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Zac Lucas is Director of Wealth Advisory Services at Henley & Partners.
Globalization of affluent families and individuals is progressing rapidly. Wealthy clients are increasingly dividing their time among various jurisdictions, holding multiple passports, and owning assets and investments across different countries. This can result in the application of succession laws that are not anticipated or desired, or that may, in certain circumstances, be positively harmful.
Clients may be familiar with rules designed to solve the problem of double taxation when someone is a tax resident in two jurisdictions at the same time. These are sometimes referred to as ‘tie breaker’ rules, where your permanent home, center of vital interest, habitual abode, or nationality may ultimately decide which jurisdiction has sole taxing rights.
However, they might be less familiar with, or totally unaware of, how various succession laws apply when multiple jurisdictions are involved.
There are broadly three types of succession law: Common Law (which originated in the UK and is prevalent across much of the Commonwealth and the USA), Civil Law (which originated in continental Europe), and Sharia Law (Islamic religious law).
They differ in that Common Law allows you the freedom to leave your estate as you wish, whereas Civil and Sharia Law require mandatory shares to be left to your family.
Unlike taxation, there is no globally agreed convention dealing with the application of succession laws. For instance, Common Law jurisdictions use the concept of ‘domicile’, Civil Law jurisdictions, particularly in the European Union, use ‘habitual residence’, and Sharia jurisdictions use ‘citizenship’ to trigger application of their succession laws. Interaction between these laws can be highly complex.
Case Study 1
Mr. A, a Saudi citizen, passed away while resident in the UK. He owned shares in various UK and British Virgin Islands companies, which hold valuable investments. Mr. A died leaving a UK will, transferring all his shares to his eldest son.
Because shares in the various companies are located in the UK and the British Virgin Islands (Common Law jurisdictions), Mr. A’s domicile will need to be determined.
If he died domiciled in the UK (England and Wales) then he would be free to leave his shares as intended in his will.
However, if it is determined that Mr. A died domiciled in Saudi then Sharia law would apply and would override any contrary provisions contained in his will, Sharia succession law would be enforceable by UK and British Virgin Islands probate courts.
Case Study 2
Ms. B, a US citizen, passed away while resident in the Philippines. She owned various financial accounts and investments in the Philippines and shares in a trading company in California, USA.
A Philippine court, applying (Spanish) Civil Law, would apply US succession law based on Ms. B’s citizenship. However, the court would also consider her domicile status, a concept that is part of US succession law.
If Ms. B died domiciled in the Philippines, then Philippine succession law would apply not only to her financial accounts and investments in the Philippines, but also to her shares in the trading company in California.
Philippine succession law provides forced heir or mandatory succession rights: whether this results in an appropriate division of the deceased’s estate, particularly in the case of the trading company in California, would have to be carefully considered by Ms. B during her lifetime — it may be of great concern to her if her shares in the trading company were inherited by a young adult child, for instance.
The case studies illustrate not only the interaction of various succession laws, but also their dynamic nature; in each case the domicile of the deceased proved crucial to determine which succession law applied.
‘Domicile’ is a legal concept that contains a default position (domicile of origin) and an active or changing position (domicile of choice).
The default rule is that everyone has a domicile of origin: either their father’s domicile if, at their birth, both their parents were married to each other, or their mother’s domicile if she was unmarried at their birth.
At the age of majority, an individual can acquire a domicile of choice, namely, they can move to a different country to live there permanently.
It’s the dynamic nature of a domicile of choice (as individuals move from country to country) that causes much confusion and uncertainty in international succession planning — what does a person need to do to establish and maintain a domicile of choice? Each case is a mix of facts and intentions. If an individual does not have a domicile of choice, then, by default their domicile of origin would revive and govern succession to their estate — but, is this desirable?
A similar challenge is encountered when applying the European Union “habitual residence” test, which is used to determine which country’s succession laws apply where the deceased or their estate has an EU connection.
Faced with this complexity and in many cases uncertainty, global families and individuals typically use international trusts or foundations to hold various estate assets and thereby ‘stabilize’ applicable succession laws.
International trusts and foundations created in leading financial centers such as the British Virgin Islands, Cayman, Guernsey, Jersey, Hong Kong (SAR China), Singapore, and the UAE (DIFC / ADGM) benefit from what is called ‘firewall protections’, that is, laws specifically designed to protect trust or foundation assets from adverse claims based on succession laws.
In this way, families and individuals are in a position to enjoy living in multiple jurisdictions, owning and enjoying assets located across the world, but without the need to consider and monitor the interaction and application of complex succession laws.
Henley & Partners assists international clients in obtaining residence and citizenship under the respective programs. Contact us to arrange an initial private consultation.
