Inheritance law in Europe

2009-10-28

in Economics, Geek stuff, Law, Politics

Wheat stalks

One thing I didn’t know about continental Europe is that in many countries there inheritance isn’t something that you can allocate in your will. If you want to give it all to charity, tough luck: it is impossible and illegal. Instead, you are obligated to leave a set portion of your total estate to your children, divided equally among them. This is referred to as “forced heirship.” There are even provisions in place to “claw back” money given away in the last few years of life, so as to prevent people from circumventing the heirship law by donating while alive. As such, if you give a big dollop of money to a charity and die a few years later (less than two in Austria, or ten in Germany), the state might take it back and give some of it to your children.

This all strikes me as rather batty and weird. After all, the privilege of being able to assign where your wealth goes after death is a natural extension of private property rights in general (though is reasonably subjected to things like inheritance taxes). Particularly in the case of very wealthy individuals, you could also argue that giving a large set share of the estate to each child will do more harm than good. This is what Bill Gates, Warren Buffet and others have argued, when setting up their wills to give only a small fraction of their wealth to their children. Indeed, one of the major consolations associated with the way wealth tends to concentrate is that people who assemble truly colossal heaps of it often give a lot to charity as they age and die. Gates is certainly an example, as were Carnegie and others. The European system seems more inclined towards the establishment of dynasties. That said, it is certainly possible for people who have been given the ability to choose who will inherit their estate to make the choices poorly. There are definitely worse options than even distribution among children. Cases of people leaving their estates to their pets spring to mind.

In practical terms, there are lots of ways people could work their way around such requirements. They could hold much of their wealth in jurisdictions where the law is different. They could also convert most of their wealth into a life annuity upon retirement. It would be interesting to know what proportion of people use such mechanisms in European countries, and how they are distributed between different levels of wealth.

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{ 17 comments… read them below or add one }

Tristan October 28, 2009 at 11:06 am

” After all, the privilege of being able to assign where your wealth goes after death is a natural extension of private property rights in general (though is reasonably subjected to things like inheritance taxes)”

Why? When you’re dead, you can’t have rights, because you don’t have responsibilities. You can’t have rights because there is no “you” to have rights.

And what makes inheritance taxes “reasonable”? If you believe in property rights for the dead, then why should being dead give the government an extra right to tax your wealth?

If you don’t think the dead have anything like normal property rights, because there isn’t any “them” to have those rights, then the state should use the money from inheritance to push forward whatever social policy it sees in its interest.

Sarah October 28, 2009 at 12:26 pm

Historically the European approach has tended to distribute one’s wealth widely in contrast to the traditional approach of the English aristocracy in which everything was given to the oldest son so that the family wealth and estate could be passed on as a unit. Aside from the egalitarianism of this approach, which I think is a benefit, it has the additional benefit of preventing infighting and intrigues between the potential heirs about who receives what, which can otherwise mar the latter years of a wealthy individual’s life. Having watched my relatives argue bitterly and manipulate one another over inheritance for over a decade, having the state mandate a solution strikes me as greatly preferable.

Tristan October 28, 2009 at 12:43 pm

Actually, different areas of Germany have different traditions of passing on wealth – and this had serious social implications in the 19th century. Some (provinces? dutchies? states?) gave everything to the oldest son, and some distributed equally amongst sons.

I’ve been to the towns and villages around Munich, and it’s the strangest sight – a field with dozens of tiny barns on it. This is presumably because in that region land was divided between sons, not given to the eldest.

Milan October 28, 2009 at 1:26 pm

That kind of sub-division apparently happened to an extreme extent in Rwanda – so much so that the resulting farms were too small to be viable. Some people have cited that as a significant contributing factor in the 1994 genocide.

That said, it was arguably a problem of population growth, not inheritance. If there had been larger farms but just as many people, there would probably still have been a similar amount of strain. The only difference would be the efficiencies that accompany scale when farming.

