Alienation of Inheritance as a Commercial Instrument

What is alienation of inheritance and why should you care?

It is crucial to understand that the heir does not sell individual items from the estate, such as a car or a house. They sell their entire position in the inheritance proceedings. The acquirer thus effectively becomes the "new heir" and a participant in the estate proceedings in place of the original heir.

This fundamental difference affects the entire strategy. The lawyers at ARROWS will help you analyze whether it is more suitable for your situation to alienate the entire right or to subsequently purchase individual assets after the proceedings have concluded.

Key differences: Why it is not a refusal or waiver of inheritance

Companies and investors must precisely distinguish this instrument from other dispositions of an inheritance:

• Refusal of inheritance (§ 1485): This is a unilateral act towards the court. The heir refuses the inheritance as a whole and is treated "as if they had never acquired the inheritance". Importantly, they cannot choose who the inheritance will pass to after the refusal.

• Waiver of inheritance (§ 1490): An heir may waive the inheritance, but only in favor of another co-heir. The circle of potential acquirers is thus strictly limited to family members in the proceedings.

• Renunciation of the right of succession (§ 1484): This is done by a contract with the decedent during their lifetime.

From this follows a key commercial conclusion. Refusal, waiver, and renunciation are "closed systems" that function either internally within the family or during the decedent's lifetime.

Alienation of inheritance (§ 1714) is the only legal instrument that allows an heir to commercially monetize their right and sell it to any third party. The law does not restrict the acquirer in any way. It can be an investor, a competing company, a real estate fund, or your holding company.

Alienation of inheritance as an effective business tool

The scenario is often simple: an investor (the acquirer) is interested in specific assets in the estate, such as a real estate portfolio. The heir, on the other hand, is not interested in managing the property, prefers immediate cash, or fears the decedent's hidden debts.

For investors, real estate funds, or developers, this is a clear opportunity. The heir is often in an emotionally charged situation and under time pressure, as inheritance proceedings can drag on for years. They may be willing to sell their inheritance right at a significant discount in exchange for immediate liquidity and the transfer of risk to the acquirer.

Resolving deadlocks and disputes in family businesses

Inheritance disputes over companies can be lengthy, expensive, and can paralyze the operations of the entire company. Alienation of inheritance can be an elegant tool for resolving these disputes.

Imagine the founder of a company dies and three siblings inherit. Two want to run the company, but the third just wants money and threatens to block strategic decisions. Instead of years of court battles over the value of the share, the active siblings (or their holding company) can "buy out" the third by purchasing their entire inheritance right from them.

This mechanism can also be used strategically against competitors. This can be done defensively (the remaining partners buy the right from an unwanted heir and protect the company) or offensively (a competing company offers a financially weak heir an attractive sum, buys their right, and thus acquires a share in the competing s.r.o.).

Key conditions: How to conduct the transaction legally and without errors

As already mentioned, any contracts regarding a "future inheritance" concluded before death are void in this regime. The transaction can only be legally carried out once the inheritance proceedings have been initiated, i.e., after the decedent's death.

The contract requires the form of a public deed (notarial deed)

This is a crucial formal safeguard. The law explicitly requires the form of a public deed, i.e., a notarial deed (§ 1714(3) of the Civil Code).

A simple written contract, even with certified signatures, is absolutely void for this transaction. Failure to comply with the form means that the transfer of the right never occurred, even if the purchase price was fully paid.

Even though the final act is performed by a notary, the lawyers at ARROWS will ensure a review of all drafts and documents so that the contract primarily protects your business interests, not just fulfills formal requirements.

Obligation to notify the court (notary) of the transaction

The parties (the alienor and the acquirer) have an obligation to notify the court (the appointed notary) "without undue delay" that the inheritance has been alienated (§ 1715 of the Civil Code).

The notary must then deal with the acquirer as the new participant in the estate proceedings. If the parties failed to notify, the notary would continue to deal with the original heir, which would lead to legal chaos and challenge the entire proceedings.

We will handle all communication with courts and notaries on your behalf. We will ensure that the transfer of your right is duly announced and that you are correctly registered as a participant in the proceedings.

The biggest risk (§ 1720): Who pays the debts?

Now for the biggest pitfall of the entire instrument. The law states that both the acquirer (the investor) and the alienor (the original heir) are jointly and severally liable to creditors for the decedent's debts (§ 1720 of the Civil Code).

This is advantageous for the creditor – they have two debtors instead of one. They can choose whether to claim 100% of the debt from the original heir or from the acquirer (the investor). Even if you agree in the alienation contract that the acquirer is responsible for the debts, such an arrangement is ineffective against the creditor.

For the investor, this means they must approach the estate like a company acquisition – by conducting thorough due diligence. It is not enough to rely on the list of assets from the heir. It is necessary to actively search for debts, which the heir may have a motive to conceal in order to get a higher price for their right.

How can ARROWS help manage this key risk?

Statutory liability cannot be waived, but it can be substantially limited and managed.

Our lawyers will conduct legal due diligence of the estate for you to uncover the maximum number of hidden debts. Crucially, we will exercise the reservation of the inventory of the estate on your behalf (or on behalf of the heir) within the inheritance proceedings.

This reservation ensures that your liability for debts will be limited to the value of the acquired property. At the same time, we will prepare contractual documentation that addresses recourse claims against the alienor.

Financial and legal pitfalls of an alienation of inheritance contract

Strategic acquisition: Alienation of inheritance with business shares (s.r.o.)

For our B2B clients, this is the most common and riskiest scenario. Inheriting a business share in an s.r.o. is not automatic. The articles of association have the final say.

