Cross-border planning for Brazilian families

Abstract

This article aims to provide an overview of cross-border planning for Brazilian Families, addressing key topics to be taken into consideration, especially those related to marital asset regimes, forced heirship rights, private, corporate, tax and international laws, from a Brazilian perspective. It also addresses the significant impacts of the 2023 Brazilian tax reform, encompassing the taxation of investment funds in Brazil, income derived by individuals resident in the country, controlled entities and trusts abroad, the introduction of CFC rules for individuals and further anti-deferral rules.

INTRODUCTION

In dealing with cross-border planning for Brazilian families, proper planning is necessary to anticipate potential legal issues. Changes in circumstances, such as a family member’s relocation to another state or country, a divorce, a new marriage or civil union, or the birth of a child, among others, also require a review of the planning to ensure that all relevant aspects are properly addressed.

It is undeniable that, in Brazil, asset and succession planning is intrinsically linked to proper knowledge of marital asset regimes and forced heirship rights, combined, as in any jurisdiction, to other features of private, corporate, tax, and international laws.

This article aims to address the most important elements of Brazilian law that should be considered in cross-border planning.

PREMARITAL PLANNING

Marriage

Under Brazilian law, marriage, including same-sex marriage, is a strictly formal act, requiring a previous determination of eligibility of future spouses to confirm the lack of legal impediments.

Cross-border marriages are governed by the law of the domicile of the parties, and, in case where the domiciles differ, the law of the first domicile of the spouses shall prevail, provided, always, that Brazilian formalities are met if the marriage takes place in the country.

Regardless of any additional requirements, marriages validly executed abroad are also valid in Brazil between the spouses. However, to claim the existence of a valid marriage before third parties, spouses must have it registered with the competent Civil Law Registry of Individuals.

Except for the formalities, in practical terms, the same consequences of marriages are extended to civil law marriages, not only during the lifetime of the companions but also in the event of death.

Civil law marriages are inherently informal and strictly fact-based. They are deemed existent whenever there is a public and continuous union between two individuals, with the purpose of forming a family. Further, the union must be lasting, but there is no minimum period legally required. Due to such factual nature, the subjective and vague legal requirements for their existence, combined with succession consequences in case of death of one of the companions, civil law marriages often represent a challenge for planners.

To mitigate unwanted risks, during the last few years, the number of agreements whereby the parties in an affective relationship expressly declare that such an affective relationship does not meet the requirements of a civil law marriage has spiked, due to the lack of intention of forming a family. Furthermore, it is not uncommon for planners to include the so-called “Darwinian clause” within the agreements, stating the potential consequences if, eventually, in the future, the relationship shifted to an actual civil law marriage, particularly as to the applicable marital regime in such case.

These agreements, however, are a mere snapshot of the affective relationship at a given point in time. Hence the importance of renewing agreements from time to time; naturally, they cannot be contrary to the actual facts surrounding the couple’s affective relationship.

Mature couples of a certain age, who typically have children from previous unions and have already accumulated most or all of their wealth, are usually parties to such arrangements. Recently divorced spouses may also be eager to enter into such “dating agreements” due to concerns about the potential consequences of a new relationship.

Marital regimes

As of 1977, the partial community of assets is the default marital asset regime pursuant to Brazilian law. Under this marital regime, assets acquired for consideration during the marriage or civil law marriage are deemed marital property and belong to both spouses or companions in equal parts, regardless of who was the acquiring party. Conversely, gifts, inherited assets, and/or assets acquired before the marriage or civil law marriage belong exclusively to the acquiring party and shall not be shared, as marital property, with the other member of the couple, in case of divorce/dissolution, or in the event of death.

Other marital regimes under Brazilian law are:

• Complete separation of assets, according to which, as a rule, assets acquired before or after the marriage or civil law marriage, for consideration, as a gift or inheritance, belong exclusively to the acquiring party; therefore, in principle, nothing remains to be shared, as marital property, with the other member of the couple, in the case of divorce/dissolution, or in the event of death. However, the surviving spouse is a legal heir of the deceased, as discussed below.

• Universal community of assets, according to which, as a rule, all assets acquired before or after the marriage or civil law marriage, for consideration, as gift or inheritance, belong to both members of the couple, regardless of who was the acquiring party. In the case of divorce/dissolution or in the event of death, each member of the couple shall be entitled to one half of all existing assets, as marital property.

• Final participation in the community of assets, according to which, in general terms, the separation of assets prevails during the marriage or civil law marriage, and the partial community of assets regime rules the division of the marital property upon divorce/dissolution, or in case of death.