Tristan October 28, 2009 at 1:29 pm

“Some people have cited that as a significant contributing factor in the 1994 genocide.”

It’s true, Diamond’s analysis is not un-convincing.

Milan October 28, 2009 at 1:55 pm

In developed countries, it also seems likely that parent-to-child inheritances will occur later than would be ideal. The investment made in a person’s education is a key factor when it comes to their lifelong earning potential. In countries with good public schools, that investment is made between when they are about 17 to 25. Given that most people live to be around eighty now, the transfer isn’t well timed.

Perhaps grandparent-to-grandchild inheritance is a more sensible model in the modern world.

R.K. October 28, 2009 at 3:46 pm

Indeed, one of the major consolations associated with the way wealth tends to concentrate is that people who assemble truly colossal heaps of it often give a lot to charity as they age and die.

This does happen, but I really doubt it is the norm. More often, I expect that the bulk of the wealth of the super-rich still goes to family members when they die.

Sarah October 28, 2009 at 3:53 pm

Longer life expectancies pose many challenges, especially in the context of the aging populations in much of Europe, but I’m not convinced that inheritance timing is one of the greatest problems especially since one can use inheritance taxes to partially resolve the problem of who possesses what wealth & when. All four of my grandparents were dead by the time I was twelve and I think it is fair to say that I would not have made good financial decisions at that age. Transferring wealth to children makes more sense to me than transferring it to young grandchildren who are likely to either mis-manage the wealth, or be denied access to it under a trust that would likelyhand control right back to their older relatives.

Milan October 28, 2009 at 4:02 pm

I suppose one virtue of the Anglo-Saxon approach is that it better allows you to take your own family circumstances into account. If you have grandchildren about to start university, you are free to leave a bequest to them. If they are too young, you might give it to their parents, or set up a trust for them.

I agree that inheritance isn’t the biggest issue in the demographic transition. While it will create a temporary pensions crunch, overall I think declining populations in the rich world are a very good thing. They will mean less strain on the environment than there would otherwise be. They will also mean higher wages (since labour will be more scarce relative to land and capital), less crowding and urban sprawl, etc.

Tristan October 29, 2009 at 1:47 am

By the way, I think this photo of the day is particularly excellent. Is it from your trip to Eastern Europe when you had to scythe the field of wheat because of some treaty?

claire October 29, 2009 at 5:10 am

I’ve thought for some time that grandchild to grandparent inheritance would be preferable to the current pattern (certainly in the UK) where middle class 50/60-somethings get a whole heap of money just when they are at their richest, and choose to spend it on farmhouses in Italy (an interesting twist on the Germany/Rwanda tradition). But which generation would agree to be the ‘skipped’ one?? And it involves an awful lot of trust across the generations.

In a similar vein, it increasingly seems sensible for grandparents to reclaim a greater role in caring for their grandchildren, allowing parents to work and pay pensions, thus helping to plug some of the demographic hole. From a policy perspective, the current social division of labour is nonsensical. People of prime working age have to choose between making future tax payers (sentimental, i know), or not paying taxes in order to raise children, while a growing number of increasingly healthy retirees neither cares for children not works. But the recently retired would, perhaps understandably, presumably be reluctant to give up time spent in the aforementioned italian farmhouses.

These two issues raise all sorts of interesting questions about what longer life expectancies mean for different types of social contract where you ‘put in’ at one age and expect to ‘take out’ at another. The trust involved across 3 or more generations seems exponentially weaker than that achievable between 2 generations. Pensions is a classic example. My generation in the UK have no confidence whatever that comprehensive pension schemes will exist when we retire, and yet are asked to pay very high taxes, the majority of which go on funding unsustainable pensions for the current cohort of the 65+.

Thoughts on the above welcome!

Milan October 29, 2009 at 11:19 am

Claire,

I can definitely see serious political disagreements emerging around pensions, as the demographic transition continues.

Retired people will favour higher taxes to sustain the current system, while younger people who have no confidence in the long-term viability of the system will hesitate to pay.

