From PLI’s Course Handbook
International Estate & Tax Planning 2009: Essential
Elements of Planning for the International Private Client
#18865
2
FUNDAMENTAL CONCEPTS
IN MULTINATIONAL ESTATE
PLANNING—CIVIL LAW
Philippe Xavier-Bender
Gide Loyrette Nouel A.A.R.P.I.
Practicing Law Institute (PLI). New York 2 June 2009
Fundamental Concepts in Multinational Estate Planning –
Civil Law
Philippe Xavier-Bender
1.
INTRODUCTION
Estate planning in civil law countries requires
different thinking. Concepts as matrimonial regimes
or forced heirship do not sound familiar to common
law practitioners, and even less to private persons of
Anglo-Saxon background trying to organize their
assets.
Nevertheless, multinational estate planning often
comes across civil law principles. Taking the
example of France, which system is quite
representative of the civil law system, real estate
owned by a deceased person in this country will be
governed by French succession law. Efficient estate
planning should consequently take into consideration
French forced heirship rules, which limit the right of
individuals to dispose of their assets per gift or
testament.
The other way round, concepts as probate or trusts do
not exist in French law, whereas they play an
essential part in common law.
There are a couple of basic rules to be kept in mind in
order to deal with civil law estate planning. They are
not always as exotic as one might think. Some of
these rules will even remind the common law
practitioner of concepts existing in some states in the
USA – reference here is made to community property
rules.
Basically, estate planning in case of death will turn
around the following questions:
-
which assets are to be shared?
2.
-
how will they be shared?
The answer to the first question is easy in its
principle if the deceased is not married: the assets
include all the assets belonging to the deceased. It is
more complex if the deceased leaves a spouse. In this
case, the issue is to determine which assets belong to
which spouse. The civil law concepts of matrimonial
regime and community property will have to be taken
into consideration.
The second question refers to the restrictions to the
right to dispose by gift of testament. In a system of
forced heirship, the children, and to some extent the
surviving spouse, are entitled to a significant part of
the estate. Only a residual part can be freely disposed
of.
Let us hereafter review these fundamental concepts
on the basis of French law.
2.
COMMUNITY PROPERTY
Estate planning has to address the issue of the
applicable matrimonial property regime in order to
determine how assets will be divided between
spouses in case of divorce or death.
The matrimonial regime consists of all the rules
which govern the ownership of the spouses’ assets
and their management.
It is helpful, in order to understand matrimonial
regimes to consider that the spouses' assets may
belong, depending on which regime is adopted, to
three separate estates, namely the husband's exclusive
estate, the wife's exclusive estate and the spouses'
joint estate. The use of the word "estate" is somewhat
misleading in that French law does not use this
concept in the same sense as in Anglo-Saxon
jurisdictions, but for want of a better expression, it
will be used here (the proper word in French is
"patrimoine" or patrimony).
The French Civil Code provides that unless spouses
agree otherwise, their relationship as to assets is
governed by the rules known as the "legal
3.
community" regime1. Where spouses intend to adopt
different rules, they are free to do as they wish
subject to certain public policy rules.
2.1
What is community property?
Under the legal regime of community property, the
spouses’ joint estate is made up of all acquisitions
made during the marriage, together or separately,
using the spouses' earned income or the income
generated by their respective exclusive estates. A
legal presumption provides that an asset is part of the
joint estate unless otherwise provided by law.
The exclusive estate of a spouse notably includes the
following assets:
-
assets owned by a spouse before the
marriage,
-
assets received by a spouse during the
marriage in the form of legacies, bequests
or gifts,
-
acquisitions of assets ancillary to one of the
assets in this list (subject to compensation),
-
damages received for bodily or moral
injury,
-
personal and non-transferable receivables
and pensions,
-
reinvestments in new assets using the
proceeds of any one of the above assets,
-
increases in value of any of the above
assets.
All above assets are known as "biens propres" or
"propres" (proprietary assets).
Special rules also apply as to what constitute debts of
the joint estate.
1
Articles 1400 to 1491 of the Civil Code.
