Wealth succession: early planning of assets distribution can lead to tax savings

Setting a succession strategy can minimize taxation on assets

Protection of assets, reduction and deferral of tax burdens, avoiding bureaucracy and reducing the costs of a probate process are common goals among those who resort to estate planning.

This is also a way of providing security to the family and reducing the strain that inheritance distribution can cause for those involved.

Succession planning consists of steps taken by an individual who determines, in his lifetime, how his estate will be distributed between his heirs and successors.

It is possible to adopt legal measures that facilitate transferring of assets and, in some cases, avoid litigation in probate processes, making them less onerous or, at least, without unexpected high costs.

“Planning succession in advance can contribute to reducing the cost of taxes over time”, states Augusto Andrade, partner and manager of the Individuals sector at Domingues e Pinho Contadores.

There are several resources included in this planning process: private retirement plan, real estate funds, the constitution of a family holding, donations, will, among others. Legal advice can indicate the best strategy based on the assets involved and the goals of the interested party.

In addition, it is essential to know the taxes levied on succession practices, in order to assess what is most advantageous for each case. For this process, relying on accounting and tax consultancy will help in analyzing the most appropriate procedures.

Donations

It is possible and often advantageous, for example, for assets to be given to successors by donations while living. In this case, it is necessary to consider the tax levied on this type of operation, the Causa Mortis Transmission or Donation Tax (Imposto de Transmissão Causa Mortis ou Doação -ITCMD).

Its rate varies from state to state but is limited to 8% over transferred assets. The 8% limit is stipulated in the Federal Constitution, but there are several proposals for constitutional amendments that aim to increase the maximum tax limit. As soon as the constitutional limit is raised, the States will adjust their legislation in order to increase their collections.

As a result, this anticipation of assets transfer to heirs through donations can represent a relevant saving that should be carefully analyzed by taxpayers.

Read more: ITCMD: strategy can reduce the impact of taxation on equity

There are also legal mechanisms to make this type of donation and guarantee the continued use of assets until the donor's death.

A planning process makes a difference in cases of transfers to heirs, preventing taxation from generating an unexpected high cost for the estate.

Anyone who has or expects to receive assets abroad can benefit from the recent decision of the Federal Supreme Court (Supremo Tribunal Federal - STF), which determined that ITCMD must not be levied on such assets. The decision applies to new cases, analyzed after April 20, 2021, and to those already in progress in court.

Family holding

Another mechanism for structuring estate planning is the creation of an equity holding, an organization that manages family assets. It consists in opening a company to partially or completely manage the assets of a family, including financial assets, equity interests in companies and real estate.

The opening of an equity holding may result in some tax benefits, such as:

• more advantageous taxation of Income Tax on revenue from rents (compared to an individual);
• the possibility of non-payment of the Real Estate Transfer Tax (Imposto de Transmissão de Bens Imóveis - ITBI) and the income tax on capital gain from transfer of the individual's property to the holding company;
• the ITCMD calculation based on units of membership and not on the market value of the property, in case of a probate process.

Another point to consider is that, in the management of assets, it is possible to establish rules for equity protection, such as: deciding how management will be conducted in the founder's absence, determining how the units of interest will be shared, defining a usufruct for life clause, anticipating inheritances, etc.

Augusto Andrade recommends caution when choosing this option, which will not necessarily generate tax savings. “If I create a holding to manage real estate assets, for example, there will be ITBI taxation, which can represent a high expense. In the long term, this solution may be worth it, but everything will depend on the consistency of the assets and the goals of each family”, he advises.

Another relevant aspect to be analyzed is the recent tax reform proposal presented by the Federal government and which is awaiting processing and voting in the Chamber of Deputies. The text of the bill significantly burdens this type of corporate structure, so the constitution of equity holdings needs to be analyzed from the point of view of succession planning and mitigation of family conflicts and rather than from the aspect of tax saving.

Tax consultancy for effective results

Tax consultancy is a valid resource for guiding individuals on taxes related to succession, contributing to the preservation of assets.

Domingues e Pinho Contadores brings together specialists who work in a complementary way to legal consultancy, assisting the taxpayer in evaluating the legal paths for paying taxes and presenting statements required by tax authorities, whether in the early planning of these obligations or in compliance with practices related to the estate.