Wealthy Russians generally do not think about succession planning or tend to put the matter on the back burner. However, when a family situation is complicated (e.g. with children of different marriages), or in cases where the estate includes various properties from around the world, for the future heirs, proper succession planning could become the one stitch that saves nine.

For instance, inheritance of properties located in different countries may turn out to be quite difficult.

Take Mr. Semyonov as an example. He is a wealthy Russian citizen who permanently resides in Russia. Mr. S owns property all over Europe, as well as securities, cash in bank accounts, companies (some of which are owned via nominee shareholders), residential houses and other items[1].

Mr. S decides to consider his succession planning options. Before making his choice, he would need to understand the rules that govern cross-border succession relationships.

Inheritance in Russia

In some international treaties between Russia and other countries, there are specific provisions that allow determination of the law of the country that governs the inheritance process. However, in case the treaty does not contain such provisions (like the treaty between Russia and Cyprus), or if there is no such treaty at all, one should refer to the national legislation of the testator’s country of permanent residence or to the law of the country where the property is located.

There is a general rule stipulated in the Russian legislation – inheritance shall be governed by the law of the country where the deceased had the last place of residence. With regard to inheritance of real estate, there is a different rule – real estate shall be inherited under the law of the country where such real estate is located.

Therefore, from the standpoint of Russian law, (i) inheritance of all movable property, regardless of location, and real estate located in Russia is subject to Russian law, and (ii) foreign real estate is to be inherited in accordance with the law of the country where this property is located (e.g. an Italian house will be inherited under Italian law).

If the property is inherited under Russian law, this means that the Russian inheritance procedure should be followed (inheritance is accepted within 6 months from the death). Upon completion of this procedure, a Russian notary issues to the heirs an inheritance certificate that also covers the overseas property.

Then, the heirs, using the translated and duly legalised documents, will initiate inheritance procedure in every country where the relevant property is located. Specific aspects of these procedures depend on the jurisdiction: In some countries, heirs are required to submit documents to a notary or a competent authority, while in others, they will have to wait for the court to appoint an administrator and to make sure that the testator’s wishes are properly fulfilled and nobody else has a claim over the inheritance (probate or similar procedures).

It is likely that Mr. S’s heirs will need to put a lot of effort (and, needless to say, a lot of money) into going through inheritance procedures over and over again, first in Russia and then abroad. They will need to act in several countries simultaneously and go through legal formalities in each of them (depending on the testator, there can be five, ten or even more jurisdictions involved).

Furthermore, management and control over the estate may be limited during the abovementioned procedures. As a result, business of some ‘operational’ companies to be inherited may be suspended. The situation may be aggravated by conflicts between heirs (which may even need to be resolved in court). In this case, the inheritance process may last for years.

Inheritance in the European Union (EU)

In the EU, the inheritance rules are different from Russian rules[2]. As a general rule, property, including real estate, is inherited in accordance with laws of the country where the testator permanently resided. In Mr. S’s case, the place of permanent residence at the time of death will presumably be Russia.

However, there is an exception to the general rule, namely the principle of the closest connection of the testator. This principle states that, in exceptional cases when it is clear that the testator, at the time of death, was more closely connected with a country other than the country of his permanent residence, inheritance is to be governed by the laws of this country.

This would be the case if, for example, Mr. S permanently resides in Russia, but spends a lot of time in Spain, where his family lives and his children go to school. In addition to that, Mr. S has a Spanish residence permit. In this case, which is quite common for Russian entrepreneurs, it could be difficult to determine the law of which country shall be applied to the matters of inheritance.

In addition, under the EU law, a testator has the right to choose the law to be applied to inheritance of his property (for example, he can state it in his will), but he can only choose the law of the country of his citizenship. If the testator has multiple nationalities, this means that he can choose the law of any country of his nationality.

Therefore, from the standpoint of the EU, generally speaking, Mr. S’s real estate located in Europe will be inherited in accordance with Russian law, since he was permanently resided in Russia. He can also make a will where he could choose the applicable law, but, in this case, he will only be able to choose Russian law (unless he has citizenship of another country).

At the same time, Russian legislation stipulates that Mr. S’s European real estate is to be inherited under the laws of the country where such property is located.

The result is confusing: Russian law and the EU law refer to each other.

In order to avoid these situations, there is a special provision in Russian legislation: A renvoi (reference) to foreign law means a renvoi (reference) to substantive law and not to a conflict of laws. In other words, from the Russian legal standpoint, inheritance of European real estate is to be governed by the inheritance laws of the country where this real estate is located.

The catch is that the heirs will need to convince the authorised court or public authority of that, which, in practice, can turn out to be extremely difficult and time-consuming.

Alternatively, heirs could obtain a certificate of inheritance relating to property located abroad (whatever it may be and wherever it may be located) from a Russian notary and initiate the procedure of acceptance of inheritance abroad on its basis. However, it is important to remember that, under Russian law, a notary can only issue such a certificate in relation to foreign movable property. It cannot be said whether it would be possible for the heirs in this case to receive title to the real estate, in spite of the fact that such property is not explicitly set out in the certificate of inheritance.

One should also bear in mind that, depending on the jurisdiction, heirs may need to pay inheritance tax.

Therefore, the issue of Mr. S’s inheritance is not as simple as it seems at first glance and it can cause a lot of troubles for his heirs and result in a complicated, time-consuming and costly process.

What can be done?

In order to make the lives of his future heirs easier (as well as save their time and money and spare their nerves), it is advisable for Mr. S to consider succession planning of his property in advance and to use Russian or foreign legal mechanisms and structures, in particular:

1. A simpler mechanism – a will. In this case, it will be necessary to thoroughly analyse the assets within the estate and how they will be inherited. It is also possible to change the ownership structure of the assets (for instance, the assets may be consolidated in the ownership of foreign companies) and take other steps aimed at making the inheritance process as simple and clear as possible (for example, by appointing an executor of an estate and elaborating the detailed scope of his/her powers in the will).

 

1. A more complicated mechanism – a special purpose structure (for example, discretionary trust or private foundation), which will enable Mr. S to plan the succession of his wealth, as well as elaborate mechanisms to support his family members and descendants for years to come.

The choice of a particular mechanism, or a combination thereof, should be based on the specific situation of the testator and take into account, inter alia, the potential heirs, including forced heirs, the property within the estate (namely the type of property and its location), the testator’s objectives (for example, assets protection), as well as other factors.

[1] Mr S’s property located outside of the European Union is beyond the scope of this article.

[2] Article 21 of Regulation (EU) No 650/2012 of the European Parliament and of the Council of 4 July 2012 on jurisdiction, applicable law, recognition and enforcement of decisions and acceptance and enforcement of authentic instruments in matters of succession and on the creation of a European Certificate of Succession («EU Regulation»). The EU Regulation is not applied by Ireland, the United Kingdom and Denmark.