Our lawyers from the corporate team, who have long served a portfolio of more than 250 s.r.o.s and 150 a.s. (joint-stock companies), know exactly how to set the rules to protect the company and the interests of the heirs. Contact us for a review of your corporate documentation at consultation@arws.cz.

Scenario A: The articles of association exclude inheritance

This is a very common setup designed to protect other partners from the entry of "unwanted" persons – for example, family members without qualifications.

In this case, the heir does not become a partner. Instead of a share, they are only entitled to a settlement share in money. If inheritance is excluded, the instrument of alienation of inheritance cannot be used to acquire the share.

An investor (acquirer) would therefore not be buying a share in the company by "alienation," but only a claim for the payment of the settlement share. This is a completely different type of investment and risk. A dispute over the amount of this settlement share is almost certain and can cost hundreds of thousands just for expert opinions.

Scenario B: The articles of association permit inheritance (or are silent on the matter)

If the articles of association permit inheritance (or are silent on it, which means the same thing), the heirs enter the company. This is a scenario where alienation of inheritance is a powerful strategic tool.

The heir (who is not interested in the company) can sell their right (to become a partner) to an investor. The investor then becomes a partner in their place. Beware, there may be a condition here too – the articles of association may make the transfer of the share conditional on, for example, the approval of the general meeting.

Buying a "pig in a poke"? The risky nature of an aleatory contract

The law (§ 1714(2) of the Civil Code) directly states that a contract for the alienation of inheritance is an aleatory contract if it is not based on a precise list of rights and obligations.

An aleatory contract means that the performance depends on an uncertain event. The investor buys a "package" without knowing its full contents. If hidden assets are later discovered (a forgotten account abroad), it is the investor's gain. If, on the other hand, hidden debts appear, it is their loss. The acquirer cannot later demand a discount.

However, the law gives the parties a choice. They can conclude either a "pure" aleatory contract or a contract based on an inventory of assets. For a serious B2B client, the second option is always safer and more professional.

We never recommend our corporate clients enter into purely aleatory contracts without in-depth analysis. Our lawyers will prepare contractual documentation for you that will be based on a detailed inventory of assets and liabilities, thereby eliminating the risk of "buying a pig in a poke."

Strategic risks in the acquisition of companies and real estate

Alienation of inheritance with an international element

Inheritance with an international element – assets abroad, an heir living outside the Czech Republic – is increasingly common. These cases are primarily governed by EU Regulation No. 650/2012 (the Succession Regulation), which determines the jurisdiction of the court and the applicable law.

What if you are buying an inheritance right from an heir living in Germany, which includes property in Spain and a share in a Czech s.r.o.? Coordinating such a transaction, ensuring the recognition of the Czech contract abroad, and making entries in local registers are extremely demanding.

This is precisely where the unique strength of ARROWS lies. Thanks to the ARROWS International network, built over ten years, we handle cases with an international element on a daily basis. We are able to coordinate notaries in the Czech Republic, lawyers abroad, and ensure that your contract for the alienation of inheritance is recognized and executed in all relevant jurisdictions.

Tax implications: Is income from the alienation of inheritance taxable?

The acquisition of an inheritance itself (whether as the original heir or as the acquirer) is exempt from income tax. But beware! The money (consideration) that the original heir (the alienor) receives for selling their right is their taxable income.

Most likely, this will be considered "other income" under § 10 of the Income Tax Act. This is not a sale of inherited real estate, where time tests for exemption apply, but a sale of a right.

For the alienor (heir), this means that they must pay income tax on the amount they receive from the investor. This fundamentally affects their price negotiations – the "net" amount they receive will be lower.

Reporting obligation for amounts over CZK 5 million

The tax issues here are complex. For example, income exempt from tax (such as the acquisition of an inheritance) over CZK 5 million must be reported to the tax office.

Our tax specialists at ARROWS will provide you with complete legal and tax advice to ensure the transaction is optimized and compliant with the law. We will prepare a tax opinion for you and handle all reporting obligations.

Why entrust the acquisition of an inheritance to ARROWS lawyers?

Alienation of inheritance is not a standard procedure. It is a complex transaction at the intersection of inheritance, corporate, real estate, and often international law. You need a partner with experience in all these areas who understands the business context.

We pride ourselves on speed and high quality. Our experience from long-term services for more than 400 corporate clients (including 150 a.s. and 250 s.r.o.) and 50 municipalities gives us a unique insight into business contexts. We can prepare internal directives for the management of such acquired property and provide expert training for your management.

In the area of inheritance, it is often advisable to consult further steps not only with a lawyer but also with a notary. ARROWS collaborates in this area with several trusted notaries, for example, with notary Silvie Dohnalová from Notary Office Bruntál or with Mgr. Tomáš Ostrožlík, as well as with other notary offices. ARROWS clients can choose from a list of cooperating notaries according to the location where they operate or where they need notarial services to be provided. For more significant cases and important client meetings, it is also possible to arrange for a notary to be present directly at the meeting on the premises of the ARROWS law firm by prior arrangement.

Moreover, we are always happy to hear interesting business ideas. If you are an investor looking for opportunities, we can connect you with other clients from our portfolio who may have interesting business or investment offers. We are more than just lawyers; we are your business partners.

Whether you are an investor seeking a strategic acquisition, a CFO protecting your company from an unstable heir, or an heir who wants to quickly monetize your share, alienation of inheritance is a powerful but risky tool. Let the lawyers at ARROWS prepare a tailor-made solution for you that maximizes your profit and minimizes risks. For a non-binding consultation and analysis of your situation, contact us today at consultation@arws.cz.