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Great is the art of beginning, but greater is the art of ending. Part II

  . Wills and Estates In this installment, we are going to review the various ways through which we can pass down property in Costa Rica. Foreigners living in Costa Rica need to be very mindful considering that

 

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Wills and Estates

In this installment, we are going to review the various ways through which we can pass down property in Costa Rica. Foreigners living in Costa Rica need to be very mindful considering that they may also have assets in other countries. I will try to be simple with my language.

 

Probate proceedings

Costa Rican law allows two options for probate proceedings. It can either be done through Civil Court or through a Notary Public.

Doing a probate proceeding in Civil Court will be applicable under two circumstances: if there is not a will, or if there is a will and the heirs are contesting the will.

 

Intestate Proceedings

Not doing a will means the rules of the Civil Code will determine who will inherit the assets. If the decedent had the intention to leave a painting or a car to a friend, it would only have been possible through a will as the Civil Code is very clear about who can be heirs, and it is only limited to relatives. This is also true to all jurisdictions.

According to Section 572 of the Civil Code, this is the list of people who can be an heir in an intestate proceeding:

  1. The children, the parents and the spouse, or the common law spouse.
  2. Grandparents and all other legitimate predecessors.
  3. Legitimate and natural siblings through the mother.
  4. Nieces and nephews.
  5. Aunts and Uncles.
  6. The board of education of the location of the assets. This means if no heirs claim the assets, the “school district” is entitled to claim the assets through probate proceedings in civil court.

Thus, if there is not a will, any of these heirs can initiate probate proceedings in Civil Court.

 

Contesting the Will

These are some of the scenarios that will allow the heirs to contest: the will was not executed appropriately; or there were some invalid dispositions in the will, or if there is more than one will. In such cases, the heirs have the right to bring their issues in court. Unfortunately, when these processes take a long time and are very expensive. As some people say: “once I am dead, it will not be my problem”.

 

Notarial Proceedings

Doing probate through a notary public has to main requirements: there has to be a will and the heirs must not contest the will, which means they all agree with the dispositions of the will and how it was executed.

 

To Will or Not to Will

When thinking about passing down property, people are primarily worried about the cost. On the one hand, the costs to do a will (which is not that much in the scheme of things) but most importantly, the costs associated with probate.

Let’s review an example. These are the costs associated for probating assets at various costs.

 

Costs Description
Value of the Assets $100,000 $250,000 $500,000 $1,000,000
a.       Legal Fees in Notarial Proceeding $8,236 $16,920 $29,419 $54,419
b.       Legal Fees in Civil Proceeding $4,968 $10,151 $17,651 $36,651
c.       Transfer Costs for the assets $3,697 $8,940 $17,115 $33,909

 

The description of the legal fees refers to how much money the estate will have to pay to the notary public to process the probate proceedings, or how much an attorney will charge to do the probate proceedings in court. Assuming that a person has only a house worth $100,000 USD, the cost to do a probate proceeding through a notary public will be at over $11,000 USD in notary public fees and taxes (we will talk more about taxes in a few moments). These fees and costs do not include the fees for the executor. Under Costa Rican law, and executor is entitled to compensation for the management of the assets.

People are generally concerned about how much probate proceedings will cost to the estate and the heirs. Although the legal fees for doing probate through the notarial process are higher than doing it in civil court, the notarial process is more advisable as it will consume less time, and potentially less money.

Part of the concern about costs is related to the taxes. Costa Rica does not have inheritance tax, therefore, any assets acquired through inheritance resulting in an increase in capital will not be taxable under Costa Rican law. However, people need to pay particular attention as to whether the laws of the country of residence of the heirs will tax any gains made in another country. This will be a question for the financial consultant of the heirs in their corresponding jurisdictions.

In Costa Rica, the only tax that heirs need to be concerned about is the transfer tax for recordable properties such as real estate and vehicles. Section c) in the table above provides a description of the taxes applicable for the transfer of real estate under different values, whether it is completed through a notarial process or in civil court. As noted a person who inherits a property worth $100,000 USD will see a cost of at least $11,000 in notary public fees and taxes for acquiring that property through the notarial process. In the case of a property worth $500,000 USD the costs will add up to at least $47,000 USD.

