ITCMD rate may rise; understand how to plan to pay less tax – 08/19/2023 – From Grain to Grain

The subject of succession planning is usually only considered by the wealthiest. However, it should be in everyone’s interest. Concern means that you care that your heirs benefit and your estate is not reduced by taxes or lawsuits.

Currently, the rate of Tax on Transmission Cause Mortis and Donation, ITCMD varies between 1% and 8%, depending on the State. However, periodically, the discussion about its elevation comes back to the fore. In this sense, I discuss succession planning alternatives to mitigate this impact.

At this time of tax reform, this topic has been discussed and was on the cover of Valor Econômico last Thursday and Folha de São Paulo this Friday.

As widely reported, the Proposal for an Amendment to the Constitution, PEC 45 voted in the Chamber in July, is now being discussed in the Senate. The discussion can lead to five changes:
1 – Uniformity of the rate among states with the application of a progressiveness relative to assets;
2 – Possibility of raising the maximum rate to 16%;
3 – Alteration of the collecting state as the one in which the Donor resides, although the person responsible for the payment is the heir or donee;
4 – Taxation of assets inherited abroad; It is
5 – Exemption in transmission or donation to philanthropic entities;

Succession planning deals with ways to mitigate the effect of this tax and other costs in the succession of your estate.

The first point to understand is that not all of your assets may be subject to tax. For example, if you are married in total or partial community property, 50% of the assets, known as Meação, is destined to the spouse and is free from ITCMD.

Of the other 50% of your assets, in the case of the partial communion regime, which is the most common, 25% are destined to the legal heirs and the other 25% can be destined according to the will or are reverted to the same legal heirs. This portion that is subject to ITCMD.

There are three basic ways to plan the succession in order to reduce the impact of the tax:
1 – Apply part of the portfolio in private pension products such as VGBLs and PGBLs. Only a few states (Acre, Goiás, Maranhão, Minas Gerais, Pará, Paraíba, Paraná, Rio de Janeiro and Sergipe) were legally able to collect the ITCMD on funds transmitted by these vehicles. However, in 2021, the STJ analyzed and decided that VGBLs are not subject to ITCMD. Therefore, the states only question the charge for PGBL-type plans.
Another advantage of pension plans is that, according to Art 794 of the Civil Code, the choice and distribution among beneficiaries in these plans does not need to follow the rules of succession. However, this may be questioned by the legal heirs;
2 – Constitution of life insurance of the type as whole life. These vehicles are interesting not only for the transmission of assets greater than the legal distribution or for people who are not legal heirs, but also as a form of asset shielding for legal cases, including debts, as they cannot be seized. Also, the compensation is exempt from income tax. However, there is a cost involved;
3 – Anticipate the sharing or donation in life. Depending on how you execute this gift, you could even exempt your heir from any tax.
For example, in the state of São Paulo, donations of up to 2,500 UFESPs per year are exempt from ITCMD. Currently, the value of UFESP is R$34.26. Therefore, you can donate up to BRL 85,650.00 per year to your heir and he will not be taxed. In 20 years, more than R$ 1.7 million could be donated freely. It is important to pay attention not to donate resources that you plan to use in life.
For larger amounts, or for States without the exemption benefit, the advantage of early donation is to lock in today’s lowest rate. The donation of real estate, shares of companies or quotas of exclusive funds can be made with reservation of usufruct. Thus, you continue to be entitled to income from dividends, rents or having the right to use for life.
In the state of São Paulo, the process of early donation with usufruct can be done with the payment of only 2/3 of the ITCMD due. In this case, the tax rate would be only 2.66%. According to the lawyer David Roberto Soares da Silva in the book Plano Patrimonial by Editora B18, currently, there is a loophole to question the payment of the remaining 1/3 when the usufruct is terminated.

Although much commented, the creation of a holding company for the capitalization of real estate does not exempt the collection of the tax on transmission. However, this business structure facilitates early donation with usufruct. In addition to being able to bring tax savings, as the ITCMD in the donation of the quota may affect the equity value of the company, and this may be less than the market value of the properties held.

Previously used to evade taxation, companies offshore will be subject to taxation with the new PEC. Also, their Income Tax taxation should become less advantageous from next year. Therefore, they are no longer an ideal vehicle for national succession benefits.

The first two estate planning strategies are most applied when it comes to financial assets. Also in high financial assets, that is, above R$ 50 million, structures of closed restricted funds can be created that would allow the donation of quotas with usufruct.

The subject of succession planning is vast. I focused more on the tax part related to ITCMD. However, more than just mitigating the effect of taxes, succession planning is fundamental for the protection and perpetuation of built heritage.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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