc. They can contribute not only high-level expertise but are also very familiar with this market segment and its specific rules. Most effectively, they can provide solutions they have already developed for other clients in comparable situations and that turned out to be helpful. Finally, the advice of a large external law firm can be advantageous for liability reasons as well, since such law firms tend to have higher levels of insurance cover. http://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