Guatemala: Preserving the Family Legacy: The Importance of Inheritance Planning

Inheritance planning, also known as succession planning, is a process through which a person, who is still alive, and is not yet a decease for succession effects, organizes his or her estate (i.e., assets, rights, and obligations) with the objective of ensuring a methodology or procedure in which his or her estate is distributed according to his or her wishes while still alive. Although some of them may materialize after the death of the organizer. Proper inheritance planning is crucial to designing an adequate succession plan which sole purpose is to ensure an organized transfer of the organizer’s estate and minimize the loss of value of such estate as much as possible. Similarly, effective succession planning must prevent the organizer's estate from being given a destination contrary to his or her will. There are numerous benefits of implementing proper succession planning, among which the following can be highlighted:

• It allows beneficiaries to be designated according to the will of the organizer. By instituting an inheritance plan, the organizer ensures that his or her estate is transferred to the persons of his or her choice and according to his or her specific instructions1.
  
  
• It can avoid conflicts amongst relatives or third parties. By establishing an inheritance plan, disputes amongst relatives or third parties over the organizer's estate can be prevented, since the organizer would have expressed his or her will in binding legal instruments.
  
  
• It makes it possible to carry out proper tax planning2. Hereditary taxes in Guatemala, depending on the degree of kinship and the amount of the inheritance, can range from 1% to 25%, which can represent an important financial burden that ultimately taxes the estate and indirectly, the beneficiaries of the deceased, with a possible decrease in the value of their estate. Succession planning enables the option of optimizing this tax burden in some scenarios by replacing it with a tax on the transfer of assets during life that can range from 3% to 12% with a possible capital gain of 10% to be paid by the transferor.
  
  
• It eases the protection of the organizer’s beneficiaries who may have special needs. Succession planning may include the structuring of legal mechanisms that ensure that the estate is properly managed with the objective that the organizer's beneficiaries who may require special needs (e.g., minors, persons with intellectual limitations, or injunctions), continue to receive the necessary financial support.
  
  
• Time reduction. In the absence of a proper succession plan, succession processes tend to be extended over a considerable period, which ultimately results in additional costs and complications for beneficiaries. However, by having a well-structured succession plan, the time required for the transfer of the organizer's estate can be minimized.
  

The first step for proper succession planning is to be clear about the organizer's will regarding the way in which he or she wants to dispose of his or her estate in favor of his or her beneficiaries. Being clear about the will of the organizer from the outset is essential to design a succession plan that allows the safeguarding, conservation, and transmission of the organizer’s assets in the most efficient and secure way possible.

Once the organizer’s will is clear, it is important to proceed to identify the assets, rights, and obligations that form part of his or her estate. In this sense, it is useful to make an inventory that details all the organizer’s assets, not only including his or her real estate, but also movable assets or rights such as vehicles, jewelry, shares, intellectual property, bank accounts, insurance, contracts in his or her favor, accounts receivable (credits), among others, so that a plan that allows the early disposition of them can be worked on, based upon the will of the organizer and falls within what is permitted. In addition, it is important to identify the obligations that the organizer may be responsible for, as well as any encumbrances or limitations that affect their assets. Identifying the assets accurately will allow the creation of an ideal legal structure that allows the design of a succession plan that avoids putting the organizer's assets at risk and mitigates possible contingencies, whether tax, commercial, labor or even family contingencies, that could arise in the future.

Once the assets, rights and obligations of the organizer have been identified, it is possible to have a clearer picture regarding to the legal structure that will be recommended to implement a succession plan, considering the various figures that the Guatemalan legal system allows (or at least, does not prohibit). In any case, a legal structure that is efficient and does not create unnecessary paperwork or complicates the process must be created. Within the Guatemalan legal system, there are legal figures that can be implemented to contribute to the conservation and safeguarding of estate in a succession plan. Within these legal figures, the following can be mentioned: the will, the usufruct, the trust, the commercial legal entities, the donation, among others that can be adapted to the will of the organizer3. Likewise, there are legal figures that, although not expressly recognized by Guatemalan law, and that operate outside the country, constitute an option to be considered.

