Clawback Law in the Context of Succession

Jayne Holliday

• Publisher: Hart Publishing
• Year: 2020
• Print ISBN: 9781509932320
• eBook ISBN: 9781509932337
• Edition: 1
• Topic: Law
• Subtopic: International Law
• Index: Law

This book offers a global solution for determining the law applicable to a claim to clawback an inter vivos gift from a third party within the context of a succession. The book aims to identify an appropriate and applicable legal framework which supports legal certainty for cross-border estate planning and protects the legitimate expectations of the relevant parties. This is an area of private international law that has yet to be handled satisfactorily – as can be seen by the inadequate treatment of clawback from third parties in the 1989 Hague Convention on the Law Applicable to Succession to the Estates of Deceased Persons, and the 2012 EU Succession Regulation.

1

Introduction

I.Background and Context

The private international law of succession is inherently complicated.¹ The reason for the complexity is in part due to the historical and cultural diversity among substantive laws, which has led to differing legal traditions characterising succession law in different ways. Some legal traditions see it as having characteristics associated with property law, whereas other legal traditions see it as inherently connected to family law.² The fact that family law draws heavily from cultural, religious and social values and the reality that these values differ widely between countries and play a major part in the development of legal policy, contribute to the legal diversity in this area of law.³ Without the unification of private international law rules, legal diversity in succession law can not only cause practical difficulties for international testators to predict which law is applicable to deal with their succession or aspects of their succession, but can also cause problems for those dealing with an estate when faced with conflicting rules governing aspects of the succession.⁴

From a practical perspective, with the number of people choosing to relocate to other countries ever increasing⁵ and the consequent number of people owning and investing in property in multiple countries rising accordingly, the possibility of complex and, by connection, costly, cross-border succession cases is a cause for concern.⁶ Finding ways to encourage and create legal certainty in cross-border estate planning, before the problems emerge, would go some way to addressing the legitimate expectations of the relevant parties.

A.The Succession Regime in Private International Law

The progressive unification of private international law – the approach taken by the Hague Conference on Private International Law – allows for the preservation of cultural and historical diversity within the substantive law.⁷ When the intention is to create a treaty which is acceptable from a global perspective, starting from a position of respect for cultural differences seems sensible. In order to determine the most appropriate private international law rule that will be acceptable to different legal traditions, it is necessary for those involved with the unification of private international law, whether at a regional level such as for the European Union or at the international level at the Hague Conference, to question the real nature of the issue so that they are able to put forward solutions that are both practical and fair. Knowledge of the private international law rules of relevant countries is by itself not always sufficient to answer these questions. Countries can be slow to amend their private international law rules or the rules can be vague on the point to be addressed, providing the drafter with nothing clear to work with. When attempting to find a truly international solution to determining the applicable law to an issue it requires a deep understanding of the substantive laws in each country in order to create private international law rules which are both pragmatic and fair to the relevant parties.

The Hague Conference has in the past attempted to unify private international law, in the area of succession, with varying degrees of success. The 1961 Convention on the Conflicts of Laws Relating to the Form of Testamentary Dispositions is regarded as a success,⁸ whereas the 1989 Hague Convention on the Applicable Law to the Succession to the Estate of Deceased Persons, whilst being considered a success by those negotiating it, has yet to be ratified by a single country – if we ignore the Netherlands ratifying it in 2008 but then denouncing their ratification in 2015 to coincide with the EU Succession Regulation coming into force.⁹ In light of the failure of the 1989 Convention, which was attempting to unify the applicable law to the whole of the succession, the aim of this book is to produce a bespoke and achievable framework for a problematic but much smaller area of law.

At a regional level, the European Union’s recent and ambitious Succession Regulation – a regulation that was strongly influenced by the rules within the 1989 Hague Convention – does bring some coherence for intra-EU succession, but it is biased towards civil law and is not sympathetic to different legal traditions. The consequence is that it still contains fundamental weaknesses which were transferred from the Convention, particularly in relation to its choice of connecting factor to determine the applicable law, which is the law of the deceased’s habitual residence at the time of death.¹⁰ These weaknesses have remained despite the intention that,

All the legal systems of the Member States have mechanisms intended to guarantee support for the relatives of the deceased, including primarily the mechanisms concerning the reserved portion of an estate. However, testators who are nationals of Member States in which inter vivos gifts are considered irrevocable may confirm the validity of such acts by opting for their national law as that applying to their successions. A key objective of the Regulation is to ensure that these mechanisms are respected (emphasis added).¹¹

The intended solution to the known weakness was that the testator would be given the ability to choose the law of his nationality to govern his succession. The problem with this is that it still lacks legal certainty for the donee, as the testator may change his nationality or his will.¹²

The point of private international law which requires sensitive handling in order to respect legal and cultural diversity, and which is the focus of this book, is the applicable law for an heir (or dependant) to claim for the clawback/reduction of an inter vivos gift from a third party in a cross-border succession context. The retroactive nature of applying the law of the habitual residence of the donor at the time of death to claims to reduce inter vivos gifts to third parties puts at risk valid property transfers to third parties where, at the time the gift was made, the law of the donor’s habitual residence allowed the gift without any risk of clawback, creating legal uncertainty for all relevant parties.¹³

B.Distinguishing ‘Clawback from Heirs’ from ‘Clawback from Non-heirs’