• Mandatory legal separation of assets, which is imposed by Brazilian law in certain cases of marriages or civil law marriages, such as: (a) when one of the spouses or companions is older than 70 years of age or is between 16 and 18 years of age at the date of the marriage or civil law marriage; or (b) in case the division of marital property of a previous marriage has not been terminated at the date of the marriage or civil law marriage. The imposition of the mandatory legal separation of assets to spouses or companions older than 70 years of age is being currently challenged before the Brazilian Supreme Court and may not prevail in the future depending on the outcome thereof.

• Sui generis marital regimes: except if the mandatory legal separation of assets regime is imposed by law (cf above), spouses or companions may validly adopt sui generis marital regimes to fit their specific needs and interests. Such regimes shall abide, however, by certain public order rules. In most cases, they are adopted to mitigate certain effects of the complete separation of assets marital regime, allowing, for instance, certain bank accounts or the family home to commingle, among others.

As noted above, in Brazil, cross-border marriages are governed by the law of the domicile of the parties. If the parties have different domiciles, the law of the first domicile of the couple shall prevail, and this rule specifically applies to marital regimes. Future changes in domicile will not affect this rule.

This can be particularly challenging for planners in the case of marriages executed abroad without a pre-marital or post-marital agreement, especially in jurisdictions that apply equitable division of assets. In these cases, the marital regime is not declared in the Brazilian marriage certificate, which leads to uncertainties and liabilities, before creditors, tax authorities, real estate purchasers, among others. Circumstances like these can normally be circumvented by the execution of post-marital agreements in the relevant jurisdiction.

Pre-marital agreements/post-marital agreements/cohabitation agreements

Except for partial community of assets and mandatory legal separation of assets, a marital agreement must be executed to validly adopt any of the remaining existing marital regimes. Nonetheless, in the case of the mandatory legal separation of assets marital regime, marital agreements can be an option if the parties wish to further avoid the commingling of certain assets during the marriage or civil law marriage, shifting this marital regime to an even stricter one.

That being said, for marriages, the agreement must be pre-marital and take the form of a public deed executed by a notary public. Such a pre-marital agreement is effective between the spouses from the date of the marriage.

Post-marital agreements were not an alternative for marriages until 2003, when the possibility of judicial alteration of marital asset regimes was introduced in Brazilian law by the Civil Code currently in effect. Once the authorization for alteration of marital regime is granted by a competent court, the spouses may require authorization to further execute a post-marital agreement, if the new marital regime adopted is different from the default marital regime of partial community of assets. In any case, post-marital agreements are only effective as of the date of their execution.

In case of civil law marriages, marital agreements can be executed before its constitution (pre-marital) or during the civil law marriage (post-marital). They must be in writing, although the form of a public deed executed by a notary public is not required. As in marriages, if executed during the civil law marriage, post-marital agreements cannot produce effects retroactively.

Either in case of marriage or civil law marriage, both pre-marital and post-marital agreements must be registered at the competent Real Estate Public Registry to produce effects before any third parties (e.g. as creditors, tax authorities, real estate purchasers, among others).

Impact of marriage and divorce on planning

Springing of inheritance rights and interests

As further explained below, not only are spouses and companions deemed forced heirs, but they were also granted a share of the deceased’s estate along with descendants and ascendants. Hence, marriages and civil law marriages have a significant impact on planning.

Enhancing said impact, spouses’ and companions’ inheritance rights cannot be validly waived under marital agreements, based on case law regarding the interpretation of article 426 of the Brazilian Civil Code, which deems all lifetime agreements regarding inheritance rights null and void.

Nevertheless, changes in Brazilian succession law concerning the forced heirship rights of spouses and companions are expected in the medium to long term. In view of that, taking into consideration the arguments of certain scholars, waivers of inheritance rights have been mutually agreed between spouses and companions, even if they currently cannot be validly enforced.

Divorce and dissolution of civil law marriages also impact planning as they lead to the sharing of marital property between ex-spouses or ex-companions, depending on the marital regime adopted. They also lead to the elimination of any inheritance rights an ex-spouse or ex-companion would otherwise have had over the estate of the other upon death.

Whenever minor children are involved, the revision of planning upon divorce or dissolution often encompasses executing testamentary dispositions whereby the surviving ex-spouse or ex-companion is prevented from taking part in the management of the minor’s future inheritance, the same goal being reached by the setting up of foreign trusts.

Termination of rights and interests

Please see above.

Fiduciary roles

Upon marriage or civil law marriage, certain roles are vested in the spouse or companion, such as: spouses and companions becoming each other’s legal administrators of assets in case of mental incapacity; upon death, they become executors of each other’s estate, among others.

It is worth mentioning that these roles frequently can be vested in third parties by the execution of proper documents, such as incapacity declarations or wills.

GIFT AND ESTATE PLANNING

Reasons for planning

Taxes

Planning and tax efficiency are symbiotic.