4.
2.2
Management of assets under community property
Each spouse is entitled to manage and dispose of
joint assets, except that any lifetime gift, the sale of
and sureties on real-estate, certain business assets,
non-negotiable assets and certain movable assets
must be approved by both2. Any violation of those
rules may lead to the nullification of the sale or
surety. As to a spouse's capacity to will assets in the
joint estate, that is limited to his or her share in the
joint estate.
For instance, two spouses have bought a valuable
piece of art during their marriage. This piece of art
can be sold by one of the spouses acting alone. In the
general case, there would be no requirement for the
other spouse to sign the sales deed.
Assets in the exclusive estate of a spouse may be
managed and disposed of freely by that spouse3.
2.3
Division of community
The joint estate must be liquidated upon death of one
of the spouses, the spouses' divorce (or formal
discontinuation of life in common), in the event of
court-ordered separation of assets or of a
modification of the matrimonial regime.
The basic rule is that the joint estate is split in two
equal parts. Each spouse receives one half of the joint
estate and keeps his/her own proprietary assets. This
means that in case of death of a spouse, the estate
includes one half of the joint assets and the
proprietary assets of the deceased.
In the event the value of one of the three estates is
increased to the detriment of one of the other, the
enriched estate is indebted to the impoverished estate.
For instance, should one spouse have paid the
renovation of a personally owned house (proprietary
asset) with the income of the spouses (joint asset), the
amount of the renovation will have to be added to the
joint assets before division.
2
3
Articles 1421 et seq. of the Civil Code.
Article 1428 of the Civil Code.
5.
2.4
Other matrimonial property regimes
Community property is opposed to other matrimonial
property regimes. The spouses are free to adopt other
rules within the limits of certain public policy rules.
The Civil Code contains certain provisions which
provide for "ready-made" regimes, namely the
"contractual community" regime4, the "separation of
assets" regime5 and the "net additions participation"
regime6.
2.4.1
Contractual community
This regime requires the signature of an agreement.
Under that system, spouses adopt the legal regime
subject to any permitted variations which are allowed
under the above-mentioned sections of the Civil
Code. The code provides for such optional clauses as
(i) the inclusion of all movable property or all assets
of the spouses in the joint estate (the latter case being
known as the "universal community" regime),
irrespective of whether they were acquired during or
before marriage, (ii) the right for a spouse, upon
liquidation of the joint estate, to take possession of
certain identified assets subject to monetary
compensation to the joint estate being liquidated, or
(iii) an uneven sharing of the joint estate (which may
lead to the surviving spouse taking the whole of the
joint estate).
2.4.2
Separation of assets
This regime also requires the signature of an
agreement. Under that regime, each spouse retains
full ownership and control over the assets he or she
owned before marriage as well as over those which
are acquired by him or her during marriage. They
both contribute to expenses as provided in the
agreement or, failing that, in proportion to their
4
Articles 1497 to 1527 of the Civil Code.
Articles 1536 to 1543 of the Civil Code.
6
Articles 1569 to 1581of the Civil Code.
5
6.
respective means. In the event neither spouse is in a
position to establish that a specific asset is owned by
him or her, that asset is deemed to be the joint and
undivided property of both, in equal share.
2.4.3
Net acquisitions participation
This regime, which also requires an agreement, is
akin to the separation of assets regime, except that
upon dissolution of the marriage, each spouse
participates in the net growth of the other spouse's
exclusive estate, as to one half of such net value.
The matrimonial regime adopted by spouses, by
default or by agreement, may be modified by a new
agreement of the parties, provided the regime then in
place has run for at least two years7. Prenuptial
agreements and modifications thereof must be
entered in the presence of a "notaire"8. Creditors
enjoy special protection whenever a regime is in the
process of being modified.
2.5
When are French matrimonial rules applicable?
Before getting in depth with the rules of community
property and matrimonial regime, the first question
should be whether such matrimonial rules are
applicable. In other words, when would two married
people be subject to French matrimonial law?