• Will. The will is a purely personal and individual act4 that expresses the testator’s intention to dispose of all or part of his or her assets after his or her death. The consequence of not granting a will is that the law will be applied supplementarily and, therefore, the transfer of the testator's estate will be made, after his death, in accordance with the provisions of the law, without considering his or her eventual will in this regard.
  
  
• Usufruct. Usufruct is a real right over that confers on the usufructuary the right to enjoy the property of others with the obligation to preserve its form and substance. It can be constituted either through a contract or through a will and under different modalities (for a fixed term, for life or under a condition)5. The nature of this institution is to regulate the transmission of bare property, which allows under a succession plan the organizer to reserve for himself or for a third party the right to enjoy the assets that form part of his or her estate until a specific term or condition is met. The different modalities that can be applied make this institution one of the most practical, since it allows to have, as in a will, certainty of the way in which the transfer of the assets that are part of the organizer’s estate will be carried out, once his or her death occurs.
  
  
• Trust. The trust is an institution with its own characteristics. The main characteristic of the trust is the allocation of an estate. A trust serves and is useful as far as it separates and affects an estate for a specific purpose. Without this characteristic, the trust would have no utility6. The trust is a pragmatic figure since the settlor (organizer) will decide which assets will be part of the trust and will give clear and express instructions to the trustee (bank or financial entity that will administer the assets) in the way in which his or her assets will be administered and how they should be transmitted or managed, instructions that will remain and be fulfilled even after the death of the organizer. This is practical, since a third-party is who manages the assets according to the will of the organizer and cannot do more than what is expressly stated in the trust agreement.
  
  
• Commercial Legal Entities: Commercial legal entities, especially corporation, can also be effective alternatives in the preparation of a succession plan, especially when it comes to the continuity of a family business or the efficient management of business assets.
  
  
• Donation: Donation is a contract through which a person (donor) disposes of an asset or right in favor of another (donee) free of charge. In the context of inheritance planning, it can be used to distribute assets or rights to specific beneficiaries prior to the death of the organizer.
  
  
• Other legal figures: Finally, there are other legal figures that foreign legislations offer to be used to implement a succession plan, such as Private Interest Foundations or Trust constituted abroad.
  

In any case, it is important to note that the choice of the appropriate legal figure in succession planning will depend on the will of the organizer, as well as the particular situation of his or her estate; and, in general, a succession plan is not based on a single legal figure, but on a combination of several and in attention to various and diverse factors, such as operational, taxes, and others that must be taken into account. ARIAS® team is made up by professionals with extensive experience in succession planning, who will be happy to advise you on the design and implementation of a succession plan that ensures that your will is fulfilled with respect to the distribution of your estate, while minimizing contingencies and preventing family conflicts.

Authors:
Florencio A. Gramajo - Senior Associate, Guatemala
florencio.gramajo@ariaslaw.com
José Fernando García - Paralegal, Guatemala
jose.garcia@ariaslaw.com

Bibliography

1. Otherwise, the deceased's estate will be distributed in accordance with the provisions of the law, which may not be in line with his or her will.
   
2. It is pertinent to take into consideration that the applicable taxes will vary depending on the succession plan that is implemented.
   
3. Some of the legal figures described may be subject to special formalities required by law, such as being executed in a public deed before a notary or their registration in the relevant Public Registries.
   
4. Decree Law No. 106, Civil Code of Guatemala, 1964, article 935.
   
5. Decree Law No. 106, Civil Code of Guatemala, 1964, article 705.
   
6. Avendaño Arana, F. (1996). THE TRUST. PUCP, (50), 343-365.
   

The information provided by ARIAS® is presented for informational purposes only. This information is not legal advice and is not intended to create, nor does it constitute, an attorney-client relationship. Readers should not act on this information without seeking advice from professionals in the field.