In the context of succession law, the term ‘clawback’ is a term used by academics and practitioners when writing about the reduction of inter vivos gifts and is generally treated as if there were no distinction between the reduction of gifts that are made to heirs and the reduction of gifts that are made to non-heirs, even though substantive law treats the two as distinctly separate issues.¹⁴

This book will work on the premise that claims to claw back a gift from heirs and claims to claw back a gift from non-heirs are inherently different and require the application of very different private international law applicable law rules. The reason for this is that the underlying functions behind the two claims are fundamentally different.¹⁵ The purpose behind reducing a gift or advance made by the donor to an heir is to create equality between the heirs.¹⁶ The effect of reducing an advance even if made with the intention to defraud the other legitimate heirs or simply as a requirement to satisfy the legitimate portion is to create equality between the heirs. This is an accepted succession issue (although there are still issues with the current applicable law rule in that the lex successionis lacks legal certainty for heirs).¹⁷ Conversely, the reduction of a gift that has been given to a third party donee is for the purpose of satisfying the legitimate portion in some civil law traditions or, in some common law traditions, for obtaining maintenance where there has been evidence of evading a duty to maintain a dependant after death. Under common law traditions, the claimant may be a non-heir, such as a cohabitant, who is asking the court to reduce a gift given to a third party donee, who is also a non-heir.¹⁸ In this case the claim is arguably one of maintenance not succession.¹⁹ Clawback from a third party in these cases is not a clear succession issue. The common law tradition does not include the value of the inter vivos gift when calculating the value of the estate and therefore considers a claim for clawback as a threat to its property laws on title. This would suggest that the applicable law for the claim to claw back gifts from third parties cannot be solely characterised as succession law, and needs to be reassessed.

When the French refer to the ‘rapport des libéralités’, they are referring to collation. They are referring to the return of an inter vivos gift by a beneficiary to the estate prior to receiving their share in the distribution of the estate; ‘for a fair share-out amongst children’.²⁰ The element that is pertinent to protecting the legitimate portion by ensuring that the ‘available portion has not been exceeded by lifetime gifts to persons other than the children’ is known as the ‘réduction des libéralités’.²¹ However, it appears that the ‘person’ in this case although not an heir entitled to the legitimate portion, may still be an heir to the estate rather than a clearly defined third-party non-family member, thus blurring the boundaries of what is meant by a third party.²²

There is also evidence of a common (mis)understanding amongst academics and practitioners that ‘collation’, ‘hotchpot’ and ‘clawback’ are the same thing.²³ As Professor Roderick Paisley rightly pointed out in his comparative exercise on clawback, they are not the same thing at all.²⁴ Hotchpot is the principle that:

requires that a child ‘advanced’, that is provided for materially by a parent, is not thereby preferred to his or her siblings but must account for the advance on the parent’s intestacy when the value of the advance will be deducted from the advanced child’s share of the estate.²⁵

The author will, for the purpose of this book restrict the scope of the term ‘clawback’ to the reduction of inter vivos gifts to third-party non-heirs, as the underlying function, purpose, timing of the claim and associated substantive law differ substantially from those relating to a claim for the reduction of the inter vivos gifts to children or collateral heirs.²⁶

(i)A Civil Law versus Common Law Approach to Clawback

A claim to claw back an inter vivos gift from a third party is a tool used in certain civil law countries to restore property to the estate of the deceased in order to satisfy the legitimate portion or in some cases a creditor of the estate. Historically the function behind the legitimate portion was to ensure certain heirs inherited the family property.²⁷ The concept appears in Justinian and places the idea of family above property.²⁸ Life expectancy at that time was short, and children had a greater chance of survival at a time when there was no state support if they were entitled to a share of the family wealth. However, with the increase in life expectancy in modern times and the fact that the ‘children’ may be mature adults with accrued wealth of their own, it is questionable as to whether this type of assumed need for maintenance is, in general, necessary.²⁹ The legitimate portion is a restriction on testamentary freedom designed to protect the succession rights of close family members, allowing certain heirs³⁰ a legal right to a share of the estate. The value of these shares differs from State to State. The underlying rationale for clawback from third parties in this context is to protect the legitimate portion, supported by the view that the property of the deceased belongs to the family and that core family members have a right to inherit.³¹

The reduction of an inter vivos gift or advance that was made to a legitimate heir creates fairness between the heirs and in essence amounts to reduction of the inter vivos gift for the purpose of collation. The claim is triggered by a legitimate heir to the succession of the donor, to reduce an inter vivos gift given to another collateral heir. As will be seen in Chapter three, an aspect that overlaps with the common law approach is that clawback from a third party is used as an anti-avoidance strategy to prevent disinheritance. This is particularly evident in some legal...

Table of contents

• Cover
• Title Page
• Series Editor’s Preface
• Acknowledgements
• Contents
• Table of Cases
• Table of Legislation
• 1. Introduction
• 2. Legislative Drafting
• 3. Clawback: A Comparative Analysis
• 4. Characterisation
• 5. The Applicable Law
• 6. Conclusion
• Annex I: Correspondence with the Senior Representative of the UK
• Annex II: Draft Convention on the Law Applicable to Clawback (by the author)
• Annex III: List of National Reporters on the Law on Clawback
• Annex IV: Member States of the European Union: Laws on Clawback
• Bibliography
• Index
• Copyright Page