Return to Tontine?

I was never really a fan of the tontine clause.

So when the EU Succession Regulation came into force, I thought that we would see an ever-decreasing number of instances where clients would choose to insert a tontine clause in their French purchase deed.  While that prediction does appear to have been vindicated over the past few years, there is a chance that this trend may perhaps go into reverse, thanks to a new draft law that could come into force soon.

As part of the explanation of the new draft law, and what impact it may have in the future, it will perhaps be wise to remind ourselves what a tontine clause does, as well as its potential problems and how these may have been addressed up to now under the Regulation.

Regular readers will be aware that the Regulation allows a person to apply the law of their nationality to the devolution of their estate in different EU jurisdictions.  Thus a British national could choose to apply English law (if they are most closely connected to England or Wales) to the whole of the estate including the home they own in France.  That would allow them to avoid the strict rules of inheritance along family lines that otherwise apply in France, should they so choose.

Before the Regulation came into force, there were other options popular among British nationals who owned property in France, and who wanted to ensure, for example, that children would not automatically be the first to inherit on their death.  One option was to include a tontine clause in the purchase deed.

Inclusion of this clause at the time of the purchase (it cannot be added after the purchase has already been completed), ensures that the survivor of the joint buyers would inherit the whole of the property absolutely.  That would be the case, in principle, even if the first person to die had children from a previous relationship who would otherwise have been entitled to inherit a part of the property from their parent.

Where the joint owners specifically need to ensure that it is the survivor of them who inherits the house, this tontine structure can be useful.  It was often, however, included without a full appreciation of some potential pitfalls.  Of particular note is the fact that the clause can work to ‘block’ anything happening to the property in the event that the owners cannot agree on what to do with it.  For example, if one wanted to sell, but the other did not, then a sale would not go ahead; this can cause difficulties, especially in an instance of divorce.

In addition, though, this inability to do anything in the absence of agreement can cover the situation where one of the owners loses capacity: that person is not able to decide to sell or not to sell, so nothing will happen.  That would be so even where a sale may be necessary to fund that person’s care fees.

The Regulation has reduced the need to include a tontine clause since British owners can in general choose to apply English law to the devolution of their French property so that the joint owner could come to own the whole property at the time of the first death.  All that is required is to ensure that a suitable declaration is included in the testator’s Will.  It does not matter that the declaration would be included in an English Will or a French Will; indeed there are good arguments for advocating the preparation of both English and French Wills where a person owns assets in both jurisdictions.

The same risks of the property being blocked would not arise.  It is perfectly realistic for someone to change their Will during their lifetime.  In addition, while the tontine clause can only apply to the property, the choice of law will cover everything else the testator owns that would be subject to French law.

Thus since the Regulation came into force in August 2015, we have predominantly used this as a method of ensuring the French property passes to the survivor.

The new draft law may potentially, however, have an influence on this.  It will have as a consequence a restriction on a person’s ability to avoid the fixed inheritance rules that apply in France.  The restriction would apply only in limited circumstances: either the testator or a child would need to be an EU resident.  However, a potential consequence is that for a French resident testator there could be a restriction on the ability to make a completely free choice of beneficiary.

The law would apply in the event that the succession is subjected to rules other than the standard French rules and if the EU nationality or residency requirement is fulfilled.  In such a case, where a person, who would automatically have been a beneficiary under French inheritance law rules, does not inherit what they would otherwise have done, then that person is entitled to make a claim against the estate to be duly compensated.

Evidently, the impact of the EU Succession Regulation has been notable in France in particular.  The fixed rules of succession are an important part of the French civil code, and the Regulation has clearly eroded them, in part at least.  While Brits buying in France have for many years looked at ways of limiting, if not avoiding, these rules, it is perhaps more recent for some French nationals to be looking at how to control their own cross-border estates.

The new draft law may in part be an attempt at limiting the ability for a French national to circumvent French inheritance rules to their French estate by moving to another country.  However, even if this is the case it might also limit the ability of British nationals to benefit from the rights they may enjoy under the EU Succession Regulation.

At the time of writing, this is still only draft legislation: it has not yet reached the French statute book.  Presuming it does, the next hurdle will be whether it stands up to any challenge through the EU courts.  It appears to be at odds with the Regulation, so could well be found incompatible with the primacy of EU law at some point in the future.  That would probably require a challenge from the eventual beneficiaries of a deceased person who would have inherited under the terms of the Regulation.  Not a cause of action we would want for any of our clients’ beneficiaries…

There may be only a very small risk of these causing problems for Brits and their estates in France: there are only limited circumstances where it would apply, even if it does pass into law and is then not struck out by the Court of Justice of the European Union.  However, it could still have an impact in the future.  It hopefully underscores the importance of seeking expert legal advice from solicitors with suitable specialist knowledge.

Will it lead to the return of the tontine clause as an estate planning tool?  Only time will tell.  Even if I have never been a fan of the tontine clause, given its potential drawbacks, it is a structure that is less likely to fall foul of the new draft law.  So if the circumstances dictate, it may well be that we would suggest to some clients, as one of the possible options that they may wish to consider.