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A Clever Clause Can Dodge the Probate Mess

by Garland M Baker on August 7, 2006

Now there is a new way to duck messy probate in Costa Rica.

Thanks to an avid reader with a ton of patience, a limited liability company called an S.R.L. in Costa Rica, is now an even better vehicle for holding assets and succession planning. Most professional people do not know this secret.

Limited Liability companies are great for holding properties and managing businesses, but if there is only one manager and the manager is taken by death, a long legal struggle can take place.

If there are multiple managers, the liability company runs the risk of internal confusion and sometimes theft.

Technically, S.R.L. stands for Sociedad de Responsiblidad Limitada in Spanish. An S.R.L. is equivalent to an L.L.C., which stands for limited liability company in other parts of the world.

Two or more people form the business structure and hold shares in the organization. One person usually manages the company, but there can be more than one, many in fact. There is no limit to the number of managers a limited liability company can have.

As flexible as a limited liability company is, if there is only one manager, his or her absence, as in death, would freeze everything in the company until there was a shareholders meeting. In many cases the manager is the majority shareholder further complicating matters.

If the limited liability company has more than one manager, too many bosses tend to mess things up as a rule. More importantly, one of the managers could go wild and sell off all the assets of others. It happens.

In succession planning, some parents make their offspring managers and create the same problem. The kids go nuts and sell off all the assets of the parents.

Now it is possible to make the second and subsequent managers’ positions conditional based on succession.

The secret is simple, but it took the Registro Nacional more than three months to approve the language. It goes this way:

In the constitution of the limited liability company in the clause outlining management there are two parts. One lists the managers and the other outlines their powers in the company.

One seeking to use this trick should list all the managers in this section giving them all the same power to manage the business affairs of the entity. However, after this is written, at the end of the clause, one should add a section stating that if the first manager is not available or incapacitated that is when the second manager can take the place of the first, not before. The same can be true for a third manager. If the second is unavailable, the third can take the place of the second.

Actually, the end of the clause on managers can be flexible. Another option would be to have managers two and three act jointly in the absence of the first.

In the clause, it is important not to mention death. The Registro Nacional at one time accepted the word death as part of the clause but will no longer do so. That’s why it rejected the setup of a limited liability company for the avid reader, who wanted to pass on assets to a third party in case of death. Fortunately, the reader was able to wait three months while this new concept of managerial sucession got approved by the technicians at the Registro.

The essence of the legal language is to substitute, not replace, someone in the management position. However, this works perfectly in the case of death, avoiding probate in the same step.

For example, Pete has a property in Costa Rica and puts it in a limited liability company, making himself the manager. Pete, with foresight, makes his son Pete Jr. a manager in his permanent absence or disability.

Pete dies. Pete Jr., as manager, can move any assets in the limited liability company to another one that he controls and does not have to go through probate to do so.

Probate is a thing to avoid in Costa Rica, much like it is in other parts of the world. Usually, it is a long road filled with legal potholes. Big ones.

It is possible to setup sociedad anonimas or S.A.s, a legal structure like a corporation, in a similar fashion, but it is much more difficult because S.A.s always have a president, a secretary, a treasurer and a fiscal. They are a more complex type of an organization usually answering to stockholders.

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