Siegwart German American Law is a boutique law firm specializing in German Law, cross-border representation and cross-border litigation, providing comprehensive solutions to cross-border and foreign law issues for individual and corporate clients. Lawyer Monthly recently caught up with Holger Siegwart to discuss the settlement of estates and estate litigation in Germany for US-based heirs or claimants.
What is a cross-border estate?
The characteristic of a cross-border estate is that either the claimants and assets are located in different countries, or that a decedent leaves assets in another country. Cross-border estates include individuals of German descent residing in the United States who claim a share of the estate of a deceased relative in Germany as well as German immigrants in the United States leaving assets in their home country.
What succession laws apply in a cross-border estate?
The applicable law must be determined separately for each jurisdiction in which a decedent leaves assets since each jurisdiction has its own conflict of law rules. Germany follows the so-called EU Succession Regulation of 2012 for all deaths occurring after August 16, 2015. Under the Regulation, the law of the State in which the decedent had his habitual residence shall apply unless he was manifestly more closely connected to another State. The Regulation also allows for a choice of the law of a State whose nationality a testator possesses.
German probate courts will usually apply German law to the entire German estate if a German resident leaves assets to heirs in the United States.
If a decedent domiciled in the U.S. leaves assets in Germany, the German probate court will apply the conflict of laws rules of the home state of the decedent in the United States. Conflict of laws rules under state laws in the U.S. typically provide that the law of the decedent’s domicile shall apply to movable property, whereas the lex rei sitae shall apply to real property. As a result, German probate courts typically have to apply the law of a U.S. jurisdiction with regard to a decedent’s movable property, whereas succession to real property will follow German in this situation. Even if the substantive law of a foreign jurisdiction applies to succession in interest, the German court will always apply German rules of civil and probate procedure.
What are the most common issues regarding the settlement of estates in Germany for US-based heirs or claimants?
Inheritance and succession laws in Germany are notably different from their counterparts in the United States, and so are the rules governing the settlement of estates in Germany. US-based claimants and their local attorneys are often unaware of the issues and risks this creates.
Under German law heirs become owners of all assets and debtors of all obligations at the time of death (Universalsukzession). In most cases there is no personal representative securing and liquidating assets and paying the decedent’s debt. The heirs, who can only act jointly, personally have the respective authority and responsibility. This requires US based heirs to cooperate with heirs in Germany. Failure to cooperate can expose them to liability, and uninformed cooperation frequently results in foreign heirs receiving less than their fair share.
Since heirs become debtors of the decedent’s obligations at the time of death they may inherit debt in Germany, for which they will become personally liable with their own assets.
A six-month deadline applies to heirs outside Germany who wish to disclaim the inheritance (Erbausschlagung) and avoid this consequence. At the same time, heirs in Germany and their representatives may attempt to scare U.S. based heirs without detailed knowledge of the estate into disclaiming a valuable inheritance suggesting that they will inherit debt. Therefore, it is critical for U.S. based heirs and attorneys to investigate an estate in Germany promptly in order to make an informed decision regarding the acceptance or disclaimer of an inheritance.
The nomination of an executor (Testamentsvollstrecker) in a will, with authority to settle the estate, is the exception, not the rule in Germany.
Even if there is an executor the settlement of the estate is not court supervised as we know it from probate proceedings in the United States. Unless a will provides for an executor no personal representative will be appointed. It is, therefore, critical for U.S.-based heirs and their attorneys to play a more active role controlling and holding the executor accountable.
Spouses and descendants (and parents in the absence of descendants) can be disinherited entirely only under rare circumstances. Under German law, disinherited spouses and descendants can usually claim a forced share (Pflichtteil) against the heirs for payment of one-half of the value of their intestate share. E.g. if a disowned child would receive a 1/3 share but for a disowning provision in a will, she can still claim payment of 1/6 of the value of the estate. The value of gifts made by the decedent in the last ten years before the passing will be added to the date of death value of the estate for purposes of calculating the forced share. Forced share claimants are entitled to receive an inventory of the estate, which must include gifts made by the decedent and an appraisal of assets without a face value.
Forced share claims to compel an inventory and appraisal, and payment of the resulting amount, are frequently the subject of estate litigation in Germany.
The legal concept of trusts is not known to German law, which does not allow legal ownership on the one hand and beneficial ownership on the other hand to be separated. Consequently, assets in Germany cannot be trust assets, and a trustee cannot be recorded as the owner of real property in Germany.
This creates significant problems when a U.S. based decedent with a traditional estate plan leaves assets in Germany. Pour-over-wills usually provide that the residue of the (probate) estate shall go to the trustee in order to administered and distributed according to the terms of the trust. Moreover, trust agreements between spouses often do not contain specific language that would allow for qualification of the surviving spouse as an heir, or the sole, heir under German standards.
It is not uncommon that estate plans drafted by practitioners in the United States fail to address assets and heirs in Germany with these differences in mind. As a result, the settlement of the estate will be significantly delayed and the heirs will incur additional legal fees in order to process the incompatible U.S. estate plan through the German court system.
How are cross-border estates taxed?
Germany levies an inheritance tax which provides for different exemptions and tax brackets depending on the degree of kinship. Each recipient is taxed individually. Spouses, lineal descendants, and parents are in the most favourable tax class 1 with exemptions of up to 500,000 Euros and tax rates between 7% and 30%. Siblings, nieces, and nephews are in class 2 with an exemption of 20,000 Euros and tax rates from 15% to 43%. All other recipients are in tax class 3 with an exemption of 20,000 and tax rates between 30% and 50%. Estate plans drafted in the U.S. are typically ignorant of German inheritance tax consequences which can create unintended tax consequences, and a significant risk of malpractice for the drafter.
