Testament: thoughts in the face of three decades of the private ownership

This year we have celebrated the 30th anniversary of the restoration of the independence of Lithuania. Besides the independence of the state, we have 30 years’ experience in private ownership, too. We recall its development stages: from the wild capitalism and Gariūnai bazaar to family businesses, listed companies, private banking services, to family offices increasingly discussed nowadays and the first grants to Vilnius University fund, the emergence of sponsorship and private museums. The recent experience has brought us closer to the property management traditions of the western world.
Successful businessmen have ambitions not only to seek more wealth but also provide benefit to society and ultimately leave property well managed. We can already see that a source of a Lithuanian person’s wealth is not only “speculation in metals” and successful family business, but inheritance, too. This is about what we used to read previously in books about English lords and French barons. Statistics show that in the West, many wealthy people inherited their property and/or invested their inherited property rather than earned it. Other, sadder statistics show that after inheritance, most families (the second or third generation) lose their wealth.
Bequeathing equally to everybody? Certainly not
Arrangement of assets for future generations implies responsible management of such investments. But what happens if a person does not leave a testament? Then the assets are inherited by the operation of law. Assets acquired in marriage is common joint ownership of the spouses, unless they have signed a nuptial agreement or a property division agreement. It means that after one of the spouses dies, half of all assets belong to the other spouse, even if the house was registered or the bank account was opened in the name of one of the spouses. The remaining half of the assets will be divided between the surviving spouse and the children of the bequeather.
It is a complicated situation. In our example, each of the successors inherits an “ideal” portion of every object: a house, shares in a company. A particularly complicated situation is where one of the children is from the previous marriage or children from one family do not maintain close relationships. What then can be done with the inherited 12.5% of shares in a company? The successors can sign an agreement between themselves and divide the property. However, after the death of a close relative, the situation is sensitive. Rationality then is seldom an argument, and ultimately each object (the house and shares) is inherited in “ideal” portions, e.g., 1/8 for each person. This is not a suitable variant. A house belonging to four persons cannot be well maintained as it could be maintained by one owner. If the house is sold after a few years, its sale is less cared for than in the event of the sale of one’s personal house. Consequently, the maximum price is not received. In terms of valuable works of art, ask collectors whom they deem a typical seller of a work of art at a fair price. Almost always, the answer is the same: an inheritor of a work of art – a widower or a child.
In helping clients to make a testament, we start from a list of assets. Debts are also included. Because debts do not die together with the testator – not only the property but also obligations are inherited (when the testator has debts, for the inheritance we recommend drawing up of a bailiff’s schedule of inheritance, then a successor is liable only to the extent of the amount of the property inherited). We recommend distributing the property based on the principle that one person inherits one (entire) object. More money can be left to the other successors to level out the portions.
However, the parts for children need not be equal – there is no legal or moral obligation.
Think who will manage after you
When shares in a company are inherited, one needs to think about the company’s effective management after inheritance. E.g., the situation is not suitable where the deceased was the director and sole shareholder, and after inheritance, the company leaves without a director, and shares are inherited by several persons. While the inheritance matters are being arranged, the company remains without its head. There is no one to appoint the company’s director (court order is necessary to impose administration). Such a situation can be resolved in advance by donating to the children one share each, signing a shareholders’ agreement, forming a board in the company that would include not only family members but also professionals from outside. In the event of the death of the company’s head, such board would appoint a new head, while the successors would have a shareholders’ agreement under which they would annually receive the dividends provided in it, would be obligated “not to tear apart” the company for several years after the inheritance, etc.
In the testament, it is worth appointing an executor who manages the property bequeathed until it has been taken over by the successors. E.g., maintains the property, repays the debts, sells the specified property, pays compensations, etc. Typically, a reliable relative or a long-time consultant is appointed to be an executor.
Sometimes a decision is made to transfer all property (except for a dwelling and monetary amount required for personal needs) to a holding company where the property would be centrally managed and dismantling of the structure after the inheritance would be restricted, a shareholders’ agreement is signed based on the same principles as discussed above.
Another alternative is to draw up a joint will of spouses where the surviving spouse inherits all property, and only after the death of the second spouse such property is distributed to other successors. The deficiency of such will is that it cannot be changed without the other spouse’s consent, and it may not be changed at all after the death of one of the spouses.
Another question we often receive is if the inherited (or donated) property will be the property of the children’s spouses (son-in-law and daughter-in-law). Inherited property or property received as a gift is personal property (not common joint ownership of spouses). However, suppose securities or a house inherited or received as a gift is sold and other property is obtained for the money received from such sale. In that case, such property will be the common joint ownership.
The will can be changed
Business people often postpone making a testament fearing that the situation with the successors will change. However, the testament can be changed at any time. While making a testament, there is no need to think what will happen after 20 years. Normally, the testament should be reviewed and updated every 3-5 years.
Lithuanian law is very favorable in various aspects. A person has full discretion to bequeath his/her property by testament, except that the testator’s children, spouse, and parents who are entitled to maintenance, inherit half of the portion they are entitled to by operation of law. In the present case, if a person wants to bequeath all property to a charity fund, but one of the children is disabled, the latter would still inherit 1/16 of the property. In the absence of parents, spouses, and children entitled to maintenance, only then all property may be left to the charity fund. Another favorable aspect is that inheritance for close relatives is tax-free. This is important because in other states where a high-value house of low liquidity is inherited and no money is left, the successors consider whether to accept the request at all because it is subject to the inheritance tax. Furthermore, the donation of property to close relatives is tax-free in Lithuania, too. Thus, if property management is commenced before inheritance, it does not cause any tax consequences (as long as the property is transferred to close relatives).
Property abroad can be managed in Lithuania
Another frequent topic is that we are becoming global, and families hold assets in several states. After selling their businesses, people choose to live in countries with a warmer climate. In such a case, a Lithuanian national, even if he/she has declared departure and factually resides abroad, has the right to make a testament with a notary in Lithuania. It is important to verify where the property is located. Sometimes in Lithuania, a “global” testament is made regarding the entire property situated worldwide, while in another non-EU state, a “local” testament is made regarding only the property located in that state. In the EU area, inheritance issues are regulated in a sufficiently detailed way; thus, usually, a testament in Lithuania is enough.
Most of us avoid going to the doctor for a preventive health check because we fear that the doctor will find some disease. A regular review would be responsible behavior. The same applies to property management. The fact that a businessman arranges for the transfer of their property does not imply that he/she will die. It just means responsible management of the property.