The pitfalls of estate planning

Sports car syndrome

The sports car is often used as a symbol to describe the situation of a child with a tendency to extravagance. Many parents worry that their savings will go up in smoke in various luxury items and other lavish expenses.

What are the legal routes to preventing heirs from squandering the family fortune?

• A joint agreement accompanying the donation, which includes an inalienability clause. Under the terms of this clause, the beneficiary undertakes not to dispose of the donated property without the donor's agreement until the day of the donor's death.
• A usufruct reserve in favour of the donor. In this case, the gift must be made by notarial deed and will be subject to gift tax.
• Life insurance, for an additional level of security, with the donor designated as the accepting beneficiary.
• Lastly, setting up a simple company with exclusive management powers concentrated in the hands of the donor is the solution that offers the most protection from the compulsive use of the proceeds of a gift.
• Lastly, setting up a civil company with exclusive management powers concentrated in the hands of the donor is the solution that offers the most protection from the compulsive use of the proceeds of a gift.

Laziness syndrome

The second obstacle regularly faced is the fear that a gift will result in the children falling into the trap of easy money and laziness, and destroy all their professional ambitions.

What solutions does the law provide for?

• Postponing the inheritance to the heir (possibly by taking out ‘sudden death’ insurance) or delaying the moment when the heir can freely dispose of the donated assets. This deferred distribution can be enacted by means of blocking mechanisms such as the usufruct reserve, taking out life insurance with an accepting beneficiary clause in favour of the donor, or setting up a simple company or private foundation whose articles of association provide for deferred distribution.

  Postponing the inheritance to the heir (possibly by taking out ‘sudden death’ insurance) or delaying the moment when the heir can freely dispose of the donated assets. This deferred distribution can be enacted by means of blocking mechanisms such as the usufruct reserve, taking out life insurance with an accepting beneficiary clause in favour of the donor, or setting up a civil company or a foundation or similar entity whose articles of association provide for deferred distribution.

• Dividing the inheritance into several instalments, so as to gauge the relationship between the heirs and the money, and then adapting the terms of the inheritance accordingly.

Accessory syndrome

This is undoubtedly the most widespread fear among parents: that stepchildren or in-laws will become involved in family affairs and jeopardise the interests of the children. Keeping stepchildren apart from the family’s assets helps to protect the interests of the heirs by preventing the bequeathed assets from being used as collateral by their creditors.

Tenir les beaux-enfants éloignés du patrimoine familial permet de protéger les intérêts des héritiers en évitant que les biens transmis ne servent de gage aux créanciers de ceux-ci.

In the case of a gift, it is usual to insert a clause whereby the donee undertakes not to contribute the assets received by donation to a joint estate that they create with their spouse. Ideally, there would be a supplement to this clause to prevent the income generated by the donated assets from being considered as joint assets, particularly in the case of a community property marriage.

More elaborate mechanisms can also be put in place, particularly when the inheritance involves a family business. Adapting the articles of association to limit access to shareholding to spouses or introducing a shareholders' agreement that defines an approval and pre-emption mechanism are good tools in this respect.

A gift accompanied by ad hoc conditions such as a conventional return clause or residuary clause could also help to allay the fears raised by accessories.

Destitution syndrome

Inheritance planning generally involves making a gift that impoverishes the donor and can give rise to the legitimate fear that the donor will be deprived of sufficient means of subsistence to finance their lifestyle for the rest of their life.

Handing over all your assets during your lifetime is not generally recommended. Prudence will always dictate that you retain part of your estate to cover any unforeseen circumstances.

Before any gift is made, you should meticulously analyse and evaluate what you will need to maintain your lifestyle until the end of your days.

How can the effects of impoverishment caused by the gift be mitigated?

Clauses allowing the donor to continue to receive some of the income generated by the donated property include the usufruct reserve and an annuity payment (alternative and/or optional) of a certain amount to be paid by the donee to the donor.

It is also possible to include a clause in the deed of gift or in the associated agreement whereby the donee undertakes to meet exceptional expenses.

Pater familias syndrome

All too often, parents who are planning to pass on their estate do so without any regard for the aspirations or wishes of their heirs, even though they are the direct heirs.

In many cases, the parents want to retain absolute control over all the assets they are planning to pass on, without taking into account the particularities of their family situation or the aspirations of their heirs.

Organising the transfer of your estate solely on the basis of tax considerations can mean you miss addressing other equally important issues that might be very difficult to resolve later on.

That's why, before anything else, you need to take time to analyse the personal, family and financial situation of all the members of the family and their individual aspirations, and take all these factors into account when planning the transfer of your estate.