You Can’t Take It With You

Posted on May 7, 2007
Filed Under Real Estate, Expat Tips, Taxes | 8 Comments

Yesterday I read a post from another blogger on inheritance laws in Uruguay and was motivated to research the subject a bit more to see how it might affect me. The information was a surprise to me, and I thought it would be a good idea to organize it so readers planning to move to Uruguay can take this into account.

I learned that if you own assets in Uruguay — real estate, bank accounts, investments, etc. — upon your death (or the death of your spouse), these assets would be handled according to Uruguayan inheritance laws. Uruguayan inheritance laws, like most Latin countries, are based on the Napoleonic code. And according to the code, the death of a spouse triggers a taxable event and inflexible inheritance rules that leave little room for the surviving spouse to maneuver. Under these rules, a good percentage of the assets goes to a blood relative, rather than the surviving spouse. There is little or nothing that can be done about this. You can theoretically disinherit a child or a parent, but it must be for an egregious thing such as a crime. Even then, that share of the inheritance skips that person and goes to his/her children instead.

Before reading further, please realize that I am not a lawyer. But I learned enough to decide that we will consult a lawyer on this subject before making a significant investment in Uruguay. The source of information summarized below was taken from the Código Civil Uruguayo. I made my best effort to understand, translate and reorganize the relevant sections on inheritance. Below a summary of the main points:

In general the inheritance gives preference to children (or the grandchildren as the case may be), over parents, spouse and siblings.

There are mandated percentages that must be distributed according to specific rules. Whatever is left after the mandated amounts, if any, can be distributed according to instructions in a will. If there is no will, that amount is divided among the inheritors.

Case 0 a – No children, no parents (mandated amount 50%):
The spouse gets the 50%. If no spouse, the siblings get the 50%.

Case 0 b – No children, no spouse, but parent alive (mandated amount 50%):
50% goes to the parent(s) of the deceased.

Case 0 c – No children, but parent alive plus spouse (mandated amount 100%):
50% goes to the parent(s) of the deceased, 50% to the spouse.

Case 1 a – One child, no spouse (mandated amount 50%)
The child gets 50%.

Case 1 b – One child, plus spouse (mandated amount 66.6%)
The child gets 66.6% minus what goes to the spouse, 33.3% to the spouse minus any assets he/she may already have in her/his own name.

Case 2 a – Two children, no spouse (mandated amount 66.6%)
Each child gets 33.3%.

Case 2 b – Two or more children, plus spouse (mandated amount 75%)
Each child gets 75/(number of children + 1)%. plus something (if the spouse has assets), 75/(number of children + 1)%. to the spouse minus any assets he/she may already have in her/his own name.

Case 3 – Three or more children, no spouse (mandated amount 75%)
Each child gets 75/(number of children + 1)%.

If one does not prepare for it properly, this law can create remarkably unjust outcomes. For example, in our case, if I were to buy property in UY and were careless enough to place it in my name only, upon my death 50% of it would go to my parents and only 50% of it would remain with my wife even though SHE may have paid for it. We decided that it would be safer for us to put the property under her name, since we have no children and her parents are no longer alive.

What can you do to avoid it?
Check with a lawyer before investing. As far as I understand the rules, if you are married, you can minimize the problem by making sure your Uruguayan assets are owned jointly. And you can create some protection for your spouse by setting up a usufruct, click here for more details. Alternatives such as creating a local company to hold title of a property can be costly. It can result in a MUCH higher yearly Asset Tax, equal to 1.5% of the purchase value (or 2% in the case of a foreign company). Not to mention, all the fees and paperwork that would be associated with maintaining a corporation. Note: Uruguay taxes assets in addition to income and in addition to the real estate tax. This amount can be considerable if you own a lot of assets in Uruguay. Married couples have a deduction of 130,000 USD and the yearly tax is usually based on the assessed value of the property, which is a fraction of the market value. For company owned property there is no deduction, the tax rate is higher AND it is based on the purchase price. So the difference is huge. Trusts for the purpose of subverting the inheritance rules do not seem to be allowed according to article 783.

