Inheritance contracts: An unknown planning tool for Brits with assets in Switzerland?

How one chooses to dispose of their estate after death usually requires careful consideration and lifetime planning. In particular, where assets are held in multiple jurisdictions (referred to here as cross-border estates) thought needs to be given to how to ensure that the estate administration and division of assets can be achieved in accordance with the wishes of the individual.

This article explores the Swiss and English law considerations of ‘inheritance contracts’, including what they are, why they are used, and in what circumstances they may be relevant.

What is an inheritance contract?

An inheritance contract (or pacte successoral; Erbvertrag) is a testamentary document often used in place of a will in Switzerland. The agreement can be made between two or more individuals for the purpose of confirming how and when the deceased’s assets will be distributed. Inheritance contracts are a well-known form of testamentary disposition in Switzerland but are not provided for under English law.

Formalities

Under Swiss law, any person over 18 can enter into an inheritance contract provided they have mental capacity to do so. The inheritance contract must be in writing and must be signed in front of a notary and in the presence of two witnesses. Unlike a will, the inheritance contract cannot be changed unilaterally. Any change must be made in the presence of a notary and with the agreement of all signatories.

The agreement can be terminated or amended by written agreement of all parties whereas unilateral termination is only possible in exceptional cases, for example where there is a justification for disinheriting one of the beneficiaries, or if one of the parties does not comply with a clause in the contract.

Statutory heirs

Switzerland is subject to a ‘forced heirship’ regime. This means that where Swiss law applies to a succession, the statutory heirs (broadly, a spouse and descendants) are entitled to a compulsory portion of the deceased’s estate. This limits the amount of an individual’s Swiss estate which can be freely disposed of by their will. Without an inheritance contract (or other testamentary disposition), a certain portion of the estate passes automatically to the heirs, with the remainder then being freely available. What percentage of the estate is left to be freely distributed in accordance with the deceased’s wishes (assuming they have left a valid will) depends on which heirs survive the deceased. An inheritance contract can bypass or delay the forced heirship rules by allowing an heir to renounce or delay the right to a specified portion of the estate which they would otherwise be entitled to.

English law, in contrast, broadly allows for testamentary freedom, meaning that a valid testamentary disposition (i.e. a will where English law applies to the succession) can dispose of a person’s whole estate however they choose, albeit this freedom can be challenged post-death in certain circumstances.

Inheritance contracts under Swiss law and English law

Whilst English law does not recognise a beneficiary’s ability to waive future rights of inheritance to a living person, an inheritance contract will still be recognised as a testamentary disposition if it is a valid testamentary disposition in accordance with the relevant private international law rules¹. Therefore, in circumstances where an inheritance contract is made in accordance with, and therefore valid under Swiss law, it will likely be recognised as a testamentary disposition under English law.

Use of inheritance contracts in practice

Despite being unknown under English law, there are scenarios where a Swiss inheritance contract can be useful for UK resident individuals where, for example, they own Swiss real estate. Under English law, immovable property (i.e. real estate) is dealt with under the law of the country in which the property is located meaning that Swiss real estate would pass under forced heirship rules. An inheritance contract could be agreed between UK resident family members in scenarios where it is desirable (and agreeable between all parties) to leave the asset, for example, to a surviving spouse to enjoy during their lifetime, and then to the children or a child following the survivor’s death. The inheritance contract could also stipulate certain conditions, such as how any sale proceeds on a disposal of the asset should be treated or distributed. As an inheritance contract is unknown under English law, the relevant UK authorities will likely request confirmation that the contract is a valid testamentary disposition.

The options for UK national individuals who are resident in Switzerland are different. During their period of residency an individual may choose to make a will disposing of their Swiss assets and elect for the succession of those assets to be governed by English law (with the aim of benefiting from a greater degree of testamentary freedom). Without a valid choice of law election, succession of the Swiss assets would be subject to forced heirship. However, if the individual were to leave Switzerland, for example to move back to the UK, the English law election would no longer apply as a matter of Swiss law and succession of Swiss immovable property would be subject to the Swiss law of succession (i.e. the forced heirship rules). An inheritance contract could be a useful planning tool where a UK/Swiss national individual leaves Switzerland but retains Swiss real estate, which otherwise would become subject to forced heirship rules on their death.

Inheritance tax

Where the inheritance contract is a valid testamentary disposition in both Switzerland and the UK, property disposed of by an inheritance contract may form part of an individual’s English and/or Swiss estate on their death. Thought must therefore be given to the estate’s exposure to English and/or Swiss inheritance tax. We have provided separate commentary on Swiss/English cross-border inheritance tax implications here: Inheritance tax impact in cross-border estates.

Conclusion

Cross-border estate planning for Anglo-Swiss succession needs to be carefully considered and, as highlighted in the examples above, individual circumstances differ so effective planning should be considered on a case-by-case basis. Generally speaking, matters are more straightforward where a will and/or inheritance contract are considered at the same time. However, there are often circumstances where a will is already in place and foreign assets are subsequently acquired. It is important in these situations that the existing will is properly reviewed before deciding the appropriate next steps. As a firm with both UK and Swiss lawyers based in Switzerland, we are well suited to provide any necessary cross-border advice.

¹ E.g., in accordance with the Convention of 5 October 1961 on the Conflicts of Laws Relating to the Form of Testamentary Dispositions.