From an Inheritance and Gift Tax (IGT) perspective, levied at the State level in Brazil, by planning, parties can benefit from lower tax rates and lower tax basis to complete tax exemption.

Certain Brazilian States, such as Mato Grosso do Sul and Bahia, apply lower tax rates if the parties opt for a lifetime gift, implying an anticipation of IGT, instead of waiting for a later causa mortis transfer.

In addition, Constitutional Amendment 132, of December 20, 2023 (“EC 132/2023”), among others, determined that the IGT shall become progressive depending on the amount of the gift or the share of inheritance involved. Even before EC 132/2023, some Brazilian States already had progressive IGT tax rates (the State of Rio de Janeiro being an example), the progressive increase of tax rates during the next years will be inevitable (currently, 8 percent is the current maximum tax rate for IGT in Brazil).

In view of such perspective, plannings involving lifetime gifts may secure current tax rates, possibly lower than the ones to be expected in the near future. Usufruct (please see below), on the other hand, can be used both as a pipeline for the donor to retain the economic flow deriving from the gifted assets (economic usufruct); and as a mechanism to guarantee that relevant voting and veto rights inherent to decision-making processes do not slip through the donor’s fingers (political usufruct).

IGT tax basis can also be lower if proper planning is adopted, the main example being the setting up of holding companies to manage real estate properties destined for rental or for sale, whereby IGT will be levied on the book value of the shares of the holding company rather than the market value of the underlying properties. In principle, such alternative can even lead to lower tax rates and tax basis from an Income Tax (IT) perspective.

Planning can also achieve exemption of IGT by using a window currently existing in cross-border cases. Until 2023, assets located abroad inherited by Brazilian domiciled individuals, and gifts made by donors domiciled abroad were not subject to the IGT, due to a decision of the Brazilian Supreme Court with general repercussion that conditioned the IGT in these cases to the future edition of a Complementary Law, as required by the Brazilian Federal Constitution.

Until the above Complementary Law is edited, transitory dispositions inserted into the Brazilian Federal Constitution by the EC 132/2023 defined the criteria for the States to be able to levy IGT in such cases. However, until each State edit or amend its own laws regarding the matter, it can be sustained that there is no valid room to demand payment of IGT thereon.

In this sense, and despite our expectation that certain States may dispute this point gifts or assets made or transferred causa mortis by individuals domiciled abroad to Brazilian residents shall be deemed exempt at least until 2025.

Protection of family

Planning is a relevant tool for family protection, not only in the sense that the family assets must be protected from creditors and ex-spouses or ex-companions, for instance, but also in the sense that family members sometimes must be protected from their own lack of maturity or proper knowledge to deal with the family wealth or the family business; other times health issues, mental health conditions, and social vices require the protection of the individual and future generations.

The complexity of the planning documents required to achieve proper protection of a family varies depending on the specific and concrete circumstances of each case and the amount of wealth involved.

It is worth mentioning that, however, recently, Federal Law 14.754 of December 12, 2023 (“Law 14.754/2023”), addressed the taxation of foreign trusts in Brazil, and many uncertainties surrounding the institute were cleared up, which favors the use of trusts for cross-border plannings to great advantage of many families.

Probate avoidance

Due to the edition of Federal Law 14.754/2023 and the creation of a safer environment for the use of foreign trusts by Brazilian families, the increase of their use as an efficient tool to avoid probate of assets located abroad is expected, in detriment of the Joint Tenancy with Rights of Survivorship (JTROS) with all its associated problems and liabilities (please see below). It is also likely that the use of foreign wills decreases in view of the friendlier scenario for trusts set up.

Local plannings tend to simplify the assets subject to probate, not completely avoiding it. Gifts subject to usufruct, many times combined with the setting up of holding companies for allocation of assets; life insurance policies and private pension funds (please see below) tend to have such simplification effect on plannings.

Parties to planning

Wills are strictly personal and, provided that the forced heirship rights are not jeopardized, the testator/testatrix, and only he/she is required to agree to the planning.

However, when more complex planning is in order, it is not uncommon that its efficiency is strictly linked to the participation of other parties, especially those performing fiduciary tasks, such as administrators, trustees, protectors, financial advisors, and family officers, among others.

Plannings involving family business frequently encompass the services of special consultants, especially in cases in which family disputes (actual or potential) need to be mediated.

Further, plannings in which members of the next generation of a certain maturity and skill participate (even without power to decide) tend to be more legitimate and, thus, efficient and straightforward.

Property ownership and interests

Usufruct

Usufruct is an in rem right that can be created upon death, as a lifetime gift, or for consideration, with the first two types being the most common in planning.