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8 Responses to “You Can’t Take It With You”

juan del plata on May 8th, 2007 10:27 am

what are the rules for inheritance of property held in foreign (non uruguayan) banks?
juan
urufish on May 8th, 2007 10:52 am

Brazzie raises some points we hadn’t considered in our blog and thanks to him, we’ll update them accordingly…
Specifically, non real estate assets held in Uruguay. The reason we didn’t think about them, is, as an ex-pat, with all due respect to the stability of Uruguay, we would never consider placing or leaving assets within Uruguay’s jurisdiction where it was possible to place them elsewhere … e.g. offshore.
In plain English, stocks, bonds, other monetary instruments and cash are as much as possible, held outside the country.
For real property owned by my wife or myself or jointly, in other countries, the local country’s laws apply. For instance, properties (and other investments) we own in Canada or the USA, are covered by our wills… because with very few, and very specific exceptions, which may vary by state/province, your will determines the distribution of assets upon your death.. period.
urufish on May 8th, 2007 10:56 am

To specifically answer Juan’s question - as a non lawyer, I’ll give you the plain English version.

A) Uruguay, like all other countries, with the possible exception of the USA, has no practical jurisdiction beyond it’s borders. I exclude the US because we said ‘practical’. The US has power it can use to ‘leverage’ cooperation far beyond it’s physical borders. Uruguay does not.
B) It could be argued that assets held elsewhere are simply not subject to Uruguayan law.
C) If a tree falls in the forest and no one hears it fall, did it really fall? Or put otherwise, if your heirs don’t know about it, they cant go after it.
Brazzie on May 8th, 2007 12:53 pm

We plan to keep the bulk of our assets outside UY as well (and have one will for each jurisdiction).

It has been said that in the past the Asset Tax in Uruguay was toothless because, without personal income tax, there wasn’t a good mechanism in place to check what your non-real estate assets were. I believe this will change with the new personal income tax going into effect this year.
urufish on May 8th, 2007 7:31 pm

We haven’t lived here long enough to absorb the real way Uruguay works so we cant comment personally. But the ‘connected’ people I know, say it will take several years to get to the point where the ’system’ works in a way that even comes close to tracking incomes or assets. They believe the system will be entirely overhauled or abandoned in the next couple of years, because they say it won’t work the way it’s been designed.
Brazzie on May 8th, 2007 8:03 pm

I imagine it will take several years and a truckload of money to institute the processes and procedures related to the new income tax.
eltony on May 9th, 2007 10:33 pm

Hi there.

I’m not a “pro” in this field, but a relative of mine passed away recently, and he had most of his stuff under a “Sociedad anonima”. So, let me explain what you can do to avoid “inheritance law”.

One thing a couple can do is put all of his assets under a “Sociedad Anònima” or “S.A.”. A “sociedad anonima” is an “persona juridica” (brazzie, please help me on translating that to english) that can own things (so, it’s not a real person, but one that is recognized by law so it can own things). Say for example “ThisIsOurSA S.A.”. Then, “ThisIsOurSA S.A.” can own a car and a house or a business, and it can be “owned” itself by many people, which would have stock on that S.A. The SA dont have to be “publicly owned” or have an IPO, but you can print stocks (or “acciones”) for that S.A., which are going to be owned say 50% and 50% by a couple.

Any of them can leave those stocks in custody of a lawyer or something, with clear instructions on what to do with those stocks in case one is no longer on this earth, for example in a “will” or something. Lawers often charge in case of death of a person, using a % of the value of the goods left by that person. If those goods are “owned” by a SA, there’s no inheritance in itself of those goods. Whoever has a certain % of stocks for a SA,
owns the SA by that %.

In that case, all of the goods owned by the S.A. are affected by the change of ownership of a % of the stocks in that scenario, so the new “accionists” of the SA would have to get together and see how to split or manage the goods. Inheritance law does not apply on the goods of the S.A., so they will not be taxed,and there no need for a “blood” relationship with those persons you want to leave your stocks to.

So, this is not final, but a lead on how things might be managed. S.A. are taxed, you have to buy a S.A. in order to use it, and you might need an accountant to manage it (which will also cost you some $), so do your math. In case the good is some real state such a farm (land), then the stocks for the SA do have a name on it, and are not “anonymous”. I don’t know how it works in that case.

Regards.
Brazzie on May 10th, 2007 9:23 am

Thanks eltony for the detailed and very informative message. In the US, there are many ways to accomplish the same thing but the easiest would be through a LLC.

http://es.wikipedia.org/wiki/Sociedad_an%C3%B3nima#Denominaciones_en_otros_pa.C3.ADses

The SA is certainly a good way to control who gets your stuff, but it has a severe drawback. As I mentioned in the post, transferring ownership to a SA is not an ideal solution since you will need to pay a very high Impuesto del Patrimonio (asset tax) every year on the property while you are alive. The tax rate is MUCH higher for a Sociedad Anonima than for personal ownership. Cheers

You Can’t Take It With You

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