Practitioner's Guide to Preserving the Latino Legacy

• Publication year: 2020
• Author: By Ariana M. Perfecto, Esq.*

PRACTITIONER'S GUIDE TO PRESERVING THE LATINO LEGACY

By Ariana M. Perfecto, Esq.*

MCLE Article

I. INTRODUCTION

With each generation, Latin American immigrants are becoming wealthier and more aware of the need to work with California estate planners to protect their legacies. However, when a client from Latin America seeks an estate plan from a California estate planning attorney, the risk is that—though all parties might be speaking English—their communications will be hampered because the attorney and the client begin with different assumptions.

This article is designed to introduce California estate planning attorneys to some of the assumptions, needs, and understandings that many Latino clients bring to the estate planning process. The article also highlights many of the tax traps that can catch an estate planner who is working with a Latino client. After reading this article, the California estate planner should have a better idea of how best to communicate with, understand, and serve Latino clients. For convenience, reference will generally be made to Mexican laws and practices.

II. LEGAL SYSTEMS OF THE UNITED STATES AND MEXICO: IMPORTANT DIFFERENCES

While countless differences exist between the legal systems of the United States and Mexico, there are key distinctions that the practitioner should be aware of at the outset. Knowledge of these distinctions will allow the practitioner to clarify misconceptions routinely held by the Latino client.

A. Authorized Practitioners

Latino clients commonly confuse the role of a notary public in California with the role of a "Notario Publico" in Latin American countries. Importantly, a Mexican "Notario Publico" is licensed to prepare an estate plan. A California notary public is not.

In the United States, the chief purpose of a notary public is to prevent fraud by certifying the identification of signers of important documents.¹ California notary publics are prohibited from practicing law.² However, in Mexico, a "Notario Publico" practices law. A "Notario Publico" in Mexico must be a Mexican citizen by birth, have full legal capacity, be between 25 and 60 years of age, have a law degree, have at least three years of experience in a notary public office, and pass several rigorous exams.³ The Federal District in Mexico specifically requires that wills be executed, issued, and signed before a "Notario Publico."⁴

The California estate planning attorney should take steps to communicate the distinctions between a notary public licensed under California law and a "Notario Publico" licensed under Mexican law to his or her Latino clients, especially because the fees charged by a California notary public are significantly more attractive than the fees charged by a California attorney.

B. Marital Property

California is a community property state. The default rule is that, "Except as otherwise provided by statute, all property acquired by a married person during the marriage while domiciled in [California] is community property."⁵ The key statutory exception, of course, is separate property, defined in Family Code section 770.

In Mexico, there is no community property default rule. Instead, the marrying parties must immediately declare whether the property acquired during their marriage will be held as community property or as separate property.⁶ Notwithstanding their election, spouses have the freedom to enter into an agreement of their own.⁷

If the spouses elect to hold their marital property as community property, the surviving spouse will be the owner of the deceased spouse's assets that the spouses acquired during marriage.⁸ However, the deceased spouse's property acquired before the marriage will be disposed of according to the separate property regime discussed below, or according to the deceased spouse's will.⁹ The surviving spouse is permitted to stay in possession of the property until it is disposed of.¹⁰

If the spouses elect to hold their marital property as separate property, then the separate property regime applies.¹¹The separate property regime provides that if a deceased spouse dies without surviving issue, parents, or siblings, then the surviving spouse will be the sole heir.¹² If the deceased spouse has surviving children, the surviving spouse is entitled to a portion that is equal to the children's portion if the surviving spouse has no assets.¹³ If the surviving spouse has assets but with a value that is not equal to the portion to be inherited by the children, then the surviving spouse is entitled to receive an amount that is equal to the difference.¹⁴

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If the deceased spouse has a surviving parent(s), but no surviving children, then the deceased spouse's separate property will be divided into two portions—one portion to the surviving spouse and the other portion to the surviving parent(s).¹⁵ Finally, if the deceased spouse has surviving siblings, but no surviving issue or parents, then two-thirds of the estate goes to the surviving spouse and the remaining one-third goes equally to the surviving siblings.¹⁶

Due to the marital property regime in Mexico, Latino clients are familiar with the concepts of community property and separate property. However, they are typically unfamiliar with the concepts of joint tenancy and the right of survivorship. It is important that the practitioner take the time to explain these property concepts since spouses commonly hold title to real property in that form in California.

