Cross-border estates: A practical approach

Thu 15 February 2018, Philippe Ropenga Estate management

Cross-border estates need to be seen in their entirety. A family business or trust is structured to take the legal and fiscal environment into account. Dispute often arise because stakeholders of a family business or trust do not share a common vision about it and cannot agree on the direction to take to continue this family adventure. Specific issues (1) arise that can be addressed with practical tools (2).

1 Issues

Practitioners usually focus on background issues (1.1) while clients often insist on front issues (1.2).

1.1 Background issues

When it comes to cross-border estates, people often concentrate on tax or forced heirship. Tax considerations are important but cannot be relied on to foster good family relationships. Tax planning by itself does not deal with any practical issues one may face when dealing with property. Conflict of laws is more interesting since one can often choose a convenient legal setting that would make more sense considering bounds that tie a family to a country notwithstanding their nationality, for example. A foreign law may also meet the testator's wishes better than the law of his nationality. Forced-heirship avoidance often comes to mind at this stage. I have written in an earlier post that forced-heirship avoidance in fact was a "nice decoy"¹ in the sense that it would not help clients to deal with practical property issues, not even those raised by the estate-planning that targeted forced heirship. Forced heirship certainly has to be taken into account and has been examined here in several posts². It is far from easy to manage property from aboard or even to get a clear view of what is happening during the wind-up of an estate made of properties located overseas. The posted cited above briefly describes how an SCI used as a forced-heirship avoidance tool can have serious consequences on the property that decays since no one can decide what has to be done to maintain its value. The same technique could have been used to maintain the value as it is shown in the post. The SCI however has downsides and is a heavy structure. Furthermore, a choice of tax regime, of legal structure to hold assets or, to a smaller extent, of a conflict rule in private international law will not help to solve practical issues clients care about. It is hard to see in practice what thread to pull to untie an uncomfortable situation. Elements the have been mentioned above are background issues.

Background issues influence the way in which a given situation is analysed. They therefore point towards an effective solution. One also has to answer questions that arise once the background has been set and that tend to obnubilate clients who then disregard anything else.

1.2 Front issues

To keep this post short, front issues will be divided between allocation and value. Allocation is a source of conflict in any company or trust. Value also is a crucial and delicate element in a family context, be it a family business or a trust.

Allocation

Allocation always is a thorny question notwithstanding the structure of the company or trust. The formulation of this question depends on the context. Someone always has the power to decide how to allocate money, time, or other resources to maintain the property or the business. This process is called allocation in this post. Let's take four examples of allocation issues.

Example 1: "A tap needs to be fixed. How are we going to deal with it?" This means that the stakeholders have to decide how to allocate the appropriate amount of money or time to fix the tap.

Example 2: "The company has made profit, am I allowed to take some of it as a reward for my implication in the company?"

Example 3: A family member asks another who has management duties: "What have you been doing all these years?"

Example 4: "I am not quite happy about the way the family property is managed."

As one may see these difficulties may be raised at any time, anywhere in the world, including in France. An education in trust is useful here since example 2 recalls two well-known English cases³. Examples 3 and 4 are ambiguous since one can clearly feel disappointment but cannot tell what causes it. Furthermore, the comment in example 4 does not seem to request any particular action as opposed to example 1. Everyone will indeed agree that a leaking tap needs to be fixed whereas no one knows whether anything can be done to answer the question asked in example 3. This question can be related to an ongoing family quarrel that has nothing to do with the property so to speak but burdens the management.

One therefore has to pay attention to value to solve issues raised in examples 3 and 4.

Value

Value does not mean "price". Price is an objective element determined at a given time. It refers to the amount of money that a person is ready to pay to buy a thing. Value always is subjective and objective. A family business can be managed to offer distinctive products over time. Family members know what matters to the company as well as to its customers. They share ideas and views to confront these values with the context and develop new products and services. They are not focused on financial performance but on consistency over time. The same company could be managed in order to increase the price of its shares because the founder is about to retire and none of the family members wishes to take the business over. The objective element still is the same: assets, shareholders, business partners, employees, and the environment. The subjective element is different: the company does not go in the same direction and is not valued the same way. Passing the baton to the next generation is a challenge and requires a totally different approach than the one which is usually taken when selling a family business or a family property.

Cross-border estates raise complex background issues that are related to tax and private international law. Maintaining value over time also requires to take front issues into account, i.e. allocation and value. There is no easy answer to the questions raised here, but there are some tools that the practitioner can use to address these issues effectively.

