The Problem of “Forced Heirship”
In serving an international clientele, I frequently run into the harsh realities of “forced heirship.” Like many Americans, I consider it a right to have a say over what happens to my assets and possessions after my death. We exercise this right through instruments like a last will and testament, or a living trust.
However, much of my business focuses on assisting high-net-worth individuals and families with wealth transfer planning in Latin America. Much of the Spanish- and Portuguese-speaking world does not enjoy this same right.
What Is Forced Heirship?
Forced heirship basically means that after you pass away, you have no right to exert your wishes through a will on some or all of your estate. By law, some portion of your estate goes to assigned descendants, ascendants, and heirs (collectively known as “legítima”).
It doesn’t matter if you have a close relationship with, or even trust the judgement of, the children, parents, spouses, or siblings that make up your legítima. Countries that maintain forced heirship uphold their right to inherit, even against your wishes.
This is of particular concern to many of my high-net-worth Latin American clients. Even if they love, honor, and cherish their children, as most of them do, they don’t necessarily want their heirs to have access to every dime of their inheritance before they have gained the values, maturity, and experience to handle it wisely. Forced heirship is a predominant issue amongst family held businesses, which represent over 80% of businesses in the region. We have witnessed serious conflicts arise amongst the heirs that are active in the business and those that may have chosen an unrelated career path. Why should all heirs inherit equal shares of the business if they are not equally involved?
Where Does Forced Heirship Apply?
Statutory forced heirship dominated Hispanic America for centuries. In the last two to three hundred years, the countries of Central America (Mexico, Costa Rica, Panama, Honduras, Nicaragua, and El Salvador) have liberalized their laws. In nearly all of Central America, you can now direct the disposition of your entire estate by will.
Cross the Isthmus of Panama, however, and you find a very different story. Nearly all of South America—Brazil, Colombia, Chile, Peru, Ecuador, Venezuela, Argentina—stubbornly retains forced heirship enshrined in law.
What Does Forced Heirship Look Like?
Forced heirship laws vary by country, but it usually takes the form of a percentage of your estate that gets distributed directly to your legítima. The rest of the state may disburse subject to your will.
Brazil, for example, dictates that 50% of the estate can be willed, but the rest must go to forced heirs.
Peru, by contrast, requires that two thirds of the estate disburse to legítima, with only one third subject to your will.
How to Cope with Forced Heirship
In assisting my clients with their wealth transfer plan, forced heirship must be taken into account given corporate or personal circumstances unique to every family. It is important to work closely with the family’s patriarch and/or matriarch to understand the inter-familial relationships, third party dependents, direct involvement in the family business in order to create a sensible plan for distribution of assets that respects forced heirship and provides for adequate asset distribution if necessary. Historically the utilization of offshore guarantor trusts, foundations, private investment companies have provided flexibility but due to CFC legislation and worldwide taxation of assets are making these solutions less attractive and burdensome from a tax perspective.
Life insurance, on the other hand is an ideal product with unique characteristics including favorable tax treatment that is not bound to forced heirship laws and it utilized by the wealthiest individuals in Latin America to circumvent “legitima” and create a financial legacy that suits their wishes and the needs of the heirs. The estate of a wealthy Peruvian, Brazilian or Chilean may be subject to forced heirship, but his or her life insurance death benefits are not. If properly structured it is not subject to taxation.
I help my Latin American clients direct substantial liquidity to the beneficiaries of their choice, free from government meddling, through creative use of life insurance.