As a rule, the right of usufruct cannot be sold, nor can it surpass the lifetime of the beneficiary thereof. However, if usufruct is retained by or granted to two or more individuals at the same time (normally both members of a couple), it can be terminated only upon the passing of the last surviving beneficiary, provided that forced heirship rights are preserved, since usufruct can only validly encumber the disposable portion of the deceased’s estate.

As a planning tool in cases of lifetime gifts, usufruct: (a) benefits the donor, if economic rights over the assets gifted are totally or partially retained during his/her lifetime, which is extendable to his/her spouse or companion, in case of usufructs concurrently created on behalf of both; and (b) avoids future probate of the assets gifted, considering that, once the gift is made, the donee already becomes the actual (bare) owner of the assets gifted, which makes the succession process direct and straightforward.

In case of shares of companies or closed ended funds, usufruct retained by the donor commonly encompasses voting or veto rights, which allows the relevant governance rules and decision-making process to be set according to the planning party intentions and/or best convenience.

Further, considering recent changes in the Brazilian constitutional framework regarding the IGT (please see above), it is expected that applicable tax rates are progressively increased by the States. Therefore, gifts with usufruct retention by the donor, over economic and/or voting/veto rights, which are made before such tax rates increments can be a good planning alternative from a tax perspective.

Joint tenancy/tenancy by the entireties

The Brazilian legal system does not bear concepts such as joint tenancy with rights if survivorship (“JTROS”), nor tenancy by the entireties.

Nevertheless, as part of their cross-border planning, some Brazilian individuals have used JTROS as an alternative to avoid probate proceedings abroad regarding assets held in common law jurisdictions. However, from a Brazilian law standpoint the use of the JTROS presents more downsides than upsides.

First, JTROS potentially creates tax liabilities concerning IGT (especially taking into consideration CRS/FATCA rules) when one or more of the joint tenants acquire this status without any contribution to the acquisition of the asset subject to JTROS.

Second, the features of the JTROS create situations not only where forced heirship rules are challenged, but also where proper administration of the assets cannot be settled.

Upon the edition of Law 14.754/2023 and the regulation of the taxation of foreign trusts, it is likely that trusts will substitute the use of JTROS (along with foreign wills) in cross-border planning.

Co-tenancy

Since the term co-tenancy is broad enough to encompass many institutes, from a Brazilian law and planning standpoints, it is worth mentioning the following: marital property entailed by certain marital regimes and the civil-law condominium.

When addressing the topic of marital regimes (please see above), in special partial community of property (Brazilian default regime) and universal community of property it was mentioned that assets qualifying as marital property: (a) belong to both members of the couple, regardless of who was the acquiring party; and (b) upon divorce/dissolution or death, such assets shall be shared equally between each member of the couple.

Under this form of co-tenancy, under Brazilian law, both members of the couple own all the assets qualifying as marital property in their entirety, at the same time. Only upon divorce/dissolution or upon death marital property is divided, in principle equally, between the spouses/companions, and the assets comprising each half are determined.

Allocation thereof to one or the other member of the couple can happen either per shares of the same asset (becoming a civil-law condominium—please see below); or by attributing each asset comprising marital property in its entirety to each member of the couple, which is relevant for planning considering that: (a) assets attributed as marital property to each of the spouses/companions upon divorce/dissolution or death, up to one half, cannot be taxed by the IGT; after all, they were already his/her property during the marriage or civil law marriage and (b) even assets in their entirety can fall under this rule, up to one half of the existing marital property, thus avoiding unwanted civil-law condominiums (please see below) between ex-spouses or ex-companion, or among the surviving spouse or surviving companion and children of the deceased (particularly in cases involving parties prone to conflict).

Conversely, the civil-law condominium entitles each party to a certain ideal share or fraction of an asset in its entirety, and this party’s rights over the asset are limited to such share or fraction.

As a rule, this form of co-tenancy under Brazilian law tends to be avoided in plannings, either in cases of divorce/dissolution, and in cases of death, especially among surviving spouses or surviving companions and children of a different union of the deceased.

Wills and gift instruments are effective alternatives to avoid unwanted civil-law condominiums among family members, along with the constitution of holding companies, subject to proper governance rules, to own assets such as real estate properties.

Closed-ended funds are deemed special forms of civil-law condominiums, subject to specific rules of the Brazilian Securities Commission (“CVM”).

Beneficiary designations (retirement accounts and life insurance)

The most common beneficiary designations for planning purposes in Brazil are: (a) life insurances and (b) private pension plans called “Vida Gerador de Benefício Livre” (VGBL). Both alternatives can be paid directly to the designated beneficiaries, not being subject to the IGT, nor to probate.

Life insurances and VGBL are often used as mechanisms to provide for the family of the deceased, maintaining the family’s lifestyle, until the probate is finished. Funds thereof are also used for purposes of paying the IGT.

