Contributed By Baker McKenzie S.A.S.
The majority of Colombian companies are family-owned. These companies are usually founded and managed by the patriarch. Other family members usually carry out other high management roles in the companies. In most cases, the patriarch is unwilling to turn over wealth and grant control to younger generations until her or his passing, or until they are no longer capable of handling the company's affairs.
As Colombia has forced heirship rules forcing the testator to assign certain compulsory portions, applicable to half of her or his estate, even against their will, Colombian families have grown increasingly concerned on implementing estate and succession planning solutions to ensure a successful turnover of wealth and allow the family estate to increase in value over time.
Colombian families have become increasingly global. This situation has created various challenges when transferring wealth to family members as Colombian rules on forced heirship are mandatory and apply to the estate of all individuals (both national and foreign) whose last residence was Colombia.
This transfer of wealth may provide various challenges from a tax and estate planning perspective, when several jurisdictions are involved. The latter, as Colombian courts usually apply local law in respect of real personal property located in Colombian territory.
Colombian rules on forced heirship are mandatory and apply to the estates of all individuals (national and foreign) whose last place of domicile is Colombia.
Colombian and foreign heirs have the same rights and are entitled to equal treatment in Colombian probate proceedings. The Colombian Civil Code forces the testator to assign certain compulsory portions, applicable to half of her or his estate even against her or his will.
The compulsory portions are (i) maintenance provided by law, (ii) marital portion and (iii) the legitimate portion.
Maintenance Provided by Law
A compulsory portion is assigned for the subsistence of the beneficiary in a way that corresponds to her or his standard of living. Individuals entitled to maintenance include the deceased's spouse, descendants per stirpes, ancestors or siblings. The amount of maintenance is assessed and appointed by a judge.
The marital portion corresponds to a part of the estate assigned by law to the surviving spouse or permanent partner lacking the necessary means for a subsistence. Taking into account the existence of any legitimate descendants, the surviving spouse or partner will be included among the deceased's children and shall receive a marital portion corresponding to a share of the estate equal to the portion corresponding to the legitimate descendants.
The legitimate portion corresponds to a part of the estate assigned by law to the legal heirs. Legal heirs are the deceased's children acting personally, or represented by their descendants or ancestors.
The legitimate portion is obtained by dividing half of the inheritance between all legitimate descendants and the surviving spouse or permanent partner.
The legal heirs converge to the succession and are excluded and represented according to the order and rules of the intestate succession.
Should there be any legitimate heirs
The testator may, at her or his discretion, favour the descendant or descendant that she or he prefers, assigning part of the estate in the proportion desired.
Should there be no legitimate heirs¬
If there are no heirs entitled to inherit this part of the inheritance, it will increase the freely disposable portion, as explained below.
A testator may, under Colombia law, dispose of a certain part of her or his wealth, up to half of his or her estate. Should there be no descendants or beneficiaries, directly or by representation, entitled to inherit, the freely disposable portion will represent the entire estate.
The general rule for marital property is the community of property regime, which automatically comes into effect for all marriages and remains so until the community of property is dissolved.
In this regime, community property is commonly owned by the spouses. It is not similar to co-ownership because the spouses (joint owners) do not possess a share in the property but are owners of the community property.
Colombian law also recognises 'common law' unions under 'de facto' marital union provisions. Opposite or same-sex couples that have cohabited together for at least two continuous years may request the declaration of existence of a de facto marital union. This declaration implies the presumption of the existence of a community of property regime (as applicable to married couples) and leads to the distribution of the common property. This declaration is made before a judge or by mutual consent of the couple before a notary public or duly authorised conciliation centre.
Upon the death of one of the spouses, the 'marital portion' of the estate is assigned by law to the surviving spouse or permanent partner lacking the means for a congruent subsistence. Taking into account the existence of any legitimate descendants, the widower or widow will be included among the children and receive as a marital portion a share equivalent to the portioncorresponding to the legitimate share of the descendants.
The cost basis of immovable property varies depending on the following rules. The cost basis of property transferred during an individual's lifetime will be the value of the legal act including any direct attributable costs, as well as any improvements on the property. On the contrary, the cost basis of property transferred at death shall be the property's cost basis declared by the deceased as of December 31st of the previous year.
Colombian law allows individuals to create trusts, private foundations, family companies, family partnerships or similar structures to hold, administer and regulate succession to private family wealth. Several commentsmust be made.
Colombian civil law does not provide rules on common law trusts or private foundations. However, there are rules on civil and commercial local trust agreements whereby a settlor transfers the property or administration of certain assets to a trustee in exchange for fiduciary rights.
Local trusts are commonly used in Colombia as instruments to administer properties or businesses with a specific purpose or to grant guaranties or collaterals, considering that trustees are professional regulated entities.
There are no civil or commercial regulations regarding the establishment of foreign trusts and private foundations. However, foreign entities are recognised by Colombian law and tax authorities, and may be used as structures to administer private wealth and circumvent forced heirship rules in Colombia. Anti-abuse rules must be observed.
From a tax perspective, there are no mechanisms that allow the transfer of assets to younger generations tax-free. As a rule, inheritances or legacies are considered as capital gain taxes at a 10% rate. However, certain structures may be used to obtain tax deferral or reduce the taxable base. This would be analysed on a case-by-case basis.
Colombia has no regulations concerning the transfer of digital assets. Access to digital assets such as email accounts or cryptocurrency belonging to a deceased whose last place of domicile is Colombia is usually regulated by foreign regulations (due to the absence of regulations in Colombia) dealing with this type of situation.
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