 

Corporations and Wills

First and foremost, as an attorney, I made a commitment to the public to uphold our laws. To the extent of my ability, I comply with the laws in the books, and I am willing to comply with them as long as they do not discriminate against a group or class of people. From that point forward, it is my intention to use the laws for the purposes for which they were created.

When people want to pass down property, the appropriate thing to do is to do a will or to do living gift. When people want to do business, the appropriate thing to do is to register a corporation. However, it has been common practice by Costa Rican attorneys to create corporations to only hold assets. According to the business code, the purpose of a corporation is to do a business not to hold assets. Nevertheless, there are already thousands of people who have their assets in a corporation pursuant to the recommendations of their attorneys.

Sometimes new clients come through our doors seeking guidance for their assets which are already in a corporation, when I tell them my opinion about corporations then they wonder whether we should move the assets out of that corporation, doing that will result in legal fees and costs. Thus, it is better to leave things the way they are.

So, people can either own property directly or through a corporation and in either case, they can either transfer property to their heirs through a probate proceeding or a gift. Some people may think that having the property in a corporation may prevent the heirs from doing probate, which is wrong. If you own the shares of the corporation and you want your children to own the corporation you either give them the shares while you are alive, or draft a will for the shares to be transferred through probate. Having a corporation does not avoid probate.

The only way to avoid probate is to give your current assets to your children while you are alive. So, whether you transfer your assets now or whether you do it through probate, the transaction will incur in taxes. You will be able to find savings if you transfer your assets while alive as the legal fees are lower than in probate.

 

Options to Transfer Assets

If you have a corporation, you can transfer the shares of your company to your heirs. There is still a tax applicable to the transfer of property through a corporation but it is not as high as the tax applicable to the transfer of properties alone.

If you own a property directly, you can create a life estate with a reversal to your heirs. The life estate will save you some money in the transfer taxes. While the costs for transferring a property worth $100,000 are about $3,600 USD, doing the life estate can cost $1,300.  The life estate allows you property rights while you are alive, but once you pass away, the property “automatically” reverts to the owner of the fee simple which will be your heirs.  There is no need for probate in you have a life estate. If you do not want to do a life estate, your other option will be to do gift or a will.

A similar situation happens with the corporation; you can transfer the shares to your heirs now which will cost you $2,000 in legal fees and taxes, and you can remain the manager or CEO of the company. Once you pass away, the heirs can appoint themselves as CEO or managers and dispose of the assets as they see fit.

 

Transfer of Property
Costs description Property Valued at $100,000
a.       Direct Transfer of Real Estate $3,697
b.       Transfer of a property through a Corporation $2,809
c.       Cost to do a Life Estate $1,312

 

While the life estate or the corporation are convenient options for passing down property, the chattels or personal property will still need to be probated. If you have a large inventory of household items, you will need to dispose of them through the will. The only exception is if you have a corporation and include the items in the books of the corporation and as previously noted, you transfer the shares of the corporation to the heirs.

Trusts are the same difference as corporations or a life estate.  With the trust, you can give cash, property or investments to someone else so they can look after them for the benefit of a third person. The trustee is the person who manages the trust and the assets in the trust, the beneficiary is the person who will receive the benefit of the investments, property or assets. You can set your heirs as beneficiaries and yourself as the trustee.

 

Planning ahead

I tried to keep it simple, I hope it worked. If you recall, in our previous installment we talked about dispositions regarding your body, this time is about the assets. The best thing you can do is to talk to a professional in order to make the appropriate arrangements for you and your assets.

If you have any additional questions or comments, please feel free to post them here in the blog and we will try to answer them as soon as we can.

 

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rvalverde@outlierlegal.com

Attorney and Entrepreneur with more than 15 years experience in: immigration law in the US and Latin American countries including Argentina, Chile, Colombia, Brazil, Costa Rica and Panama. In addition, Rafael has extensive experience in Business Law, Estate Planning, and Real Estate. Lastly, Rafael has developed experience in people management, talent development and business development.

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    Allison Spencer October 18, 2017

    Hey Rafael,
    If you own a property directly, and create a Life Estate with a reversal to your heirs, who actually owns the property while you are still alive? Does anyone have the right to sell the property while you are still living?

    Thanks,
    Allison Spencer

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