However, in certain cases, when disputes among heirs arise, Brazilian courts tend to deem the VGBL as a mere financial investment, thus being subject to probate, along with all other assets of the same kind. This happens especially when a significant part of the deceased’s assets was invested in the VGBL at the expense of rights of forced heirs. Such risk is mitigated after the so-called “accumulation period”, when the investor has acquired the right to the benefits of the VGBL, payable in installments or in a lump sum.

In addition, certain foreign life insurances products may be used to mitigate the effects of IT due in Brazil as a consequence of the controlled foreign corporations (CFC) rules deriving from Law 14.754/2023. Law 14.754/2023 was regulated by Normative Ruling No. 2.180/2024 (NR 2.180/2024), which determines that redeemable policies may receive the same tax treatment as trusts, except if the policy holder could influence investment decisions, controlling, and/or directing how investments are made, in which case it would be treated as a CFC for tax purposes.

Property disposition paradigms

Freedom of testamentary disposition

As many civil law jurisdictions, Brazil does not grant complete freedom of testamentary disposition to individuals.

Freedom of testamentary disposition applies only to one half of the net amount of the deceased’s estate, namely the “disposable portion of the estate”.

The other half of the net amount of the deceased’s estate, namely the “mandatory portion of the estate”, must be divided among forced heirs. Descendants, ascendants, and the surviving spouse, or the surviving companion in a civil law marriage (the latter not completely exempt from controversy), are deemed forced heirs and, therefore, cannot be deprived of their share of the mandatory portion of the estate. Such a mandatory portion of the estate may be further increased by the incorporation of certain lifetime gifts made by the deceased to his descendants or to the surviving spouse or surviving companion (“collations”), so that all descendants are treated evenly; and the surviving spouse or surviving companion receives his/her proportional share of the mandatory portion, pursuant to specific rules regarding his/her concurrence with the descendants. Collations do not apply to ascendants or other relatives of the deceased.

In Brazil, the law of the place of the last domicile of the deceased shall govern the relevant succession, which means that, in these cases, Brazilian courts shall apply the relevant foreign law to the division of the estate among the heirs.

However, even if the deceased was last domiciled in a jurisdiction where there is complete freedom of testamentary disposition, and has, in fact, executed a will which, somehow, violates forced heirship rights according to Brazilian law, Brazilian courts shall make the relevant adjustments so that the mandatory portion of the estate is properly shared among forced heirs, limiting the testator’s last wishes to the disposable portion of the estate.

The above outcome is due to fact that the right of forced heirs to the mandatory portion of the estate is a fundamental constitutional right pursuant to the Brazilian Federal Constitution (article 5°, XXX). In view of that, no disposition of foreign law in detriment thereof shall prevail.

To avoid unnecessary disputes among heirs, planners tend to prepare wills in compliance with Brazilian forced heirship law requirements, even if the testator is domiciled in a jurisdiction of free testamentary disposition.

Forced heirship

As pointed earlier, descendants, ascendants, and the surviving spouse, or the surviving companion in a civil law marriage, are deemed forced heirs. Descendants (either natural or adopted) are preferred over ascendants; and ascendants are preferred over the surviving spouse or the surviving companion.

Children inherit per capita, other descendants, such as grandchildren, inherit per stirpes. Ascendants only inherit per capita.

The rights of a surviving spouse or surviving companion as forced heirs are conditioned to the perpetuation of the marriage or civil law marriage until the passing of the other spouse or companion. If a divorce or dissolution takes place, even if not properly formalized after two years (the so-called “de facto” separation), forced heirship rights of the surviving spouse or the surviving companion are terminated, as indicated above.

Despite being preferred over descendants and ascendants by his/her own legal right, the surviving spouse or the surviving companion also inherits as a “concurrent heir” along: (a) with all descendants, depending on the marital asset regime applicable to the marriage or civil law marriage; and (b) with all ascendants, regardless of the marital asset regime adopted.

Intestacy

In case of intestacy, all the deceased’s estate shall be subject to the rationale explained above regarding forced heirship rights: descendants (either natural or adopted) are preferred over ascendants, and ascendants are preferred over the surviving spouse or the surviving companion. In any case, rights as a concurrent heir granted to the surviving spouse or surviving companion must be preserved.

In the absence of any descendants, ascendants or of a surviving spouse or a surviving companion, other relatives (until the fourth degree) shall inherit. Cousins in the first place, followed by nephews, uncles, and aunts.

If there are no eligible heirs, then the government collects the estate.

Note, however, that the deceased’s estate is his portion of the assets based on the applicable marital asset regime. If the surviving spouse has a right to a portion of the assets based on the relevant regime (corresponding to the surviving spouse’s share of marital property), such portion shall not form part of the deceased’s estate.

