The return on investment in international succession planning Dr Marcus A Hosser, TEP, is the founder of the German law firm DR HOSSSER Rechtsanwalt Taking a huge effort in one`s international succession and estate tax planning is a profitable investment. That thesis especially applies to decision-makers and at the same time prospective testators, who have international points of contact. Those are by far more widespread than one would assume: Working as an expat in a foreign country, intermarriages, assets in foreign countries eg. holiday homes or even shares in a business enterprise abroad, are only a few examples to be mentioned here. Nevertheless, a well-timed international succession planning is neglected in most cases. Even most of the rich persons who do not have a family officer who takes care of such issues, are not aware of the need to act in time. The possible legal and economic consequences of a lacking international succession planning are severe. The advantages of such a planning for the testator’s successors are significant. In such constellations the return on investment (ROI) of the succession’s planning will indeed just be generated after the testator’s passing away. However, this ROI often turns out to be much higher than the comparable rates of return for other common investments. Starting point for our argumentation in favour of the ROI is to assume that prospective testators are thinking in categories of ‘family fortune’ and ‘leaving a part of their lifetime’s work to their descendants’. We will illustrate briefly that in spite of the expenses for the counselling, the bequest will be higher at the end of the day than it would be without a professional succession planning. Most important reasons for this are international succession planning pitfalls. Illustrating them and some of their consequences seem to be the best way to illustrate the ROI. Of course, there are other reasons for the high ROI existing, like the tax mitigating effects of estate planning. A significant number of persons live and work in foreign countries and enjoy their lives as expats. Nevertheless, the foreign country’s legal system remains by far more unknown to (most of) them than the one of their home country. The assumption that the foreign law treats a potential case of succession, eg. a fatal accident, quite similar as the inheritance law of one’s home country, can turn out to be wrong and expensive. Breaches of the respective countries’ form requirements can even lead to the result, that a Last Will and Testament is null and void. Not to make up a Last Will and Testament, is neither a viable solution. There will be many cases in which the perspectives of the various inheritance laws in question differ from each other significantly. The different nation’s statutory rules about the testator’s succession might lead to results of a quite diverse kind: The statutory participation of the surviving spouse in the estate with a quota of three quarters in one country, compared with one of one fourth in the other country is one example. Even cases of conflict appear, in which one of the potential heirs tries to be the first one to sue the other ones in a certain country, because the legal results under that jurisdiction would be better for him (so called forum shopping). The bare knowledge of your home country’s form requirements for Last Wills and Testaments and executing your Last Will in accordance with it, does not necessarily protect you from such effects. Although, there are conventions existing which shall assure the acceptance of such Last Wills and Testament’s form in the other state, one should not rely too much on such rule’s existence and/or the application of the rules by a judge from abroad. A number of jurisdictions do not accept holographic (entirely handwritten and signed by the testator) Last Wills and Testaments. Those are common under German inheritance law. Others require the presence of two or three witnesses, which is completely unusual from a German inheritance law perspective. A good advice concerning form requirements is to always meet all specific form requirements, if possible. A last example for a succession’s structuring which causes problems and the need for counselling, whenever contacts to Germany exist, is the (common) law trust. Trusts are unknown in the German (inheritance) law system. The same applies for a number of other European countries’ jurisdictions. Especially the split-ownership (legal owner, equitable owner) does not go together at all with the German law of property (law in rem) and with German inheritance law’s instruments. This makes it at first necessary to translate the respective trust’s meaning into the categories of German (inheritance) law. Secondly, trusts are subject to a special kind of ‘punitive’ taxation under the German inheritance tax and gift tax act. Last but not least, the risk of double taxation is imminent in international succession cases. If both of the countries levy estate or inheritance taxes (like Germany does) the estate might be reduced significantly by the tax payments to both states. Only a few double taxation conventions in the field of estate or inheritance taxes exist and make milder the tax burdens which the estates or the successors have to carry. Even more serious constellations are German-Canadian-Successions, for example, in which one state – Canada – does not levy estate taxes, but significant capital gains taxes when the testator passes away. Germany will nevertheless ask the heirs or the estate for inheritance tax payments. German inheritance tax law does not allow any crediting of the capital gains taxes paid. As an example, Germany has up to date only concluded six double taxation conventions in the field of estate tax or inheritance taxes with the United States of America, Switzerland, France, Sweden, Greece, Denmark. The risks of double taxation and the scope of the mere national tax provisions which shall help to avoid it should be checked, especially for larger international estates. Trying to solve problems – if possible at all - of the above kind after the testator’s passing away causes significant efforts and a lot more than a structuring in advance would have caused. The testator’s descendants will need to assign at least one experienced advisor who helps them to administer the estate and to deal with the (tax) authorities involved. In international cases which have not been professionally planned, the attorneys’ fees will reach significant amounts, given that counsels with international experience charge their services per hour, generally with higher rates than the ones of other counsels, who would not be able to adequately assist the heirs. Last but not least, most of the heirs will wish that the whole proceedings will be over soon, against the background that an unplanned international estate’s administration can last many years. Having said the above, there will be no doubt left that an international succession planning has a lot of advantages for the heirs and for the estate itself. But does it really also have a high ROI? After having paid the invoices for a lifetime counselling regarding the succession and tax planning, the testator’s account balance will be lower than without it. Nevertheless, the fees for an in advance international estate planning are – in all regularity – by far lower than the ones for a subsequent counselling, after the testator’s passing away: it is always easier and cheaper to avoid legal mistakes than to correct them afterwards - if possible at all. Even if one takes the necessary costs of administration into account, which are to be paid even in professionally planned succession-cases, the planning’s ROI will be high: the costs without a proper planning might be more than twice or even four times (or more) as much as such in case of a timely international succession planning. If we also take the tax mitigating effects of a proper estate planning into account, eg. structuring in order to minimize the taxes and/or avoid the double taxation, the ROI on that investment might even be excellent, especially for larger estates. The testator will benefit from this, at least in two respects: he can be sure that his last wishes will be followed and, last but not least, that his successors will be grateful to him and will surely recognize what a brilliant ‘investor’ he was.
The possible legal and economic consequences of a lacking international succession planning are severe