Wealth Planning | 18 November, 2019

Do I include my descendants in my investment account?

Ricardo Ramírez Wealth Planning

Inheritance tax: How does it affect me?

Revenues from inheritance and gift taxes have reduced over the years; from an OECD average of 1.1% of total tax revenues in 1965 down to the present 0.4%.

When opening an investment account in a Bank to manage funds, many investors ask us if it is convenient to include a spouse or their descendants as co-owners to simplify inheritance procedures in the event of the death of the principal holder in the future.

From the succession point of view, most countries consider that a part of the inheritance must necessarily go equally to the descendants of the deceased. If the investment account implies a relevant part of the inheritance and we would have other descendants who do not participate as holders or one of those who do, keeps the funds, the rest of the heirs may not receive their share of the inheritance, creating a conflict between heirs that can even carry out the blocking of the account.

Exchange of tax information

From a fiscal point of view, when several people are co-owners of an account, they are presumed to be co-owners of the funds and their returns. He was usually the real owner of the funds -‘Beneficial Owner’- in English, who took over the tax obligations even though his descendants were listed as co-owners. As we move towards an increasingly intercommunicated world, where the exchange of tax information is widespread, the authorities of the country of residence can receive information on the returns of these funds, which they would not have declared because they understood that they were already declared by the real holder.

This can create problems for descendants who may be required by the tax authorities of their country of residence to give explanations since descendants of legal age must take care of their taxes. On the other hand, when there is also a tax on donations in the holder’s country of residence, it can be understood that including descendants as co-owners is, in fact, a donation to be paid.

From a regulatory point of view, financial institutions are obliged to verify the origin of the funds and identify their real holder or their Beneficial Owner. If the funds are put in the name of several holders, it would be necessary to justify before the entity finance how those funds have become the property of the other co-owners, for example, through a donation.

Inheritance Tax

There are some countries where these rules do not apply locally. In Mexico where there are no forced heirs and there is currently no inheritance or donation tax between parents and children, bank contracts can include the figure of the Beneficiary as a person – other than the holder – to whom the funds would be delivered in case of death of the holders. This in practice would be a legacy designation in that this particular asset is assigned to the beneficiary (legatee) independent of the distribution of the rest of the inheritance.

The most convenient when opening a personal investment account is that only the real owners of the funds appear as holders. If you want to give authorization to one or more people to instruct the bank, the most appropriate is to use the figure of the Representative. The procedure to change the assets in the name of the heirs in the event of the death of the holder is relatively quick, as long as there is an agreement in the distribution between them.

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