Main Challenges and Boundaries on Brazilian Resident's Succession Planning

The rise of globalization, easy traveling among countries and immigration have led to an increase in multi-jurisdictional families. It is not uncommon for families to have members spread out across a number of countries, whether or not on a permanent basis, and that forces practitioners with private clients to be constantly on the lookout to manage cross-border elements while designing their clients’ succession planning.

In this scenario and apart from the complexity of all the tax issues involved, we see that, when it comes to multi-jurisdiction succession planning, the starting point is to determine - with the collaboration of local lawyers from the country of residence of the individual- which law would be applicable to an individual’s succession. Consequently, the practitioner needs to understand, among other elements, how the heirs would be affected by such law, in what extent it would be possible to plan succession, and whether the applicable legislation would allow that client to choose the relevant applicable jurisdiction or not.

As an example, succession of European Union residents is ruled by the law of the country of the individual’s habitual residence at the time of demise, although it allows individuals to choose between such residence legislation or the one of their nationality (as provided for in Regulation EU No. 650, of July 4th, 2021).

In this sense, Brazilian individuals who reside in Portugal would be able to choose between Portuguese law or Brazilian law to rule his/her succession. On the other hand, if that individual relocates to Brazil, his or her succession would necessarily be ruled by Brazilian law, since the Brazilian legal system does not allow anyone to choose the governing law of the succession. In other words, the law governing succession of those living in Brazil at the time of death is always Brazilian law, regardless of the nationality of the deceased.

In this case, irrespectively of where the assets are located and where the probate will be opened or filed, Brazilian succession law will be the one to determine who are the heirs of the deceased, the amount of the estate allocated to each of them, and will also be the one to rule on last will dispositions (that is if the decease has left a will) etc.

Within such context, this article is intended to point out, in a very brief and general manner, which are the boundaries imposed by Brazilian succession law on individuals, whether Brazilian or foreigner, when it comes to succession planning.

| GENERAL RULES OF BRAZILIAN SUCCESSION LAW AND BOUNDARIES TO SUCCESSION PLANNING

According to Brazilian law, individuals’ legal heirs are their descendants, their ascendants, their spouse or partner, and their collateral relatives up to the fourth degree (second degree siblings, third degree uncles and nephews, fourth degree cousins, great-uncles, and grandnephews).

If an individual residing in Brazil dies intestate, the estate must be distributed entirely to his/her legal heirs, in accordance with the order of priorities set forth in the Brazilian Civil Code.

In the first place, the deceased's descendants are called to take part in the succession, and are entitled to inherit in equal shares with the spouse or partner of the deceased (except if (i) they were married to, or living in a common-law marriage with the deceased under the universal communion of property regime, (ii) where the compulsory segregation of property regime applies or, (iii) if married under the partial community of property regime, the deceased left no private property). In equal concurrence with the descendants, the spouse or partner will be entitled to the same amount as those who succeed them individually, and may not receive less than a quarter of the inheritance, if he/she is an ascendant of the heirs (descendants) with whom he/she concurs.

Secondly, if there are no descendants, the ascendants will be called into succession, also concurrently with the spouse or partner (in this case, the matrimonial property regime is irrelevant). If they are concurring with the deceased's parents, the spouse and partner will be entitled to one third of the estate. If they concur with the grandparents or if there is only one living ascendant, they will be entitled to half of the estate.

"Brazilian law establishes that ascendants, descendants, spouse, and partner are forced heirs and may not be excluded from the succession by will... unless they are disinherited or declared to be unworthy by indignity, which only happens in very specific situations"

In the third place, if there are no descendants or ascendants, the inheritance will be allocated entirely to the spouse or partner (also in this case, the matrimonial property regime is irrelevant) and, finally, if the deceased had no descendants or ascendants and was not married or living in a common-law marriage, collateral relatives up to the fourth degree (cousins, great-nephews, great-uncles) will be called upon for succession.

Brazilian law establishes that ascendants, descendants, spouse, and partner are forced heirs and may not be excluded from the succession by will (unless they are disinherited or declared to be unworthy by indignity, which only happens in very specific situations ) and are entitled to half of one’s estate (the mandatory portion of the estate).

As a way of ensuring this right, Brazilian law prohibits individuals from (I) disposing of more than half of their estate during their lifetime (through gifts or donations) or upon their death (through a will); and (II) unjustifiably reducing or restricting the mandatory portion of the forced legal heirs.

That is because the forced legal heirs must have broad and unrestricted access to the mandatory portion of the inheritance, which must be transferred to them free of any liens, charges, encumbrances or conditions, except when there is justified cause for such and in the events of indignity and disinheritance.

The mandatory portion of the estate must be calculated based on the individual's global estate and not solely on the estate located in Brazil. So, if an individual has left assets abroad, even if these assets are subject to a foreign probate (normally, assets are probated in the countries in which they are located), such assets must be taken into account when calculating the share of each forced legal heir and, if it is found that a forced legal heir has received a larger share than the others, the Brazilian courts may try to balance the succession by offsetting assets located in Brazil, in order to adjust the share of the forced legal heirs (although it is not provided for in any law, there are some court precedents to that effect).