Core gift and estate planning documents

Wills—single, multiple, holographic

For planning purposes, two types of wills are commonly used: (a) public wills and (b) private wills.

Public wills are the safer form to testate, thus being preferred in planning. They are kept in public registries and no local probate may move onwards without a proper certificate of existence (or absence) of a public will. Such type of wills must be executed by a notary public and signed by two witnesses. Their contents, however, only become accessible to third parties (especially heirs) upon the passing of the testator. Notaries and public records offices are prevented from issuing copies of public wills without a court order or a specific authorization of the testator.

Although not so common, private wills are also used for purposes of planning in Brazil. They must be read by the testator and signed before three witnesses, who must later confirm that the will is legitimate (the use of three witnesses is also recommendable whenever foreign private wills are executed in Brazil). Private wills can be validly executed in a foreign language, provided that the testator/testatrix and the witnesses understand it, which can be helpful in case of foreigners.

Regardless of the type, wills must be strictly personal documents revokable at any time by the testator/testatrix. Due to such nature, Brazilian law does not admit the execution of one will by two or more people. Mirror wills are accepted, however.

Trusts and foundations

Brazilian foundations can only be created to achieve specific purposes, such as promotion of culture and education, health care, environment preservation, etc. Given their restrictive use, associated with mandatory supervision of the Public Prosecutor’s Office, Brazilian foundations are not common alternatives for planning purposes.

Philanthropic initiatives in Brazil often involve other types of entities such as associations, which are more flexible regarding their purposes and subject to supervision only by their associates, pursuant to the terms of their bylaws. Depending on the amount of funds involved and/or the complexity of the purposes to be reached, foreign trusts can also be alternatives for private clients’ philanthropic initiatives.

The Brazilian legal system does not bare the concept of trusts, nor is Brazil a signatory of the Hague Convention on Law Applicable to Trusts and their Recognition. In addition, although existing, legal initiatives aiming at internalizing the concept of trusts are not expected to develop in the next few years.

However, trusts validly set up abroad can be recognized in Brazil provided that public order dispositions, such as forced heirship and creditors’ rights, are preserved.

As of the enactment of Law 14.754/2023, certain aspects regarding the taxation of foreign trusts became clear, hence an increase in plannings involving trusts is expected.

Pursuant to Law 14.754/2023, trusts are treated as transparent entities, and the underlying assets shall remain as the settlor’s property, until: (a) they are distributed to the beneficiaries; (b) the trust becomes irrevocable; or (c) upon the settlor’s demise. If the transfer occurs during the settlor’s lifetime, it will be deemed as a gift. If the transfer occurs upon the settlor’s demise, it will be deemed as inheritance. Income and capital gains arising from the trust, on the other hand, are subject to the IT.

Nevertheless, some aspects regarding the taxation of trusts were not properly clarified by Law 14.754/2023, in special the taxation of discretionary trusts, under which no beneficiary is entitled to a specific share of the trust fund and distributions are fully dependent on the trustee’s judgment of convenience and opportunity, according to the dispositions of the trust deed and/or letter of wishes.

Finally, regarding the regulation of the foundations, Law 14.754/2023 does not regulate the structure and only mentions that the dispositions of the law shall also apply to agreements regulated by foreign laws bearing similar characteristics to trusts, as long as they do not qualify as a CFC. However, NR 2.180/2024 determines that companies and other entities, whether personified or not, including investment funds and foundations, will be considered CFC.

Durable financial powers of attorney

In general, the granting of powers of attorney as a planning tool is limited and is very often combined with other alternatives.

If not expressly revoked, powers of attorney lose their effects upon the demise of the grantor or if the grantor becomes incapacitated. Financial powers of attorney are no exception.

Financial powers of attorney can be granted for a certain period of time or without an expiring date. Regardless, especially if the grantor is of an advantage age, it is not uncommon for financial institutions to require that the power of attorney is periodically renewed.

It is worth mentioning that the Brazilian financial system is currently mainly digital. Therefore, in practical terms, financial powers of attorney have been left aside, substituted by the sharing of passwords and tokens between the parties involved.

Medical directives and healthcare powers of attorney

Provided that the decision if dully informed, and one has proper knowledge of the relevant consequences, medical directives, called Anticipations of Will Directives (DAVs) are accepted under Brazilian law, regarding which types of treatment the patient does or does not wish to be subject to once, due to health conditions, he/she is incapable of freely and consciously manifesting his/her will.

Although euthanasia is not admitted, under the DAVs, the patient can previously state that he/she shall not be subject to procrastinatory or futile medical proceedings once an irreversible process leading to death takes place.

Specifically for planning purposes, it is relevant to anticipate one’s will regarding who should be named legal representative by the competent judge in case of incapacity. Such a measure can mitigate or even avoid disputes among family members for the administration of the assets of the incapacitated party.

