Under English law, a residuary beneficiary receives a legacy net of the estate liabilities, ie what is left after tax (both the deceased’s lifetime taxes and those in relation to the estate) and debts are deducted. If the estate is insolvent, a beneficiary receives nothing. Seems fair.
However, in some continental jurisdictions, if not careful an heir can end up out of pocket where the estate’s liabilities exceed its assets. Not so fair?
The position depends on which country is involved.
In many European jurisdictions, an inheritor ‘steps into the shoes’ of the deceased. So, if an heir accepts a residuary legacy, the heir also inherits the deceased’s debts (without limitation). With effect from the acceptance of the inheritance (which is a requirement in those jurisdictions), there is no longer a distinction between the estate of the deceased and the personal assets of the heir, and so a creditor of the deceased can also rely on the personal assets of the heir to satisfy the debt. Not only that; in certain circumstances, an heir may be deemed to have accepted the inheritance implicitly without express formalities. In doing so, they may have unwittingly put their own assets at risk.
However, in certain jurisdictions (Italy and France, for example), to avoid such a result, the beneficiary can opt to accept the inheritance ‘with benefit of inventory’, to avoid accepting liability for the deceased’s debts beyond the value of the property inherited. There are strict guidelines to follow and even stricter deadlines to meet in order to benefit from such a limitation. It is quite easy for a residuary legatee (heir) to fall foul of those strict requirements.
There are safety mechanisms. For instance, under Italian law, foundations, not-for-profit organisations and vulnerable individuals (including minors) can only accept an inheritance ‘with the benefit of inventory’ in order to protect them from unqualified exposure to liabilities.
Let’s say you receive a notification that you are the heir to a French or Italian estate. But you are also told that, given the deceased’s extensive debts (or ongoing tax enquiries/litigation involving the estate), there might be insufficient assets to pay the inheritance.
Without a clear understanding of the value of the estate and the extent of any liabilities, you may be unsure if it is worth undertaking the costs of pursuing the inheritance – particularly if you could be held liable for some or all of the deceased’s own debts.
But what can you do (or not do) to avoid exposure to the as yet unquantified liabilities in addition to your own costs pursuing the matter?
How best to proceed
You should not do anything that could be construed as ‘accepting’ the inheritance for local law purposes until you know that it is safe to do so without exposing yourself personally to liabilities of the estate.
Firstly, you need to clarify with a local notary whether the balance of the estate assets exceeds local tax or other liabilities (both in respect of the deceased during his or her lifetime and in respect of the estate / inheritance itself).
Depending on whether there is provision to protect charities or vulnerable beneficiaries (as in Italy above) you should check whether you would be recognised as such in the relevant jurisdiction. If so, then you can only accept an inheritance ‘with the benefit of inventory’, meaning that your exposure will be protected, provided that you comply with the proper procedural formalities.
Whatever category of heir you are, if the net assets have not been determined, you may elect to accept the inheritance ‘with benefit of inventory’. That means you do not inherit debts beyond the value of the property received. However, you must claim this within a restricted timeframe post-death – this is often six months from the date of death, but in certain jurisdictions, it can be as short as three months, so it should be checked and confirmed in each jurisdiction at the earliest convenience post-death.
If it turns out the estate is insolvent you may wish to formally ‘disclaim’ your interest in the estate, ie waive any right or entitlement to receive it. Note, however, that this may not always be possible, easy or in effect advisable, depending on which law applies to the estate, and as always in international matters, seeking advice early on is crucial to determine the appropriate strategy.