From PLI’s Course Handbook
International Estate & Tax Planning 2009: Essential Elements of Planning for the International Private Client
#18865
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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?
- 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 community" regime[1]. 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.
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 both[2]. 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 spouse[3].
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.
2.4 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" regime[4], the "separation of assets" regime[5] and the "net additions participation" regime[6].
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 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 years[7]. 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 marriage[9].
The spouses may also explicitly choose the law applicable to their matrimonial regime[10]. In the case 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 irrelevant[11].
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 rules[12]. 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 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 portion1 / One half / One half
2 / Two thirds / One third
3 or more / Three quarters / One quarter
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.
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 spouse[15].