ESTATE AND TRUST SETTLEMENT

Direct vesting in heirs

Brazilian law adopts the concept of the “saisine”, according to which the transmission of the inheritance to the heirs occurs immediately and automatically upon the decease. It does not depend on the probate or any title.

In view of that, spouses who are deceased at the same time (comorientes) do not transfer any inheritance rights among themselves; but those who pass away successively do.

If an heir disclaims his/her inheritance rights during probate proceedings, Brazilian law deems such heir has never existed (and his/her descendants do not inherit per stirpes).

Due to the direct vesting of the inheritance in the heirs, the IGT is triggered on the date of death.

Probate process

Admission of will

Will must be validated by competent courts in Brazil in order to be executed within the country during the probate procedure.

It is relevant to mention that cross-border cases involving assets abroad demand that a probate or other succession proceeding takes place at the relevant jurisdiction, since Brazilian courts shall refrain from probating and sharing assets the deceased might have left outside Brazil.

Until now, foreign Wills have been the preferred choice to address the partition of foreign assets. However, upon the edition of Law 14.754/2023, the setting up of foreign trusts to avoid probate of assets located outside Brazil tends to substitute foreign wills to discipline the transmission of such assets.

Appointment of personal representative

There are two types of personal representatives: (a) the executor of the estate of the deceased and (b) the executor of the will the deceased eventually left.

The executor of the estate of the deceased must be appointed either in case of intestacy or in case there is a will, and its responsibilities encompass representation of the estate, actively and passively, as plaintiff or defendant; management of the assets to be probated; performance of all actions regarding the probate proceeding, preparing and filing IT returns (please see below), and giving account of its actions.

The competent judge must appoint the executor of the estate, with the surviving spouse or surviving companion being first in line. If, however, there are no minors or incapacitated parties involved in the probate and all parties thus agree, there will be room for the heirs to choose who should be appointed as the executor of the estate.

The executor of the will is freely appointed by the testator under the will, and its responsibilities encompass enforcing the dispositions of the will, adopting all actions thereto; defend the validity of the will in case it is challenged; perform any other actions the testator determines; and giving account of its actions. Unlike the executor of the estate, whose responsibilities generally end with the completion of the probate, the executor of the will may need to continue performing certain duties beyond the probate process. For example, the executor of the will may need to supervise the management of assets inherited by minors, ensure that conditions set by the testator are met, and so forth.

Planners must be aware that, except if the executor of the will is also an heir or legatee, it is entitled to an amount from 1 percent to 5 percent of the net amount of the estate, to be defined by the competent court, depending on the level of complexity of the actions performed. However, since the testator can determine a different (or even no) amount to be paid to the executor of the will, it is highly recommended that wills properly tackle this matter determining such an amount or lack thereof according to the testator’s wishes.

Claims

Probates are the stage for a plethora of claims, such as those of spouses/companions, heirs or legatees, children the deceased might have had but did not recognize, creditors of the deceased, and creditors of the heirs. However, depending on the type of claim, competent courts may qualify it as “claim of high complexity”, pausing the probate proceeding until such claim of high complexity is properly solved before specialized courts. These types of claims generally lead to excessively expensive and time-consuming probates. Proper planning tends to mitigate or even completely eliminate such situations, generally to the benefit of all parties involved.

Taxes

Types of taxes

IGT and IT are the taxes involved, in principle, in cases of succession.

For IGT, please refer to the topic “Taxes” above.

For IT purposes, the deceased’s estate continues the personality of the deceased, until the probate of the assets is finished. IT returns, under the responsibility of the executor of the estate, are normally prepared and filed before Federal tax authorities as if the deceased were still alive.

Once the probate is finished and the assets comprising the deceased’s estate are properly shared among successors, a “Final IT Return of the Estate” shall be filed, and the assets once held by the deceased transferred to the relevant successor. If transferred at cost, there should be no IT. However, if stepped-up, IT on capital gains at a 15 percent tax rate shall be levied on the surplus between the cost and the stepped-up basis, at the deceased’s estate expense. Nevertheless, there are discussions at the Brazilian Federal Supreme Court regarding the IT on capital gains in these cases.

In cross-border situations involving heirs domiciled abroad, two main points regarding IT must be taken into consideration: (a) in the last few years, when heirs wish to send inherited (or gifted) financial assets abroad, local tax authorities have been demanding the IT is withheld by the relevant financial institution and paid at the expense of the relevant heir, at a 15 percent to 25 percent tax rate, the latter applying if the jurisdiction of destiny is a tax haven. Such tax rates apply to the whole amount transferred. Since the matter is quite controversial, there is room to question the withheld IT in these cases as well and (b) if the heir, however, wishes to maintain inherited (or gifted) financial assets in Brazil, the transfer of such financial assets to non-resident bank accounts (4373 accounts) is subject to IT on capital gains at tax rates which may vary depending on the financial asset involved.