2.5.1
Rule of first domicile
The general rule is that French matrimonial regimes
are applicable if the spouses have established their
first domicile in France after their marriage9.
The spouses may also explicitly choose the law
applicable to their matrimonial regime10. In the case
7
Article 1387 of the Civil Code.
A notaire is a public official exercising under the authority of the
courts who is officially authorized to attest documents or actions so
as to give them legal authenticity.
9
For instance, Cour de cassation, 12 December 2000, nr. 99-10.618 ;
Cour de cassation, 31 January 2006, nr. 02-18.297.
8
7.
of "international" marriages, the spouses are indeed
entitled to designate the law applicable to their
matrimonial regime.
Citizenship and the form of celebration of the
marriage are irrelevant11.
2.5.2
Litigation forum
In case of litigation regarding which matrimonial
rules are applicable, choosing the right jurisdiction
can be important.
A French judge would not use any "renvoi" regarding
matrimonial rules12. This means that, should a French
judge consider that foreign law is applicable to the
spouses' estate, he would directly apply the
provisions of such foreign law which govern the
matrimonial regime and not the rules of conflict.
A foreign judge would not necessarily have the same
position, and the end result on what matrimonial
rules are applicable may consequently be different
according to jurisdiction.
3.
FORCED HEIRSHIP
Once the assets of the deceased are determined, the
next question is to which extent such assets can be
freely disposed of by gift or testament.
In a civil law system, forced heirship limits the
ability of a person to dispose of his or her assets by
donation or testament.
Forced heirship rules under French civil law ensure
that certain members of the family cannot be totally
disinherited by will or by gift. Issue of the deceased
(referred to as héritiers réservataires (forced heirs))
and surviving spouse (conjoint survivant) of a person
10
Cour de cassation, 2 December 1997, nr. 95-20.026.
Cour de cassation, 31 January 1968, nr. 65-11.561.
12
Cour de cassation, Civ. 1, 27 January 1969, Lardans, Rev. Crit.
DIP 1969, 711, obs. Derruppé, JCP 1970, II, 16407, obs. Foyer ;
Cour de cassation, Civ. 1, 1 February 1972, Gouthertz, JCP 1972, II,
17096.
11
8.
receive a set portion of the estate. The portion of the
estate which exceeds such portion is referred to as the
quotité disponible (disposable portion). The balance
is known as the réserve héréditaire (reserved
portion).
3.1
Children
The disposable and the reserved portions depend on
the number of children of the deceased, as follows:
Number of
children
Reserved
portion
Disposable
portion
1
One half
One half
2
Two thirds
One third
Three quarters
One quarter
3 or more
In the event a child dies leaving issue, then the same
rules apply per stirpes.
3.2
Surviving spouse
The law protects the surviving spouse who has
specific rights on the estate and on the home.
3.2.1
Rights on the estate
Where a spouse leaves children or descendants, either
legitimate, natural, or illegitimate, he or she may
dispose in favor of the other spouse either (i) of
ownership of what he or she may dispose of in favor
of a third party (i.e. the disposable portion), or (ii) of
one quarter of his or her property in full ownership
and of the other three quarters in usufruct (i.e. life
interest), or else of the totality of property in usufruct
only.13 If the deceased only leaves his or her parents,
the surviving spouse is entitled to one half of the
estate in ownership.
13
Article 1094-1 of the Civil Code.
9.
If the deceased does not have any descendants, one
quarter of the estate goes to the surviving spouse,
who only becomes a forced heir under these
circumstances. The deceased may not dispose to
other persons of more than three quarters of the
estate. Indeed, gratuitous transfers, either inter vivos
or by will, may not exceed three quarters of the
property where, failing descendants, a deceased
leaves a surviving spouse.14
These rules allow the deceased to give the whole
estate to the surviving spouse when the spouses do
not have children.
3.2.2
Rights on the home
Furthermore, the surviving spouse automatically
becomes the beneficiary of the lease agreement for
the house or flat in which the spouses lived at the
moment the death occurred. Rents are paid for a
maximum period of one year on the estate assets.