C. No Estate and Gift Tax in Mexico

The most important difference between the United States and Mexican tax regimes for the California estate planning attorney to be aware of is that Mexico has no estate or gift tax.¹⁷ Another important difference is that, unlike in California, an inheritance in Mexico is considered income to the beneficiary. However, an inheritance is tax-exempt under the Mexican Income Tax Law if properly reported to the Mexican Tax Authorities.¹⁸

D. Estate Planning Documents

California practitioners should be aware that the will, or "testamento," is the primary estate planning document used in Mexico to transfer assets on death. Additionally, there are numerous types of "testamentos" that are classified as either ordinary wills prepared under ordinary circumstances by a "Notario Publico," or as special wills created under extraordinary circumstances without a "Notario Publico" It is beneficial to explain to Latino clients the somewhat more simplified approach to wills in California and that, in California, a will typically plays a secondary role when prepared in an estate plan that includes a revocable trust.

The notion that the will may not be the primary estate planning document is strange to the Latino client. When a Mexican citizen dies in Mexico with a valid "testamento" directing the disposition of his or her property in Mexico, there is no probate process as would be typical in California. Instead, there is an estate administration process comparable to trust administration in California. The executor, or "albacea," of a Mexican "testamento" is tasked with managing, protecting, and dividing the property of the estate, and with carrying out the distributions set forth in the "testamento." Because a will is all that is required to accomplish a transfer of assets upon death in Mexico and other Latin American countries without the necessity of a court-supervised administration, Latino clients in California often make the error of preparing only a will, believing that a will is all that is required to avoid a court-supervised probate administration in California as well.

California practitioners should also be aware that the trust is a creation of the common law system. Civil law countries, such as Mexico, have no equivalent to the revocable living trust.¹⁹ There are only comparable substitutes that accomplish "individual trust-like goals."²⁰ Mexico has a statutory trust substitute, or "fideicomiso," that has only seen limited use as a family estate planning technique.²¹ The "fideicomiso" has failed to become an important estate planning tool largely because self-declared "fideicomisos" are not permitted and only Mexican banking institutions may serve as trustees.²²Furthermore, the discretion of the bank to make investments is quite limited and individuals born after the death of the settlor cannot be beneficiaries of the "fideicomiso."²³

As a result, Latino clients are largely familiar with the "fideicomiso" as a bank trust loophole for foreign nationals, rather than as a family estate planning tool. Under Mexican law, foreign nationals and foreign entities "cannot acquire direct ownership of lands or waters within a zone of one hundred kilometers along the frontiers and of fifty kilometers along the shores of the country."²⁴ To work around this restriction, foreign nationals and foreign entities often set up a "fideicomiso" through Mexican banks.²⁵ The bank holds title to the real property on the foreigner's behalf and the foreigner is the sole beneficiary.²⁶

E. The Validity of California Wills and Trusts in Mexico

The validity of a California will in Mexico that addresses property in Mexico is a question commonly asked by Latino clients. According to the Federal Civil Code in Mexico: "Wills made in a foreign country shall be effective in the Federal District and Territories if made in accordance with the laws of the country where they were executed."²⁷ Therefore, as long as the will is valid in California,²⁸ it will also be valid in Mexico. However, it is still recommended that Latino clients dispose of their property in Mexico with a Mexican "testamento" because the process of having a California will recognized in Mexico is lengthy and expensive, while the process of probating a "testamento" is quick and inexpensive.

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As discussed previously, trusts are a creation of the common law system.²⁹ Civil law countries, such as Mexico, generally deny recognition of United States trusts.³⁰

III. TAX CONSIDERATIONS FOR THE LATINO CLIENT

The...