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11.03.2015 03:49 Age: 8 days

Latin lesson

Nicolas Malumian TEP is a Partner at Malumain & Fossati

Nicolas Malumian highlights three issues that practitioners in Latin America should consider when dealing with foreign common-law trusts.


Common-law trusts are highly regarded and advisable protection schemes for Latin Americans. But what should estate practitioners expect when dealing with a common-law trust for Latin American settlors and/or beneficiaries? To answer that, it is necessary to consider three key issues: recognition of common-law trusts in Latin America, forced heirship, and tax requirements.



Recognition of common-law trusts


With the sole exception of Panama, no other Latin American country is party to the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition. Does this mean Latin American countries will not recognise common-law trusts?


Most Latin American countries incorporate trust regulations in their domestic law (some of them even regulate the tax treatment of income arising from foreign trusts). Unlike some European civil-law countries whose courts have established that trusts are alien to their internal regulations (e.g. Case No.338/2008 of the Supreme Tribunal of Spain, 30 April 2008), some Latin American countries’ courts have decided that trusts are not alien to their national law (e.g. Vogelius, Chamber of Appeals of Buenos Aires City, 3 November 2005).


In short, domestic trust regulations in Argentina, Bolivia, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Panama, Paraguay, Peru, Uruguay and Venezuela, and even tax regulations on foreign trusts in several of these countries, make it reasonable to infer foreign trusts will be recognised.1



Forced heirship


There is no forced heirship in Panama or north of Panama (i.e. Mexico, Guatemala, Honduras, Nicaragua and Costa Rica), but there is forced heirship in South America and the Dominican Republic.2 Nevertheless, estate planning for wealthy individuals living in forced-heirship jurisdictions is achievable using a common-law trust – this is clear, at least, for assets outside of the settlor’s jurisdiction, if the right external jurisdiction is chosen (i.e. jurisdictions with anti-forced heirship rules or with clear case law against forced-heirship claims).


Importantly, forced heirship provides immediate transfer of assets to heirs. Not only is it contrary to forced-heirship rules to give beneficiaries a smaller portion under a trust than under the forced-heirship rules, but it is also contrary to the rules to provide that the heir will have to wait for a period of time after the death of their father or mother to receive the assets.


In other words, a common-law trust under which the forced heir will receive all the assets (i.e. there is no contention about percentage), but only when a certain condition is met (such as when they turn 30 or obtain a degree) is contrary to the forced-heirship rules, no matter how carefully the conditions in the trust deed are drafted.



Tax requirements


By creating a trust and transferring formal ownership and control over the assets to the trust, the settlor’s wealth tax basis is reduced and any income arising from such property is excluded from their income tax. Tax authorities have challenged this arrangement, however. Below is a list of points that a settlor should consider in order to avoid a challenge by tax authorities.


- An independent trustee. An obvious requirement is that the settlor lose control of the trust fund and the trustee be independent from the settlor.


- Clear proof of the date at which the creation of the trust and the transfer of property took place should be provided. This includes the notarisation and apostille of the trust deed, the notarisation and apostille of the instrument of the transfer of property (i.e. the transfer of shares of a company), and, if the settlor is executing the deed through a power of attorney, the notarisation and apostille of such a document.


- Irrevocable trust. If the trust is revocable, tax authorities will consider it an investment mandate. This is a key point and experience shows that it is one of the very first questions asked by the tax authorities.


- The correct level of trustee discretion. This is one of the most delicate requirements, because the desire of the settlor to give instructions to the trustee must be balanced with the actual loss of control over the trust assets. On the other hand, purely discretionary trusts have been challenged by tax authorities as ‘unbelievable trusts’. In other words, it has been considered unbelievable that a wealthy person would transfer a substantial portion of their assets to an independent trustee with no instructions at all.



Final comments


With the increase of common-law trusts in tax, corporate and other planning structures, it is important for estate-planning practitioners and advisors to be aware of these common trends in Latin American jurisdictions.