Moreover, the surviving spouse enjoys (i) a lifelong
right of occupation of the family home (provided he
or she occupied it effectively with the deceased at the
time of death), if such home was owned by the
spouses together or by the deceased alone, and (ii) a
right of use of the furniture in the home which is part
of the estate, unless the deceased, in a will, denied
such right to the surviving spouse15.
3.3
Recent provisions limiting forced heirship
A law of 23 June 2006 has softened the provisions
regarding forced heirship and opened new
perspectives for estate planning16. Indeed, it is now
possible for a heir to give up to his/her forced portion
before the death of his/her parent.
14
Article 914-1 of the Civil Code
Article 764 of the Civil Code
16
Law nr. 2006-728 of 23. June 2006, now Articles 929 et seq. of the
Civil Code.
15
10.
3.3.1
Conditions
This right may only be used in favor of one or several
determined persons. The idea behind the law is in
particular to facilitate and securitize the transfer of a
family company to one particular child for instance,
or to increase the part of the estate allowed to a
disabled child, but any combinations are possible.
There is no requirement for the beneficiary of the
renunciation to be a heir: it may be any third person
as well.
It is however a requirement that the renunciation is
accepted by the person from whom the heir will
inherit of.
The renunciation may concern the whole forced
portion, only a part of it, or one particular item of the
estate.
3.3.2
Protection of the heir
Given the consequences of this decision, and the
potential dangers for the renouncing heir, the Civil
Code provides for strict formal rules to be observed.
The heir has to be over age. The heir’s consent to
give up his/her part of the forced portion or a fraction
of it has to be written down in a public instrument
drafted by two notaires. Any other way for the heir to
express his/her consent would be void. In accordance
with general principles applicable to agreements, the
consent would also be void if made in error, or where
exhorted by duress or deception.
3.3.3
Consequences
Once the heir has given a valid consent to give up
his/her forced share in total or in part, such consent is
final.
It can only be reversed in the following three specific
cases:
-
the person the heir inherits of has not
complied with his/her maintenance
obligations towards the heir, i.e. has not
11.
provided food, clothing and other basic
necessities of life if the heir needed such
support,
-
at the day where the succession is opened17
the heir experiences financial difficulties
which could be remedied by the heir
receiving his/her part of the estate.
-
the person who benefits from the
renunciation has committed a crime against
the renouncing heir.
The renouncing heir has a limited time frame to claim
back his or her part of the estate.
4.
ENFORCEMENT OF FORCED HEIRSHIP
The Civil Code provides for protections of the forced
heirs against any infringement of their rights, under
the condition though that French forced heirship rules
are applicable.
4.1
Protection of the forced heirs
The application of clawback rules ensure that the
above rules concerning ‘portions’ are respected. It is
therefore not possible for a person, through lifetime
gifts or special will dispositions, to circumvent forced
heirship rules with a view to disadvantaging certain
reserve heirs and benefiting others. If the total of gifts
and legacies exceed the disposable portion, the
excess is notionally added back into the estate, for the
purpose of computing the rightful share of each
reserve heir. This is known as the rule of rapport18
and its purpose is to reinstate equality among reserve
heirs.
Similarly, gifts to third parties generally (i.e.
including reserve heirs, surviving spouse and nonfamily members) are subject to another claw-back
rule known as “réduction”19, which applies to the
17
Which usually corresponds to the day where the deceased died.
Article 843 of the Civil Code
19
Article 922 of the Civil Code
18
12.
case where gifts or legacies exceed the free portion.
The effect of reduction is to nullify excess gifts or
legacies, so that the reserve heirs may receive their
lawful share of the estate. Only reserve heirs are
entitled to claim réduction.
Furthermore, according to the general rule of Article
1166, "creditors may exercise their debtor's rights
and actions". Creditors of the forced heirs may
therefore also seek protection of the forced portion of
the estate. It is not a requirement that all the forced
heirs act together. Each forced heir is entitled to act
for his or her part of the succession.
4.2
When are forced heirship rules applicable?
