Legal News August 2009
|
Dear clients and business friends
With reference to the factual or presumed last will of a person who has died, there is always the possibility - if not
indeed likelihood - of heated argument between the heirs if the deceased has failed to regulate his or her estate clearly
and comprehensively. It is particularly important to make the necessary arrangements in good time when substantial assets
are going to be left behind.
The arrangements that need to be made can, as a rule, only be determined after analysis of the specific asset situation
and the family circumstances (particularly the existence of spouses and/or other heirs entitled to what is known under Swiss
law as a "statutory share"). A lot - thought not everything - can be done if arrangements are made in good time and the
solutions found are reviewed at regular intervals to ensure that they still match the current situation and the intentions
of the involved parties.
With this issue of Legal News we want to provide a brief summary in general terms of ways to approach possible solutions
and encourage our readers to think about the theme.
Daniel Bachmann,
Partner, Legal
daniel.bachmann@ch.ey.com
|
Avoiding disputes in estate distribution
Dr. René Schwarzenbach, Attorney-at-law, Managing Partner, Legal Services, rene.schwarzenbach@ch.ey.com
Print version (PDF 169 kB)
1. Sharing a common destiny
If disputes arise between the heirs, experience shows that distribution of the estate can become a lengthy, expensive affair. Apart from the
costs for external consultants, there is also the threat that disputes will lead to a diminution of the assets involved because management of
the estate is blocked. Securities cannot be sold, even if their price is under threat, and real estate cannot be professionally managed. If the
disputed estate includes a major participation in a company, customers and employees are likely to feel insecure, often with catastrophic
consequences for the company.
The effect of the principle under inheritance law of "universal succession" is that the heirs become legal successors of the deceased person.
They take over all the rights and obligations of the deceased as co-owners and can only jointly and unanimously decide on what happens to the
estate. Until the formal distribution takes place, they form a community of heirs with a common destiny. Every heir can, of course, demand that
the estate is distributed by the court. However, in view of the long durations of court cases like that, the right to call upon the court is of
little help to the heirs who want the distribution to be executed as quickly as possible.
2. Example constellations
If, for example, the direct descendents are already arguing among themselves before the death or if there is a poor relationship between a
step-parent and children from the first marriage, arguments about the inheritance are virtually pre-programmed. How much leeway does a person
have to prevent disputes and reduce the associated risks after he or she has died?
2.1 The virtual heir
It is generally known that in Switzerland the closest relatives of the deceased (children, spouses and parents) are legally entitled to a
share of the estate (the so-called "statutory share"). If a person with that status is excluded from his or her entitlement by means of a
last will and testament, he or she becomes a so-called "virtual heir", without the legal status of an heir and without being mentioned in
the official certificate of inheritance. If agreement cannot be reached with the other heirs, he or she will have to battle for official
status as an heir by means of a law-suit (in the form of an invalidity or mitigation claim). That would block the estate. This risk can be
reduced if the testator pays to the excluded person a legacy equal to the statutory share to which he or she is legally entitled. The law
states that the share in such a case is of a purely mathematical nature, i.e. "in value" (Article 522 ZGB). This means that it is hardly
worthwhile for the entitled person to enter into legal proceedings simply because he or she is formally excluded from the status of an heir.
The testator can therefore use this opportunity to exclude a quarrelsome person from the community of heirs.
2.2 Gifts paid out during the lifetime
As long as he or she is still alive, the testator can dispose freely of his or her wealth. If he or she pays gifts to statutory heirs during
his or her lifetime, those amounts have to be compensated and added to the estate. Decisive is the value of the gift at the point in time at
which the inheritance is opened. If the available ratio is exceeded through the gifts paid out during the lifetime of the testator, they can
be reduced. This means that gifts paid out during the testator's lifetime can therefore lead, when the inheritance is opened, to claims for
compensation or reduction. However, the only matter under discussion in this case is the value of the gifts made during the lifetime. The
assets themselves are deemed to have been validly transferred by the testator during his or her lifetime and no longer form part of the estate.
The testator can therefore pre-empt physical division of individual assets (e.g. real estate properties, works of art, etc.). The statutory
heir receives his or her share of the value of the estate during the lifetime of the testator and has no further claims when the estate is
later distributed.
2.3 The surviving spouse
In the case of a married testator, distribu-tion of the estate is always preceded by determining the ownership of matrimonial property.
It might therefore be necessary to make arrangements in advance by means of a matrimonial or a combined matrimonial and inheritance agreement.
Matters with the potential to cause argument regarding the allocation of assets to individual groups of property (e.g. wealth achieved during
the marriage or own property) including the determination of claims can be bindingly regulated in this manner. Particularly for a business
owner who lives under the normal matrimonial property status of participation in wealth brought into the marriage, there could be argument
as to whether the value which has been added to a business brought into the marriage is deemed to be an achievement subject to participation
by both spouses or the sole property of the de-ceased. (Please refer in this respect to Legal News May 2006 "Business owner's salary and
matrimonial property law").
2.4 Inheritance buy-out
In order to pre-empt any arguments with a difficult member of the circle of heirs, the testator can conclude an inheritance agreement with
that presumptive heir. That heir draws his or her share in advance and, in return, waives his or her participation in the inheritance process
(inheritance buy-out).
2.5 Distribution stipulations by the testator
In his or her last will and testament, the testator can issue instructions on allocation of individual objects within the estate. With
stipulations of this kind, the testator can avoid arguments and secure the particular needs of individual heirs. The instructions are basically
binding in the distribution process.
2.6 Determination of values
In order to avoid arguments about the values of individual assets in the estate (real estate properties, investments, etc.), the testator
can issue instructions regarding valuation. In cases in which the value of an object can fluctuate sharply prior to the opening of the
inheritance (e.g. shares in an unlisted company), it can be worthwhile to at least define the method of valuation as well as the person
designated to carry it out.
2.7 Executor of the will
The testator can designate the executor of the will either by means of the last will and testament or an inheritance agreement. The executor
executes administration of the last will and testament and can help in asserting the specific instructions of the testator. Designation of
an executor also makes sense if merely the legal distribution rules are to be applied; he can submit suggestions to the heirs for the
allocation and prevent arguments among the heirs as an independent third party.
3. Transparency
Experience shows that it is advisable to discuss as transparently as possible the last will and testament with the heirs while the
testator is still alive (in the case of inheritance agreements, the heirs are in any case included). This enables avoidance of unpleasant
surprises, false expectations or arguments on the part of the heirs when the last will and testament is opened. It is a demanding task,
and it is advisable to include an external consultant and/or the future executor in the discussion.
|
Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 135,000 people are united by our
shared values and an unwavering commitment to quality. In Switzerland, Ernst & Young is a leading auditing and advisory services firm and
provider of tax and legal as well as transaction and accounting services. Our 1900 people generated revenues of over
CHF 563 million in the financial year 2007/2008. We make a difference by helping our people, our clients and our wider
communities achieve potential.
Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity.
Ernst & Young Global Limited, UK, does not provide services to clients.
Note: The Legal News provides an overview of new legal developments. The content does not represent any legal advice.
|