If both the decedent and the recipient are non-residents and non-citizens of Germany, or citizens without residence for a number of years, the inheritance tax applies only to German situs property such as real property and business interests.
If the decedent is a citizen or permanent resident of the U.S. the value of the German estate will be part of the worldwide estate subject to U.S. estate tax. The provisions of the double taxation agreement between the United States and Germany apply.
Even if the value of the overall estate does not exceed the federal estate tax exclusion amount (and also if it does and the decedent is not a citizen or permanent resident of the United States) an interest in an estate in Germany, distributions from an estate in Germany, and inherited accounts in Germany may still be reportable to the IRS depending on the value. Failure to meet IRS reporting requirements can result in severe penalties for U.S. citizens and permanent residents.
How is an estate dealt with if there are assets in the United States and Germany?
This situation requires separate administrations in each jurisdiction. In the United States a personal representative typically administers the estate whereas the heirs themselves settle the estate in Germany based on a certificate of heirship (Erbschein) which is a court order identifying the heirs and their respective shares.
The personal representative of a decedent’s estate in the U.S. cannot automatically proceed to settle an estate in Germany. Letters issued to an executor or administrator in the U.S. do not provide authority to act in Germany because probate courts in the U.S. do not have jurisdiction over assets and individuals in Germany. If an executor appointed in the U.S. intends to administer the same decedent’s estate in Germany, it will be necessary to obtain letters testamentary from a German probate court. In the event of intestate succession a personal representative appointed in the U.S. will not be able to receive letters of administration in Germany.
Likewise, a German executor does not have authority to act in the U.S. While it may be impractical, some States in the U.S. will issue letters to a non-resident executor while others have a strict residency requirement for personal representatives.
How quickly can the cross-border estate be resolved, and what, if any, are time limits applicable?
Since Germany does not require a formal probate court-supervised administration of estates, disputes can be resolved more expeditiously as long as they are resolved out of court. However, depending on the complexity of the estate and the family situation, litigating inheritance disputes in Germany for U.S.- based claimants may take several years regardless of whether we litigate entitlement issues in probate court or forced share claims in civil court.
Can your law firm settle American estates on your own in the USA?
We settle decedent estates on our own on a regular basis in California and elsewhere in the United States with the assistance of local counsel if the decedent is German or of German descent or if beneficiaries are German or from German-speaking countries.
What are the issues and complexities when litigating cross border estates between Germany and the USA?
Civil procedure and probate procedure in Germany are very different from what U.S. based clients and attorneys expect. The substantive law is very different with unexpected surprises as well. It is critical that clients and their attorneys are aware of and understand these differences at all stages of a case in order to secure their best cooperation toward a successful outcome.
The requirement to produce certified translations for foreign language documents, Apostilles for foreign public records, and legal opinions to prove foreign law slows down proceedings significantly. Parties and counsel being in different countries and time zones, unable to appear on short notice (remote appearance are generally not available for this type of proceedings at this time) causes additional delays.
German civil procedure and probate procedure do not provide for discovery as we know it in the United States.
This means that opposing parties do not have to respond under oath to interrogatories or requests for admission and production of documents, nor can the parties subpoena records. There are no depositions under oath outside the courtroom.
Witnesses and parties testify in the courtroom as the case proceeds questioned by the judge and counsel. The testimony is not always given under oath nor is it recorded verbatim. Witness testimony in civil and probate proceedings in Germany is not as thorough and detailed as a deposition in the United States.
These factors have a major impact on the evidentiary strategy in a disputed case, as a case that is winnable in the U.S. may not be winnable in Germany and vice versa. It is critical for parties and counsel to understand and evaluate the effect of these factors on the outcome of a case at an early stage.
The business of winding up an estate can be challenging for all concerned. This is the case for most estates, but it can be particularly so for those estates that include an international or cross-border element. What are the key issues to be kept in mind when dealing with cross-border estates between Germany and the USA?
Both substantive law and procedure are systemically different in both countries. It is important for claimants to be proactive as soon as they become aware that they may have a case, particularly if hostile parties have taken possession of the estate or relevant evidence. This is also to determine whether an estate is indebted and the inheritance should be disclaimed. In disputed cases, U.S.-based claimants should demonstrate from the outset that they are able and willing to litigate the matter in Germany if necessary.
Attorneys drafting estate plans for clients with assets or a future inheritance in Germany must not only be aware that German succession laws do not recognize trusts, but also consider German forced share claims and German inheritance tax, which will lead to unintended results if not addressed properly.
About Holger Siegwart
Mr. Siegwart was born and raised in Southern Germany where he practiced law with an international firm for almost a decade before he relocated to the United States.
He started practicing law in the U.S. in 2007 and established his own firm in 2010. The experience of living and working in both countries, and the practical understanding of both societies and their legal and administrative systems, have become invaluable assets for his clients.
Mr. Siegwart serves as a retained expert and expert witness in the U.S. on German law and in Germany on U.S. law. He is one of very few attorneys who are not only licensed in both countries but actually practice in courtrooms in both countries.
About SIEGWART GERMAN AMERICAN LAW
SIEGWART GERMAN AMERICAN LAW specializes in connecting both worlds. Every case the firm handles has a German and an American connection. One main focus of the firm’s practice is the settlement of German-American estates and German-American estate litigation.
SIEGWART GERMAN AMERICAN LAW, INC.
San Francisco Airport Office, International Trade Building, 1799 Bayshore Highway, Suite 150, Burlingame, CA 94010, U.S.A.
Tel: (001) 650 259 9670
F (001) 650 259 9682
mail@siegwart-law.com
Published by: Lawyer Monthly - 1st May, 2024
