Estate planning is the process by which a person analyzes and determines, in an organized and planned manner, the destination of their assets, in order to avoid conflicts among their heirs and reduce the expenses and tax costs associated with the transfer of their assets upon death.

This report does not aim to analyze in detail the different scenarios that may arise in estate matters, as these can vary widely and depend on a range of circumstances, such as: the person’s marital status, whether they are in a domestic partnership, whether they have minor or adult children, whether they have been married more than once, whether they entered into a prenuptial agreement, whether they have a separation of property regime, whether they executed a will, whether they made any gifts, etc.

Proper estate planning requires analyzing the circumstances mentioned above, the assets and/or liabilities the person may have, and how they wish those assets to be distributed.

In our country there is no established culture of estate planning, as may exist in other countries. This means that if no provision is made for what will happen to the deceased’s assets, rights, and debts, the rules on succession set forth in current law will apply by default.

Proper estate planning offers the following advantages:

• Avoiding conflicts among heirs, spouses, and other parties.
• Distributing assets according to the deceased’s wishes, determined in advance of the succession.
• Ensuring that agreements reached with heirs are honored.
• Protecting heirs from potential debts of the deceased.
• Ensuring the continuity of the family business.
• Reducing expenses and taxes at the time of succession.

We believe it is essential to understand the possible strategies available in estate matters in order to carry out proper planning. This is not an easy topic to address, and few people take the time to consider it, but those who do can avoid major problems for their successors and their businesses — businesses that have grown through great effort and dedication, and that their founders do not wish to see disappear quickly due to conflicts among their successors.

Succession and the Challenges of “Family Businesses”

We refer to “family businesses” as those in which the partners or shareholders are members of the same family or maintain a close relationship of friendship, know one another, and share a special bond of trust arising from family, personal, or professional ties. In all of these cases, we are generally dealing with companies with few partners, a very close relationship, and limited possibilities of transferring an ownership interest to third parties. These are “closed” companies, in the sense that there is no opening toward third parties to participate in the company, nor a market to turn to in order to sell an ownership interest, as exists in the case of publicly traded corporations whose shares are listed on a stock exchange.

This lack of liquidity means that if one partner wishes to sell their interest, they will have to sell it to another partner, and if that partner has no genuine interest in purchasing the shares, they will only buy them at a price below their real value. This often results in the partner wishing to sell being unable to do so, or initiating legal action against the company and its partners in order to pressure for, and attempt to obtain, a higher price for the sale of their interest — which always ends up harming the company and the partners, who must bear the costs and professional fees involved.

This situation frequently arises when the heirs of a partner acquire the status of partners in the company. Heirs do not become partners by their own choice, out of any “affectio societatis” with the remaining partners, but rather become partners of people with whom they might never have chosen to be partners had they been able to decide.

It is common for different partners to have different expectations regarding the company: some may wish to reinvest profits into the business, while others expect to receive maximum possible returns. Some may be employees and thus receive a regular salary, while others are not. Each partner’s personal situation also differs in terms of their financial needs, which can likewise generate conflicts, as some partners may seek to meet their needs through the company or through the sale of their interest.

In order to avoid problems upon the death of one of the partners, it is possible to establish in advance solutions for what will happen in that scenario. Since most companies in our country are organized as corporations (SA) or simplified stock companies (SAS), we will analyze these cases below.

The Case of the Corporation (SA) or SAS

Shares of a corporation or an SAS are considered personal property, and therefore all succession rules that apply to any other asset apply equally to them.

The general principle is that share transfers are unrestricted; therefore, if there is no prior agreement among shareholders, the shares will pass to the heirs or spouse, as applicable.

It is important to note that, in the case of bearer shares, the holder of such shares is, as the term implies, whoever physically possesses them. This does not mean that bearer shares should not be included among the assets of the estate. What often happens is that whoever holds possession of the bearer shares may claim that the shares belong to them and not to the deceased, seeking to exclude them from the estate. This gives rise to all manner of disputes and conflicts, which invariably end up harming the heirs and the company.

Where prior agreements exist with the eventual heir regarding share ownership, it is important that these be properly reflected in the distribution of the shares. In one case in which we provided legal advice, the father believed that 30% of the company already belonged to his younger son, since the son had worked in the company his entire working life, and that the remaining 70% was what should pass into the estate upon his death. Although this had been agreed upon with all of his children, the shares were bearer shares and were kept in a safe in the mother’s name; given the state of the documentation, we warned the father that his intentions, the actual facts, and the verbal agreements might not be honored. In this case, we suggested issuing share certificates in such a way that one certificate representing 30% would be held by the younger son, and another certificate for the remaining 70% would remain in the father’s safe, so that it could be properly included in the estate.

In the case of registered shares, since the company’s records identify the registered holder of the shares, the succession will proceed according to what is reflected in those records.

Regarding the rights of successors, until the assets comprising the estate are formally distributed, the successors will be co-owners of the shares and, in order to exercise their rights, must appoint a common representative to attend shareholders’ meetings and represent them.

Shareholders of a corporation or an SAS may regulate, through shareholders’ agreements or share trusts, what will happen upon the death of a shareholder. The following mechanisms may be established to allow the heirs of a deceased shareholder to exit the company:

• Sale options for the successors.
• Purchase options for the company.
• Purchase options for the remaining shareholders.
• Redemption of the shares by the company.
• An obligation to continue complying with a pre-existing shareholders’ agreement.

In all of these cases, in order to ensure the proper functioning of the agreed-upon arrangement, it is essential to also establish the method by which the shares will be valued for purposes of exercising the purchase or sale options. Determining and agreeing on the value of the shares is one of the most frequent points of conflict in these situations, so defining a valuation method is essential.

Conclusions and Recommendations

We believe it is necessary to analyze the potential rights and obligations of heirs and to arrange for estate planning appropriate to each individual’s needs.

Estate planning is a subject we are not accustomed to addressing in our country, but it is essential in order to avoid conflicts among heirs and, eventually, between heirs and third parties (primarily the remaining partners in the case of companies).

To the extent that business is conducted through “family businesses” — that is, businesses made up of family members, friends, or professional associates — proper estate planning is essential to avoid conflicts among partners and to protect the continuity of the business.

There are tools available to eliminate, or at least reduce, the potential for conflicts among heirs and within the “family business”; implementing appropriate solutions requires analyzing each situation and planning accordingly.