Private Wealth Newsletter - Autumn 2012

What are the key differences across Asia?

The factors which influence how a jurisdiction approaches key private wealth issues include the following:

• The type of legal system. Countries with a common law system (e.g. Hong Kong, India, Malaysia and Singapore) tend to approach trusts and estates in a similar way, which is not dissimilar to the way that these issues are tackled under English law. Equally, countries with a civil code legal system tend to demonstrate a similar approach to other civil code countries.
• Cultural issues. The laws in this area are by no means static and, as cultural norms change, the laws and the ways that they are applied change too. For example, under Hong Kong law, illegitimate children have the same rights of inheritance on intestacy as legitimate children, whilst under Malaysian law the same illegitimate child would inherit nothing on intestacy. In Japan, the Civil Code stipulates that illegitimate children inherit half of what legitimate children receive. However, this provision has recently been declared as being contrary to the constitution.
• Religion. On occasion, it is not enough to simply know someone's nationality or domicile when trying to ascertain the rules and laws which apply to them. In some jurisdictions, religion can also play a significant role. For example, in India different legal regimes apply to your Will depending on your religion.

How do you determine what law applies?

Most countries follow a similar approach, namely:

• Movable assets (e.g. cash, shares, furniture, paintings) are governed by the law of the testator's domicile or nationality.
• Immovable assets (e.g. houses, flats) are governed by the law of the place where the properties are located.

What is "forced heirship" and why is it significant?

Forced heirship rules deny testamentary discretion, by requiring that a certain portion of an estate goes to particular heirs determined by the law. An example of this is in Singapore, where a Will can only govern one-third of a Muslim's estate, with the other two-thirds being governed by provisions of the school of Muslim law professed by the deceased. These rules may therefore impact on how a person drafts their Will by, for example, prompting them not to provide for those who are automatically provided for under the forced heirship rules. Forced heirship rules can be incredibly complex (take, for example, the Philippines rules set out on pages 42 and 43 of the Guide) and their application should cause testators affected by them to regularly review their estate planning.

How do inheritance tax provisions differ?

Inheritance tax regimes differ greatly across the region, for example:

• Hong Kong – Inheritance tax was abolished in 2006.
• Singapore – Inheritance tax was abolished in 2008.
• Taiwan – 10% estate tax applies.
• Philippines – A graduated system of taxation applies, up to a maximum of 20%.
• Thailand – There is no inheritance tax, but the heir is subject to income tax if s/he sells any immovable inherited property.

How do different countries approach issues regarding a testator's mental capacity?

In recent years Asia has seen an increase in the number of disputes which turn on the mental capacity of the testator. Two factors contributing to this increase are:

• increased life expectancy, and the corresponding increase in age-related mental conditions; and
• developments in litigation tactics, for example the increasing sophistication in psychiatry and the growing use of experts as a result.

 In Hong Kong, Singapore and Malaysia, mental capacity issues are dealt with in accordance with the English case of Banks v Goodfellow. This requires that a person making a Will must:

1. understand the nature and effect of the document being signed;
2. understand the nature and extent of the assets involved;
3. understand the people who may have "moral claims" on the estate; and
4. not be suffering from a "disorder of the mind [that] poisons the Testator's affections, perverts his sense of right or prevents the exercise of his natural faculties".

We found that limbs 3 and 4 are not common in civil code jurisdictions. For example, in Thailand someone challenging a Will has to show that the testator was suffering from an illness that rendered him unable to manage his personal business on a day to day basis, whilst South Korea appears to apply a lower test of mental capacity to a Will than to a contract.

In order to avoid disputes arising regarding mental capacity, steps should be taken during the testator's lifetime to reduce the risk of challenges. These include considering estate planning earlier in life, and using open questions (and repeated tests) to measure the testator's capacity before she executes a Will.

If you have not yet received your copy of the Guide or would like further copies, please contact Wendy Kam. We are in the process of translating the PRC, Hong Kong and Singapore chapters into simplified Chinese. Please let us know if you would like a copy of this translation.

The next Herbert Smith Freehills private wealth event will be held at Herbert Smith Freehills' Hong Kong office on 13 December, where we will be looking into issues surrounding family companies and the remedies and options open to family member directors and shareholders when relationships break down – particularly in light of the recent Yung Kee decision. For further details or to reserve your place, please contact either Richard Norridge or the Herbert Smith Freehills Events Team.