2 Tools

There are conceptual tools (2.1) as well as procedural tools (2.2).

2.1 Conceptual tools

There are two core difficulties that need to be addressed in practice:

• The person who is in charge of allocation, e.g., the trustee, has to take action to solve any problem as soon as possible. These actions have an effect on the property. The beneficiary who reviews management once in a while with the trustee cannot figure out how these daily actions have changed the property since he does not care about daily operations. He sees the evolution of the property as a whole while the trustee sees what has been done and what has to be done. This difference of perception creates misunderstanding and conflict.
• Value cannot be easily described at the start of the manager's mission since it cannot be described in abstract terms. One sees it instinctively by contemplating the property and its environment. Value contains a subjective element that cannot be described in abstract terms and objective terms either. What matters here however is to determine what has changed and whether these changes have benefitted the beneficiary. In other words, can one objectively say that a given action has been taken in the interest of the beneficiary? Trusts allow to solve a dispute by looking directly at the beneficiary's interest; it makes them unique⁴.

Let us now turn back to the four examples given above.

Example 1: Fixing a tap requires a bit of organisation, but it certainly will not change the direction of the management that will continue developing value as it did before. The beneficiary's interest is unlikely to be missed. The tap fixing should clearly appear in the account and that should be the end of it.

Example 2 is a classic of fiduciary law; I have written a post on it⁴. I will therefore be brief. The fiduciary should normally be held to account and give any profit made from his duty back. He exceptionally can keep the profit made as a liberality rewarding his skill. There is a risk that the fiduciary disregards the value of the property or the company to maximise his own profit. This is the reason why Equity allows to keep the profit made as an exception.

Example 3: It is hard to interpret the question. Does it mean "Where did the money go?" or "How did you manage to develop value? If one tries to answer the first question, showing the accounts should be enough. If one tries to answer the second one, it is worth explaining how the trust or family business has evolved to show how the family spirit has been preserved.

Example 4 is a complaint that probably cannot be dealt with only by showing the accounts. Several actions might have been taken that stop this person from engaging any further in the family business or trust. Any past action should therefore be justified by examining its effect on the development of value according to the family spirit. This tends to highlight the fact that notwithstanding the usefulness of the objective notion of interest in trust law, the subjective element of value can never be totally abolished.

It is a big issue since the creation of a trust or company often is seen as an achievement when is should be seen as a starting point. As long as money comes in, everyone is happy and no one really bothers to try to figure out what is the value that has to be developed. It thus is necessary to distinguish between organisation and direction. On the one hand, organisation refers to any action taken. It can be traced in accounts. Direction, on the other hand, refers to value. It deals with the opportunity of an action with regard to the development of value. It is important to talk about value as well as accounts at AGMs. One should not miss an occasion to make sure that the organisation functions well and that the business or trust is going in the right direction. It is essential to define criteria that would be used to identify value. Anglo-Saxons seem to enjoy drafting long deeds that start with a long preamble. French may be well inspired to write a letter that they would hand over to the notary. The public officer could open it before reading the testament out to the heirs. If there is no indication left by the testator or the founder of a business, the heirs should agree on the value to develop as soon as possible before a conflict arise.

One may also wish to take some procedural precautions.

2.2 Procedural tools

One should also discuss what procedure to use if a conflict arises:

• What process of resolution should be used (collaborative law, mediation…)?
• What pieces of evidence should be accepted? In what language?

As far as French law related to ADR is concerned, it has recently evolved. French law now strongly supports settling out of court⁵. Collaborative law has been recognised as the "most accomplished form"⁶ of alternative dispute resolution. French jurisdictions easily recognise international arbitration awards and now have the same approach regarding collaborative law, mediation, and other ADR techniques. Furthermore, it is clear that value is crucial and always is partly subjective. It therefore cannot be determined by the judge. Negotiating about at least some thorny questions regarding value is essential, even if someone decides to go to court afterwards.

As one can see, cross-border issues regarding a family business or an estate are interesting since their require a transversal approach and can be solved without heavy court proceedings. It appears that in practice people should pay more attention to value. ADR techniques that are known worldwide are suitable to address subjective issues such as value. French law now makes these techniques easy to use on an international scale.

In brief, practitioners often concentrate on background issues such as tax and private international law. It however is necessary to take front issues, especially value, into account when dealing with a family business or trust. There are tools that allow to tackle these issues in practice.

Go Top