Exclusive to A.M. Costa Rica
Expats and Costa Ricans alike are dumping their companies that hold property and other assets because they feel they will save money in the long run by putting the asset in an individual’s name. Granted keeping a company costs money, but it is cheap compared to what probate costs when someone dies. Everyone should know the facts about death and transferring assets in Costa Rica.
Many attorneys promote the business of closing companies because to do so is a handsome fee for them. What they do not explain to their clients is probate in Costa Rica is costly, much more expensive than keeping a company holding assets up to date.
Here are the facts:
Most people using a company to hold an asset like property use an inactive entity like a sociedad anonima, an anonymous society in English, S.A. for short or a sociedad de responsabilidad limitada, a limited liability company in English, S.R.L. for short but also known as an L.L.C.
Creating an inactive company can range from $500 to around $1,000. Keeping it alive and well each year costs an estimated $250. This amount includes $125 of company taxes required by Law 9428 and an additional $100 to pay a professional to file the yearly stockholders and transparency report now required by Law 9416.
Probate on the other hand can cost thousands of dollars to move assets from a deceased person to another even if there is a will in place.
Here is an example and the math:
The following information and calculations are meant to be an illustration. They are estimates. They may vary based on factors not contemplated here.
Bob came to Costa Rica to retire with his wife, Alice. They bought a house. It cost $150,000. Alice wanted to put the property in a Costa Rican company, but Bob objected saying it would be too expensive to maintain. So they put the property’s title in his name. Bob made a Costa Rican will and gave all his worldly possessions to Alice upon his death
Bob died. Alice went to an attorney and requested transfer of the house into her name since Bob left it to her in his will. She about fainted when she looked at the quote to do so.
• Property value: $150,000
• Attorneys fees for probate: $13,297
• Probate publication required by law: $70
• Appraisal required by law (est. 1%) $1,500
• Transfer costs (est. 2.5%) $3,750
• Attorney fees to transfer property (est. 1%) $1,500
• Total cost $20,117
People do not realize that when something is willed to them and it is registered in the National Registry, it needs to be legally transferred for them to acquire ownership. Probate in Spanish is called a processo successio. That is the legal procedure attorney use to move an asset from the name of a deceased individual to another.
The legal fees are based on a sliding percentage of the value of the assets. Here is the fee schedule based on the value of Bob’s property of $150,000 (represented in U.S. dollars at an exchange rate of 580 colons to one U.S. dollar):
• Asset value from $0 to $28,448 — 10% of value = $2,845
• Value from $28,448 to $142,241 — 7.5% of value = $8,534
• Remaining value from $142,241 to $150,000 — 5% of value = $388
• IVA (sales tax) of 13% = $1,530
• Total attorneys fees = $13,297
If Bob had put the property he bought with Alice in an inactive company, lived and held the company for 20 years, it would have cost him around $6,000 assuming he had paid $1,000 to form the entity and $250 a year to maintain it, according to Costa Rica’s current laws.
On the other hand, Alice is going to have to pay out $20,117 to get the property he willed to her put in her name, maybe more depending on the attorney she has to do the work.
It is pretty easy to see it is better to keep property in a company rather than in a person’s personal name for financial reasons.
The reason many people are moving their real estate assets out of companies and into an individual’s name is for lack of knowledge of the facts. Many attorneys are not good at explaining the nitty-gritty details of legal processes to people. Some of them are pretentious and lack good communication skills.
What would have happened if Bob had the property in a company when he died. Well, that depends on how well the company was put together when he and Alice formed it. There are many ways an entity created to hold assets can be constructed to protect the shareholders in the event of a person’s death or major disability.
In many cases, succession is not even discussed when forming a company. Dumb, but true. Most people just say to their attorney, “. . .we bought a property, make us a company to hold it.” Worst yet, the professional does not do the job and explain the odds and ends properly to their clients.
In summary, it makes financial sense to hold valuable assets in Costa Rica in a legal structure like an S.A. or S.R.L. to protect love ones when death comes knocking at the door. Most people cannot afford the high cost of probate in this country.
Article first published in A.M.Costa Rica on July, 6, 2020.