How does securities inheritance work?

Quick overview

Securities and book-entry securities are part of the estate just like other assets. Their existence, type, registration and value are established in the succession proceedings. In the case of book-entry investment instruments, it is mainly the relevant records that are dealt with; in the case of certificated securities, it is also who actually holds them. In the case of shares in commercial corporations, it is generally the case that on the death of a shareholder the share passes to the heirs, unless the articles of association prohibit or restrict the transfer; however, the prohibition or restriction of the transfer of shares in a joint-stock company and a housing cooperative is not allowed. In addition, for bonds, a distinction is made as to whether the bonds are certificated or book-entry bonds and who keeps the list of owners.

What is meant by securities in practice

For the ordinary heir, securities most often refer to shares, bonds or other investment instruments held in an estate account. In the case of bonds, the law expressly states that a bond is a security or book-entry security that carries a right to repayment of a certain amount owed by the issuer, or other rights under the law or the terms of issue.

What is important for succession proceedings is that it is not just “paper” in the literal sense. Today, a large proportion of investments are held electronically as book-entry securities in the relevant investment instruments register. Therefore, it is not often the case that an heir will find the papers in a drawer at home. Much more often, the existence of an investment is traced through the records and through documents requested by the notary.

What the central depository and other records are used for

In the case of inheritance, there is often talk of a central depository, but in practice the broader rule is more important: book-entry investment instruments are kept in the relevant register of investment instruments and, in the case of book-entry bonds, the list of owners is kept by the person keeping that register. For certificated bonds, on the other hand, the list of owners is maintained by the issuer.

This is particularly important when the family has no idea what exactly the testator owned. The notary then ascertains what property belongs to the estate in the course of the probate proceedings. If investment property is discovered, records, statements and certificates are worked with in the same way as for bank accounts or real estate. In fact, the estate includes the entire estate of the testator, i.e. assets and debts, unless the law provides otherwise.

How securities are inherited

The basis is the same as for any other inheritance. In the probate proceedings, it is established who the heirs are, what belongs to the estate and to whom the property is to be confirmed. The court confirms the inheritance to the person who has not refused the inheritance and who, according to the course of the proceedings, has the best right to inherit; in the case of multiple heirs, it also confirms their shares.

In the case of securities, there is then a practical part: depending on the type of property, a transfer or a change of entry in the relevant register is made. In the case of book-entry securities, the key is the registration of investment instruments. For certificated securities, the deeds themselves and the continuity of ownership may also need to be documented.

In practice, this often looks like this:

• the testator had an investment account with a securities dealer,
• the notary will ask for documents on the account balance and the type of investments,
• the order of the estate determines who acquired the investments,
• the records are then adjusted in accordance with this decision and the heir can continue to dispose of the assets.

Shares, interests and participation in a company

For shares and interests in companies, it is necessary to distinguish what exactly the testator owned. In the case of a corporation, the general rule is that on the death of a shareholder, his shares pass to his heirs or successors in title, unless the articles of association prohibit or restrict the transfer. However, this does not apply without exception: prohibiting or restricting the transfer of shares in a joint stock company and in a housing cooperative is prohibited.

This is very important in practice. In the case of shares, the transfer to heirs is usually more straightforward. However, in the case of a share in a limited company, the memorandum of association should always be checked. The latter may restrict or regulate the transfer of the share differently. If, at the time of the succession proceedings, the heirs have not agreed on the exercise of the rights attached to the share and no administrator of that part of the estate has been appointed, the court may, on application by the company or one of the heirs, appoint an administrator of the estate to exercise those rights.

Practical example: a father owned a share in a limited liability company and died. The heirs are three children, but only one of them knows the company and wants to continue it. If the others want to be paid out, it is usually best to settle in probate. If they disagree, the situation can become complicated not only for the heirs but also for the company itself.

How about bonds

There are two main distinctions to be made with bonds: whether they are certificated or book-entry, and what rights they carry. The Bonds Act provides that the list of owners of certificated bonds is to be kept by the issuer, while for book-entry bonds the relevant records are to be kept by the person keeping the records of investment instruments. In addition, the presentation of a bond with a continuous series of endorsements or other proof of ownership is required for the transfer of a certificated bond to be effective against the issuer.

This means that for certificated bonds, succession can be both more practical and more problematic at the same time. If the family can’t find the deeds or it’s not clear who holds them, proving it can be more difficult. With book-entry bonds, the situation is clearer because the status of the record is critical.

The heir should always check, after the proceedings have been concluded, not only that the bond has passed to him or her, but also what the terms of issue are, when it is due and whether it pays a regular return. The issuer is obliged to make the terms of issue available under certain conditions and to provide them to the owner free of charge on request.

Can securities inheritance be settled online?

The probate procedure itself is a court proceeding conducted by a notary as a court commissioner, so it is not a purely “click-and-click” process. However, some communication is now commonly done electronically and many documents can be supplied remotely. So, in practical terms, yes: part of the inheritance of securities can be dealt with very conveniently, but it is not the case that the whole procedure can be dispensed with without a formal decision and without the notary’s involvement.

In addition, it is common for investment property to be followed by a technical part with a securities dealer, bank or other account institution after the inheritance procedure has been completed.

What the heir must do after acquiring the securities

After the legal validity of the decision on the estate, it is a good idea to take three practical steps.

• The first is to verify exactly what has been inherited. It is not enough to know that “it was stocks” or “some bonds.” The type of investment, the number of pieces, the registration and the rights associated with them are crucial.
• The second step is to check whetherthe transfer or transfer on the register was actually made. This is particularly important if the heir wants to sell the investment, receive a return or exercise voting rights.
• The third step is to consider the tax and investment implications of the further disposition. The acquisition of the inheritance itself is exempt from income tax for individuals, but this does not mean that future gains or sales of inherited securities will be without tax consequences. For these, the specific regime is already assessed according to the tax rules.

Where are the most common problems

The most common complications in practice are not legally exotic. These situations are usually:

• The settlor has invested through multiple institutions and the family does not know about it. Then it takes longer to track down the property at all.
• The heirs don’t understand whether to keep the investments or sell them. With stocks or shares in a company, this can be more sensitive than with money in an account.
• Shares in a company are limited by the memorandum of association. This is especially typical in LLCs, where the incorporation documents need to be read carefully.
• Securities are held offshore. In such a case, the proceedings are often prolonged and the rules of the foreign state or foreign institution need to be addressed.
• In the case of certificated securities, deeds are missing or the continuity of transfers is not clear. In the case of bonds, it is the proper proof of ownership that is critical to the effectiveness of the transfer against the issuer.

Summary

Succession to securities is not a separate special world from ordinary succession. It is still a probate proceeding in which assets are ascertained, the circle of heirs is ascertained and then it is confirmed to whom the assets will go. The main specificity is that, in the case of investment property, the evidence, the technical transfer and the rules of the particular instrument or company play a greater role. In the case of shares and some stocks, the transfer to heirs is relatively straightforward, in the case of LLCs, the articles of association need to be checked, and in the case of bonds, a distinction needs to be made between certificated and book-entry form. If it is possible to find out early on where the assets are held and what rights are attached to them, the inheritance of securities is usually also manageable in principle.