Incidence of tax (donor/decedent or donee/beneficiary)

As indicated above, IGT is a tax levied at the State level, and, as a rule, the beneficiaries of gifts or inheritance are required to pay the tax.

Regarding IT capital gains on the transfer of assets gifted or inherited at a stepped-up basis, these are to be paid by the donor or the estate of the deceased, depending on the case. IT on the above-mentioned cross-border cases encompassing financial assets is to be paid by the relevant beneficiaries.

BRAZILIAN TAX REFORM

Law 14.754/2023

Law 14.754/2023 provides for the taxation of investment funds in Brazil and of income derived by individual residents in Brazil from financial investments, controlled entities, and trusts abroad.

The new Law provides a definition for the concept of control. According to this definition, companies, and other entities, whether incorporated or not, such as investment funds and foundations, are deemed to be controlled if an individual, either directly or indirectly, alone or jointly with others, holds rights ensuring predominance in corporate decisions or the authority to elect or dismiss the majority of administrators. Additionally, control is established if an individual, directly or indirectly, alone or with related parties, holds more than a 50 percent stake in the social capital or rights to profits or assets in the event of liquidation.

Controlled foreign companies

Until December 31, 2023, Brazilian legislation allowed the tax deferral for individuals with controlled entities located abroad. It was possible to postpone the income taxation to the time of effective distribution of profits and dividends (individual IT with progressive rates from 0 percent to 27.5 percent) or capital reduction (positive capital gain subject to income tax at progressive rates from 15 percent to 22.5 percent depending on the amount of gain).

This treatment has been modified to provide that profits determined in compliance with international accounting standards or Brazilian accounting standards (the latter mandatory if the entity is in a country with favored taxation or if it benefits from a privileged tax regime) will be taxed on 31 December of each year at a fixed rate of 15 percent as per the new rules set forth by law, regardless of any actual distribution.

It should be noted that controlled entities—either directly or indirectly—will only be subject to automatic taxation if they fall into one or more of the following hypotheses: (i) they are located in a country or dependency with favored taxation or are beneficiaries of a privileged tax regime or (ii) they have their own active income of less than 60 percent of total income (ie, more than 40 percent of their profits come from royalties, interest, dividends, shareholdings, rents, capital gains, financial investments, or other passive income).

Tax transparency

Law 14.754/2023 provides for the possibility of reporting entities controlled abroad as transparent for tax purposes. Therefore, individuals may separate each underlying asset in their Income Tax Return and equate them, from a tax perspective, to assets directly held by them. It is important to emphasize that this decision is irrevocable and irreversible. Therefore, once the individual chooses the reporting model to be adopted, there will be no possibility of change.

KEY TAKEAWAYS

One could dare to say that, in Brazil, no asset and succession planning would work if issues related to marital property and forced heirship rights are not properly addressed. The maximum IGT tax rate of 8 percent is still very low, if compared to other jurisdictions. However, a significant portion of the family estate, especially if it is illiquid, could be at risk when no planning is in place.

Cross-border planners must be able to further combine Brazilian and foreign (civil and common) laws and instruments, with international private dispositions, often navigating through revolting waters to determine which and what shall prevail and to what extent, so that the client’s needs and interests are met.

With the enactment of Law 14.754/2023, structures using trusts will likely increase in Brazil, as the institute brings great advantage for succession planning as an alternative to local wills. In addition, it is also likely that structures including controlled companies will decrease as Brazilian individuals should evaluate the scenario and their offshore structures to make sure it makes sense to continue investing in controlled companies abroad that fit the circumstances described on the new legislation.

Finally, it is worth remembering that, in conjunction with the approval of Law 14.754/2023, the approval of EC 132/2023 has only helped to increase the importance of adopting a proper planning.

Author Biographies

Humberto de Haro Sanches is a founding Partner of Humberto Sanches & Associates (HSA) and has over 20 years of experience in strategic wealth planning for families and their businesses. He is a member of the Brazilian Bar Association (OAB/SP), The International Academy of Trust Estate Lawyers (TIAETL), the American College of Trust and Estate Counsel (ACTEC) and of STEP (TEP) Brazilian branch. Email: [email protected]

Adriane Cristina Spicciati Pacheco Danilovic is a founding Partner of Humberto Sanches & Associates (HSA) and has over 20 years of experience in wealth planning for families and their businesses. She is a member of the Brazilian Bar Association (OAB/SP), and of STEP (TEP) Brazilian branch. Email: [email protected]

This article was presented at The International Academy of Estate and Trust Law Annual Meeting, which took place on 19–23 May 2024, in Mayakoba, Mexico.