Estate and Succession Planning: Donation and its Advantages and Attributes to the Donor and Beneficiaries

It is impossible for humans not to feel uncomfortable when thinking about their own death. However, one of the main pillars of Estate Planning is succession. This is a delicate subject, but necessary, and the main objective of this reading is to bring the main attributes of donation, as well as its advantages and points of attention.

The pandemic we are experiencing with COVID-19 has helped to relativize the cultural barrier surrounding the finiteness of life. It is the financial planner's obligation to provoke interactions and reflections on the subject, since death, unfortunately, will come to everyone. Along with it, there are various implications that accompany the transmission of assets, ranging from the simplest and low-cost to the most complex and burdensome. It is also up to the planner to be sensitive in choosing the timing and manner of this approach with their client, as well as the ability to present the main alternatives, consequences, and costs based on the path the client decides to take.

When discussing the subject of donation, many sensitive thoughts come to mind. Judgments such as "getting something for nothing" or "leaving someone behind" can deter the donor and the recipient from very relevant aspects and advantages within estate planning. Once the cultural barrier of death and the need for succession planning is overcome, donation is one of the main tools to be considered by families with assets and wealth concentrated in their patriarchs.

Regarding intangible aspects, donation acts as a preventive measure to mitigate conflicts among heirs, conflicts that can persist for years, turning into disputes with the potential to rupture family ties and ultimately destroy or devalue family assets. Along the same lines, donation allows the donor, while alive, to voluntarily arbitrate regarding the emotional or sentimental value of a particular asset to the recipient: a watch to the son, a ring to the daughter, a vehicle to the mechanically inclined son, or a stable to the daughter who practices horseback riding or loves animals. It can also, in addition to avoiding conflicts, attribute great symbolic value to certain items/assets in their transmission across generations, to the point of enhancing their perpetuation and maintenance. Finally, time is also an intangible factor, and the greater the disposition of donated assets, the fewer assets will be subject to inventory, accelerating a process that is often painful to heirs.

Fiscal and tax efficiency may be the main tangible benefit of succession advancement through donation. Lifetime donation, in addition to having a lower tax rate compared to inheritance tax in some states, ensures a lower tax incidence as the Inheritance and Donation Tax (ITCMD) has been experiencing a strong upward trend since the last decade. ITCMD is a state tax, which can fluctuate according to fiscal stability and the need for revenue collection by the respective state. It is important to remember that ITCMD in Brazil is still relatively low (up to 8%) compared to developed economies like the United States, where the rate can reach up to 40% (maximum of the local progressive table).

There are protective and restrictive clauses that can be attached to the asset being donated. These clauses have various applications and particularities and, due to the possibility of being linked to both movable and immovable assets, they have been widely used in the estate planning of families with large accumulated wealth.

• The Usufruct clause seeks to separate the right and the usufruct of the property of the same asset. In practice, the asset is transferred to the donee, but the donor retains the benefits of use and income generated by the same asset. Executable in both real estate and corporate stakes and closed exclusive funds, and flexible due to the possibility of lifelong or temporary nature, donation with a usufruct clause is one of the most common tools in estate planning.
• The Reversion clause provides that if the donee were to pass away before the donor, the donated asset would revert to the donor's estate. Widely used in donations to descendants who have a spouse, this clause protects the donor parents from the donated asset falling under the possession and rights of their child's spouse in the event of their untimely death.
• The Inalienability clause restricts the sale of the donated assets by the donee (sale, exchange, fiduciary alienation).
• The Incommunicability clause prevents the donated asset from becoming part of the shared property of the couple if the donee is married, gets married, or maintains a stable union, and can be extended to income and dividends such as interest and rent.
• The Impenhorability clause prevents the seizure of the donated asset to pay the debts of the donee and its use as collateral for loans taken.

Strategically, by advancing succession through donation, the donor can circumvent financial, business, or legal problems inherent in the resolution and transmission of their assets in case of inheritance, thus protecting the family's wealth. There are many particular cases for each of these facets. In financial terms, assets with high inventory costs may force heirs to liquidate some assets prematurely to cover these costs. In the business and legal sphere, shareholdings in companies with legal embargoes may prevent their transmission and enjoyment by heirs.

Regarding tax incidence, in addition to the different ITCMD rates practiced by each State, the question of updating (or not) the value of the asset to be donated is still interpretive and controversial, such as the benchmark for this correction, such as accumulated inflation, updated venal value in the case of real estate, or market value in the case of securities. The form is also of paramount importance, with the most common being the anticipation of legitimate, where assets are usually communicated between ascendants, descendants, and spouses. In this case, as the name suggests, the donee (heir) receives their share of the inheritance in advance, so the donation by anticipation of legitimate should be taken into account in deducting the share (quota) of this beneficiary at the time of the inventory.

The last but not least important point of attention is the definitive and irrevocable nature of the donation. In other words, there is no possibility of revocation and regret once the donation is made.

Considering the particularity of each family and business governance, as well as their respective deliberations, the donation strategy carries with it numerous benefits, from the simplest to the most complex and customizable. However, it is not a simple process, as factors such as emotional attachment and disputes driven by pride, for example, bring subjectivity to the subject.

Therefore, there are numerous variables, tangible or not, that can burden, embargo, or even annul the donation. Thus, its execution and implementation must be legally supported by a team of specialists in the field who can, together with the financial planner, cross-reference these particularities and family and business deliberations with the premises of the donation mentioned above, in order to establish the most harmonious and efficient solutions possible.

 

Written by Keiji Hinohara, CFP ®

Partner and Investment Advisor