With a recent decision (judgment of 29.6.2022, case no. IV ZR 110/21) the German Federal Court of Justice has clarified the requirements for the application of foreign law to a succession with regard to the right to a compulsory share (or: forced share, Pflichtteil). The judgment should be taken into account in both international succession planning as well as on the occurrence of a cross-border succession with ties to Germany.

The case before the German Federal Court of Justice concerned a testator who had effectively chosen English law as the law to govern his succession. The Court held, however, that English law would not apply despite such choice; instead, the Court applied German law with regard to the right to a compulsory share. The Court found that English law violated German public policy (ordre public), because English law would not afford an adequate right to a compulsory share in such a case.

Summary

  • Testators who possess a foreign nationality may choose the law of that State as the law to govern their succession. If the deceased does not make a choice of law, generally the law of succession of the State in which the deceased had his habitual residence at the time of his death applies before German courts.
  • However, a German court will refuse to apply the foreign law if this leads to a violation of German public policy (ordre public). Such a violation of the German ordre public may occur if the foreign law does not provide for a right of the descendants to a compulsory share determined according to fixed quotas and independent of need. Compensation by non-equivalent substitute mechanisms – e.g. the needs-based participation under English inheritance law – is not sufficient.
  • A further prerequisite for the non-application of foreign law – and, usually, the application of German law in its place – is a sufficiently strong German connection of the facts. The Federal Court of Justice leaves the exact formulation of this open. In any case, a sufficient connection is said to exist if both the testator and the claimant of the compulsory share have lived in Germany for a long time.

1. Legal Background

In Germany, like in most EU countries, the determination of the law applicable to a succession is governed by the EU Succession Regulation (EU 650/2012) ("the Regulation"). According to the Regulation, it may happen that foreign law has to be applied by a German court. This is the case if a German court is concerned with a case where the deceased had his habitual residence at the time of death abroad (Article 21 of the Regulation). Moreover, foreign succession law is applied if the deceased possessed a foreign nationality and chose the law of that State as the law to govern his succession (Article 22 of the Regulation).

Even under these circumstances, there is a limit to the application of foreign law: if the application of such law is manifestly incompatible with the public policy of the country in which the legal action is brought, with regard to proceedings in Germany i.e. with German public policy (Article 35 of the Regulation). In such a case, the application of such provisions of the foreign law may be refused by the court hearing the case, also if this was the law chosen by the deceased.

2. Facts of the Case

The case before the German Federal Court of Justice concerned a testator with British citizenship, who had lived in Germany for several decades until his death. In his will, the testator chose English law as the law to govern his succession. He disinherited the claimant, his son. The son had to rely on the right to a compulsory share in order to bring his claims against the beneficiary under the will. Under German law, certain family members and the spouse, who are excluded from succession by the testator, may be entitled to a fixed compulsory share irrespective of financial resources and needs. Under English law, on the other hand, there is only a more narrowly understood, means-tested compulsory share in the estate under the Inheritance (Provision for Family and Dependants) Act 1975.

German provisions on compulsory shares would generally not have helped the claimant, due to the choice of English law. The German Federal Court of Justice held, however, that English law would not apply despite the effective choice of law, because it would not afford an adequate right to a compulsory share. This would constitute a violation of German ordre public.

3. The Right to a Compulsory Share as a Limit to the Application of Foreign Law – even if chosen by the Testator

The German Federal Court of Justice decided that the entitlement to a compulsory share formed part of German ordre public. The right to a compulsory share of the children would amount to a constitutional right based on the right of inheritance (Article 14 para. 1 sentence 1 and Article 6 para. 1 of the German Constitution, Grundgesetz). This would constitute a limit to the general right of the testator to appoint freely any person as his heir and to disinherit his (intestate) heirs. The German Federal Court of Justice referred to decisions of the German Federal Constitutional Court.

According to the understanding of the Federal Court of Justice, under English law, in the present case a fixed compulsory share irrespective of financial resources and needs for family members would not exist. According to the Federal Court of Justice, English law as understood like this would not satisfy the minimum requirements made by German ordre public for the application of foreign law: namely a minimum compulsory share of the children in the estate of their parents irrespective of the former's financial resources and needs.

The lack of such a right under the foreign law may also not be compensated through other entitlements which fall short of such a right. In the case decided by the German Federal Court of Justice, this was a mere discretionary award by the English courts made under certain statutory requirements.

Finally, the Court determined that another prerequisite for the non-application of foreign law would be the sufficient domestic connection of the case. This would be present if the family relations which are the subject matter of the protection afforded by the ordre public are mainly focused on Germany. In this regard, the Court considered the habitual residence of the deceased and the claimant before and at the time of death, the location of the estate and the citizenship of the claimant.

4. Consequence: Application of German Law

As a consequence of this violation of German ordre public, the German Federal Court of Justice found German law on compulsory shares to be applicable. The mere non-application of specific provisions and substitution with regard to the foreign law would only be possible if corresponding rules existed.

5. Practical Implications

The requirements set out by the German Federal Court of Justice mean that there are limits to testators' options – by choice of law in particular – for the prevention of claims against the estate by family members entitled to compulsory shares. On the other hand, for disinherited family members, new possibilities arise to enforce such claims before German courts even if a foreign law was chosen.

However, the decision should not be understood in such a way that generally every disinherited family member or spouse can enforce the compulsory share as long as a German court has jurisdiction. This is particularly because of the requirement of a sufficient domestic connection, which was quite clearly fulfilled in the present case. Unfortunately, the Federal Court of Justice did not provide any legal certainty as to where the limit of such a domestic connection is: Is it sufficient for the claimant of the compulsory share to be resident in Germany or even for the estate assets to be located in Germany?

Estate planning with cross-border ties to Germany should be aware of these requirements regarding the entitlement to compulsory shares, while not disregarding remaining options. In particular, it might be advisable to consider alternative ways of avoiding compulsory share claims in Germany. Ideally, these could be waivers of the compulsory share or the minimisation of a later claim to the compulsory share through inter vivos gifts. Under German law on compulsory shares, however, gifts within ten years before the succession will lead to an augmentation of the compulsory share. Within this period, gifts will be taken into account pro rata with the years that have passed until the succession. In the case of a retained right to usufructs or gifts to spouses, however, the pro rata reduction of the augmentation of the compulsory share may not apply at all.

We will be happy to advise you.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.