. October 29, 2009 at 5:11 pm

The standard tools that rich families use to preserve their wealth down through the centuries include the following:

* give money to a grandchild instead of a child; by skipping a generation, the government gets only half as many opportunities to collect estate tax (reduce estate tax by 50 percent)
* take money that you were going to give to someone upon your death and, instead, buy a huge life insurance policy with it; when you die they collect the proceeds of the insurance policy tax-free (reduce estate taxes by 100 percent)
* various trusts to hold insurance proceeds and other money so that young and/or irresponsible inheritors don’t burn through the money too fast (doesn’t really save tax, but lets you control people from beyond the grave)
* charitable foundations and organizations that are supposed to work for the public benefit, but in fact provide jobs and luxurious vacations (“board meetings”) for members of your family for decades to come; the Enron executives were into these. Supposedly it is illegal and the family foundation ought to recruit employees on the open market, but in practice people are able to say “the only person we could find to review grant applications at our family foundation was our cousin Margaret at $100,000 per year” (reduce estate taxes by 100 percent)

A good lawyer can put together a package with a Will, a single trust, and maybe an insurance policy, for about $2,000. Even at big firms, some of the more honest lawyers will do this work for a fixed fee.

Edward November 1, 2009 at 8:46 am

“When you’re dead, you can’t have rights, because you don’t have responsibilities. You can’t have rights because there is no “you” to have rights.” – Perhaps. But it doesn’t explain the clawbacks.

“Some people have cited that as a significant contributing factor in the 1994 genocide.” – While it is plausible that hereditary subdivisions resulting in too-small-to-be-viable farms may have been a significant contributing factor in the 1994 genocide in Rwanda, it does not follow that equal inheritance distribution between children is morally bad. The genocide was the thing that was bad, not the equal inheritance policy by itself.

That being said, I think that forcing people to give their money equally to their children, or to their children at all, is a case of government overstepping its role and meddling too much in private affairs.

Milan November 2, 2009 at 3:33 pm

[I]t does not follow that equal inheritance distribution between children is morally bad.

True. And as I said above, the number of farms really isn’t that important. What is important is the ratio of food available to hungry people.

. November 12, 2010 at 4:42 pm

What, exactly, makes a will Islamic?

Incredibly specific inheritance laws. Verses 11, 12, and 176 in the fourth book of the Quran lay out exactly how a Muslim should dispose of his wealth after death. Two-thirds must be distributed as follows, when applicable: One-sixth should go to your father; one-sixth to your mother; half or one-quarter to your husband, depending on whether you’ve had children; and one-quarter or one-eighth to your wife, also depending on whether you’ve had children. As for those hypothetical kids, the fractions vary, but boys get two shares for every one share that girls get.

Sunnis and Shi’ites disagree on how to allocate the remaining one-third. Sunnis can give it to whomever they choose, so long as the recipient isn’t also getting a piece of the initial two-thirds. Shi’ites do not have the same prohibition; they can bequeath all or part of the last third to a favored relative or, if they want to even out the 2-to-1 gender differential mentioned above, bequeath it to their daughters.

MaureenBridget January 22, 2012 at 6:01 pm

Interesting to see that the focus is on ‘when a grandparent passes away
Every year in France there are close to 4,500 people who pass away from heart attacks . When a spouse loses his/her beloved spouse and children come out of the woodwork to claim their rights, I must tell you it is a sorry state. Le Code Napoleon supposedly treats children equally yet this is not in line with society where 9% of children live in recomposed families. Where is equality when a 50 yr old son from a first marriage that lasted 6 months and who has been highly compensated for all his life compared to two children of 30 years just starting out? These two children who will have the responsibility of taking care of their mother ,the aging spouse. Since women tend to live longer, and the part of their inheritance decreases with age, who will take care of her? When it is time to sell the family home for which she worked all her life to contribute to and the son of a mis-marriage gets to walk away with a scott-free inheritance and no responsibility? It doesn’t make sense in 2012

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