Despite being a frequent target of criticism by renowned Brazilian scholars, based on the most varied arguments, the mandatory share of the estate is one of the most important rules of Brazilian succession law and, as long as it is in force in the Brazilian legal system, it must always be complied with.

In this sense, succession planning that involves reducing or limiting the mandatory portion of the forced legitimate heirs could be subject to legal disputes and be considered null and void by courts.

Another challenge to succession planning is the prohibition of inheritance agreements. In Brazil, forced legal heirs may not waive their inheritance rights (waivers are only allowed once the probate procedure is initiated) and may not celebrate any kind of agreement on a living individual’s estate, under the penalty of nullity.

There has been a lot of criticism from scholars on this matter as well, especially with regards to the possibility of the spouse or partner waiving their inheritance rights while concurring with the exclusive children of the estate's holder, but the fact is that there is a very likely risk that any succession planning based on acts that resemble agreements on a living person's inheritance shall be deemed as absolutely null and void.

"Brazilian succession plannings usually start with the election of the matrimonial property regime (and the signing of a prenuptial agreement), since it holds a direct influence on the amount of the inheritance that will be allocated the spouse or partner whenever they concur with one’s descendants"

Some court rulings have already declared the nullity of legal transactions carried out within the scope of succession plannings, under the argument that the plannings were inheritance agreements. As an example, reference can be made to a situation in which a former couple, by virtue of their divorce and by virtue of an amicable partition of assets, assigned to the male spouse the inheritance rights to a property owned by the female spouse's parents, who were still alive. Such property sharing was, among other arguments, considered an inheritance agreement and deemed null and void by the Brazilian Superior Court of Justice (STJ).

Nevertheless, in December 2022, the Court of Justice of the State of Rio de Janeiro issued a new Regulation (“CGJ” Provision No. 87/2022) which provides for the possibility of including an inheritance waiver provision in public deeds recognizing common-law marriages, provided that the parties are warned about its "controversial effectiveness" and therefore, some notaries have been allowing partners to waive their inheritance in prenuptial agreements.

| FINAL CONSIDERATIONS

There is a considerable diversity of instruments widely used to carry out estate and succession plannings in Brazil. As a rule, all acts that do not violate the mandatory portion of the forced legal heirs and that are not deemed as inheritance agreements of a living person or as a waiver of inheritance rights, may be achieved (if, of course, the transactions are not forbidden by Brazilian law).

In general, Brazilian succession plannings usually start with the election of the matrimonial property regime (and the signing of a prenuptial agreement), since it holds a direct influence on the amount of the inheritance that will be allocated the spouse or partner (and to the exclusive or common children of the spouses) whenever they concur with one’s descendants.

Since inheritance agreements are forbidden, wills are broadly used for succession plannings but should be carefully drafted, in order that the mandatory portion of the forced legal heirs is sought by the testator while bequeathing his assets. The testator is allowed to allocate the assets of the mandatory portion of his/her estate to the share of each forced legal heir, but may not unjustifiably reduce or impose liens, charges, or restrictions on that portion of the estate.

Trusts are also excellent succession planning tools, especially for HNW and UHNW families with assets abroad, who have great concern about the destination of their assets after death, and who worry about not giving their descendants (especially minors and vulnerable people) immediate access to the funds, restricting such access to spending and expenditure on health, education etc., and allowing the assets intended to those beneficiaries to be managed by a specialized institution, therefore ensuring an efficient and focused estate administration not hinged by setbacks such as possible changes of legal guardians.

Even though trusts are an extreme versatile and flexible instruments, they are not very well understood by Brazilian tax authorities, which used to treat distributions of the trust fund (income or capital) as income and subject to income tax under a progressive rate (up to 27.5%). For such reason, it has not been frequently used by Brazilian residents, especially when the Brazilian residents are the beneficiaries.

More recently, upon the enactment of Law no. 14. 754/2023, trusts are to be considered as fully transparent vehicles for tax purposes, so that trust fund is deemed to be owned directly by the settlor or the beneficiaries (depending on the specific case) and profits earned shall be automatically taxed in Brazil at a 15% rate, irrespectively of any distribution and regardless of whether settlor or the beneficiaries have access (or the right to access) the trust fund.

Law no. 14.754/2023 also considers transfers to trust funds and distributions from trusts as gifts or inheritance and, consequently, it is likely that such transfers and distributions shall observe the boundaries and restrictions imposed on the rights of one to dispose of his/her assets while living or upon death.

Indeed, there are other estate and succession planning instruments in addition to those briefly and generically mentioned in this article, such as the establishment of usufruct on specific assets, the setting up of protective clauses of incommunicability and impenetrability on certain assets, the setting up of holding companies in Brazil and/or abroad, the inclusion of family members as beneficiaries in insurance policies, the anticipation of the mandatory portion of the inheritance to the forced legal heirs etc. In any case, regardless of the chosen estate and succession planning instrument, as long as the current Brazilian legal system is in force, the same caution must be taken to protect the right of the forced legal heirs to the mandatory portion of the estate, in order to avoid any potential legal dispute between the heirs.