The Strategic Use of the Joint Tenancy with Rights of Survivorship and its efficiency in succession planning

The study about the succession efficiency and the survival of business companies affected by an unplanned or improper organizational and succession process is one of the most important themes regarding the need of an adequate succession planning. 

Succession planning encompasses, among other possibilities, the adoption of a set of strategies aiming a greater efficiency in the organization of assets in a business company and the perpetuation of this business; but especially deals with the succession of ownership of the equity interest with operational and tax efficiency, focusing on better company governance and protection against third parties.

In the face of a worrying Brazilian economic scenario, the current political instability and being election year in the country, the search for investments abroad is relevant as it enables access to greater security and asset protection, to diversification of investments and to other markets more reliable and less volatile. 

It is a fact that carrying out operations abroad through the incorporation of a business company in the United States or in any Offshore jurisdiction, or even through an individual, does not remove the need and relevance of arranging a prior succession planning.

Especially financial or investment operations executed abroad usually are carried out through the incorporation of a business company (Ref:1) incorporated in the country where the assets/investments are effectively operated (“Onshore”) but the company may also be incorporated in a different jurisdiction from the one where the assets/investments are being operated (“Offshore”), in this case, jurisdictions with more favorable tax treatments are preferred. Such companies incorporated in Offshores are called Private Investment Companies (“PIC”).

Regardless of whether it is an Onshore or Offshore jurisdiction, in a business company outside Brazil, the death of a share owner implies a series of succession consequences, the following standing out: (i) the need to file a probate abroad; (ii) the possibility of paying inheritance tax abroad (transfer mortis causa); and (iii) the transfer of the company shares to the owner’s successors.

The first two points listed have bureaucratic and lengthy procedures, in addition, the succession is subjected to considerable expenses to support the mentioned procedures also having to bear the tax obligations for the inheritance transmission. 

Therefore, in case of assets located in the United States (Ref:2), like shares of a US company, the inheritance tax for non-US tax residents can easily reach the maximum rate of 40% (forty percent), considering the exemption of USD$60,000.00 (sixty thousand dollars). At the same time, in different jurisdictions with more favorable tax treatment (Ref:3), the succession process for assets and rights is bureaucratic, time-consuming, and costly, due to the obligation of hiring a local professional for the legal process.

About the third point listed, the possibility of unwanted third parties entering the business environment can cause power disputes, conflicts of interest, disagreements and even corporate dissolution or litigation between the partners.

Consequently, the use of the Joint Tenancy with Rights of Survivorship (“JTWROS”) clause in the international corporate sphere is a relevant succession planning strategy, mainly to avoid inheritance tax and the need for probate abroad, but also to “control the transfer” of the asset in the absence of its owner.

JTWROS refers to a legal structure of ownership in a condominium, involving two or more parties (Ref:4) for any type of asset (e.g. company shares). Each Joint Tenancy owner has an equal right to the asset, that is, all Joint Tenancy owners are considered co-owners of the same asset, in a condominium.

Under the “rights of survivorship”, joint tenancy owners who outlive the deceased owner are automatically considered owners of the property.

JTWROS translates into the exercise of the right of ownership by the “joint owners”, in an indivisible way, over the asset considered as a whole. While alive, the “joint owners” are indivisible holders of the same property right (co-ownership). Upon the death of one, the survivor becomes the sole owner of that property. Hence, nothing remains to be transmitted, inherited, or fractionated by third parties.

In the United States, it is possible to apply a (similar) institute to Corporations, but not to LLCs or LPs companies. In other jurisdictions with a more favorable tax regime, ideal for the incorporation of PICs, such as the Bahamas, British Virgin Islands (BVI) and Belize, it is possible to use the JTWROS clause.

The JTWROS is an institute existing in some countries governed under the Anglo-Saxon legal system and, therefore, is not applicable in Brazil (under the Romano-Germanic legal system), however is applied in the country the principle of plurality of succession courts, according to which, if there are assets in different countries will be necessary a probate proceeding in each of the jurisdictions involved. Consequently, always considering any possible limitation, under the article 17 of the “Lei de Introdução às Normas do Direito Brasileiro” (“LINDB”), Brazil must respect the application and effects of foreign laws. 

In the case of a JTWROS clause instituted in an Offshore at an Anglo-Saxon jurisdiction, the applicable law in Brazil, in the event of succession, must be the law of the Offshore jurisdiction itself, as determined in the article 8 of the LINDB.

The transfer of the assets will not be considered a donation, since assets located abroad are exempt from the probate process and succession in Brazil, being applied the succession rule of the deceased’s last domicile; or, in this case, the JTWROS clause.  

Also, the transfer will not be a donation because when the co-owner in a Joint Tenancy does not makes any financial contribution to the asset, he does not need to present it in his annual tax report in Brazil. Only upon the death of the owner the asset will become part of co-owner’s list of assets, this happens because of the “automatic succession” arising from the JTWROS clause.

JTWROS is in fact a useful and efficient tool to prevent probate abroad and avoid the payment of inheritance tax abroad. At the same time, it ensures the “transmission” of the asset to the “owner in a Joint Tenancy” with no obligation to apply the Brazilian legal rules for inheritance transmission.

In short, despite the strategic efficiency of the use of the Joint Tenancy with Rights of Survivorship clause as a succession planning instrument, it is inferred that the various particularities of each situation need to be carefully studied in the specific case and the possible tax effects/reflections on Brazil need to be prudently evaluated for a better decision making in this regard.

Ref:1 – To not diverge from the proposed topic, we later will write about the advantages of carrying out business operations abroad employing a legal entity based in an Offshore jurisdiction that has a more favorable tax treatment. 

Ref:2 – U.S. situs property/assets: American company stocks, real estate, tangible assets, etc.

Ref:3 –  Like the British Virgin Islands (BVI), Bahamas, Belize, Nevis, among others.

Ref:4 – It can be instituted between members of the same family, successors to each other, or between parties not endowed with any bond, that is, that are not related in a consanguineous or civil way with each other.