Just as with matrimonial regimes, one of the first
questions in estate planning should be whether
French succession law, and thus forced heirship
rules, are applicable.
4.2.1
Distinction between movables and immovables
A distinction is drawn between immovables and
movables regarding the applicable law for
successions. French law will govern successions of
all immovables located in France. In return,
successions of movables will only be governed by
French law if the deceased’s last domicile was in
France.
Movables are defined by the Civil Code as "animals
and things which can move from one place to
another, whether they move by themselves or
whether they can move only as the result of an
extraneous power".20 Furthermore, "obligations and
actions having as their object sums due or movable
effects, shares or interests in financial, commercial or
industrial concerns, even where immovables
depending on these enterprises belong to the
concerns, are movables by prescription of law".21
20
21
Article 528 of the Civil Code.
Article 529 of the Civil Code.
13.
Immovables are primarily lands and buildings.22
Standing crops and unpicked fruit and belongings
perpetually attached to a tenement are also regarded
as immovables.23
4.2.2
Movables and French concept of "domicile"
Many disputes concerning international successions
in France are related to the question of identifying the
last domicile of the deceased, in order to determine
whether or not French law will be applicable to
govern the succession of movables in a particular
case.
French law has no rules helping the identification of
domicile in this context. The last domicile of the
deceased is therefore to be determined in accordance
with the general rules of the French Civil Code
defining the domicile, as interpreted by applicable
case law.
The two main criteria defining domicile are the place
of principal residence24 and the intention to stay
there.25 Although a person intends to change
domicile, such change would not be considered as
having occurred as long as such person has actually
not moved to the new domicile.26 Conversely, living
a long time out of the domicile does not entail a
change of domicile if no intention to change domicile
has been expressed.27 The intention to be taken into
consideration is, however, not necessarily the
publicly declared intention but rather what could be
called the ‘personal’ one. Declaring "having London
as principal place of residence" is not decisive if it
does not correspond to a real intention of having the
22
Article 518 of the Civil Code.
Articles 519-526 of the Civil Code.
24
Article 102 of the Civil Code: ‘the domicile of a French person, as
to the exercise of his civil rights, is at the place where he has his main
establishment’.
25
Article 103 of the Civil Code: ‘a change of domicile takes place in
consequence of an actual residence in another place, in addition to the
intention to fix one's main establishment there’.
26
Cour de cassation, Soc., 8 June 1951, D 1951.510.
27
Cour de cassation, Soc., 25 May 1951, D 1951.509
23
14.
domicile there. However, the burden of proof lies on
the heir who seeks to argue that the deceased’s words
did not express the deceased’s real intention.
4.2.3
Real estate
It is less difficult to determine the law applicable to
immovables, as this depends on the country where
the particular immovables are located. If located on
French territory, French succession law will apply.
An exception would be if an immovable is owned by
a "civil company" (société civile immobilière). As
shares in such companies are considered as
movables, succession to the immovable would be
governed by the rules for movables.
4.2.4
Litigation forum
A French judge would apply the rule of "renvoi" in
determining what law governs the succession28. This
is the contrary of what happens in defining the
matrimonial regime. This means that if a foreign law
is applicable to the succession according to the
aforementioned rules, the judge will apply the rules
of conflict of such foreign law, and not the
succession rules.
5.
CONCLUSION
Whenever a civil law country is involved, estate
planning will address the issue of matrimonial
regimes and of forced heirship.
The estate of a deceased may vary significantly
according to which matrimonial regime is applied.
French law is also quite protective of the deceased’s
descendants as they benefit from the forced portion
of the estate, and cannot be disinherited. But these
rules will only apply for the deceased’s real estate
28
Cour de cassation, 24 June 1878, Forgo, S 1878.I.429, Ancel et
Lequette, Grands arrêts de la jurisprudence française de droit
international privé.
15.
located in France, and, as far as movables are
concerned, in so far as the deceased’s last domicile
was located on French territory. This is the big issue
in international succession: the last domicile is often
difficult to determine.
Given the complexity of the applicable rules,
everyone probably has a chance in this respect.
16.