For decades, many Latin American families have built substantial wealth through businesses, real estate, and investments. However, it is increasingly common for their children and grandchildren to be U.S. citizens or residents of the United States, particularly in states such as California, Texas and New York.

This reality raises tax considerations that may not have been anticipated when the family’s estate was originally structured. Transferring assets to children who are U.S. citizens or tax residents can have consequences that differ from those originally envisioned.

In Mexico, inheritances are generally exempt from income tax when received by Mexican tax residents. However, the tax treatment may differ when beneficiaries reside abroad. In certain circumstances, gratuitous transfers of Mexican real estate or shares in Mexican companies to nonresidents may be subject to a 25% Mexican withholding tax on the value of the transferred assets, subject to applicable exemptions and exceptions.

It is also important to consider what will happen when heirs eventually decide to sell those assets.

The sale of Mexican real estate or shares by nonresidents may trigger income taxes in Mexico, with rates that, depending on the applicable tax regime, can reach 35% of the gain. If the owners reside in California, they may also be subject to federal and state income taxes, with California’s top state income tax rate reaching 13.3%.

Furthermore, upon the heirs’ deaths, those assets could become part of their estates subject to U.S. federal estate tax, which has a maximum rate of 40%, taking applicable exemptions into account.

Given these circumstances, there are three important considerations:

1. Identify the tax residency and citizenship of beneficiaries. The transfer of Mexican real estate or shares may have different consequences depending on whether the beneficiaries reside in Mexico or the United States. Understanding these circumstances allows families to properly evaluate their available options.
2. Review estate planning structures. Depending on the assets involved and the family’s needs, it may be advisable to consider Mexican fideicomisos, trusts, or other mechanisms for organizing the transfer of wealth while accounting for the tax laws of both countries.
3. Plan ahead for changes in tax residency. This is particularly important when an asset owner is considering moving to the United States. Upon becoming a U.S. tax resident, the individual’s worldwide income may become subject to U.S. income tax. If the individual also establishes U.S. domicile for estate tax purposes, their worldwide estate may become subject to federal estate tax. It is therefore advisable to review existing structures before relocating, as certain planning options may receive different tax treatment after immigration.

Family circumstances and tax obligations evolve over time, meaning that an estate structure that was appropriate when originally established may require adjustments years later.

The transfer of wealth between generations deserves as much attention as its management, particularly when family members are subject to different tax systems.