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5 tools for saving money on your inheritance

5 tools for saving money on your inheritance

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30.Dec.2022

The best way to save on taxes is to plan your actions from one year to the next, and not just wait until you have to fill in your income tax return. With an inheritance it is exactly the same.

The big difference is that you know when you have to pay your taxes, but you don’t know how much time you have to plan your inheritance. The solution? Do it as soon as possible so that nothing is left to chance. This is how you can really save your loved ones time and money.

What is estate planning?

Planning your estate is all about thinking about your legacy, how you want to distribute it and what you can do today to reduce the amount of taxes you will pay and make life easier for your loved ones when the time comes. It’s that simple.

Which assets am I going to bequeath? Should I give those things as a gift during my lifetime or leave them as an inheritance? How do I want to distribute my assets? Do I want my children or my spouse to inherit? These are some of the questions you should be asking yourself.

From there you will be able to think about what is the best way to leave your estate, how to distribute your assets the way you want, pay the least amount of taxes possible and make the process easier for your heirs.

Here are five tools that can help you do just that.

Make a will

A will is the central inheritance planning and savings tool.

Using a will you will be able to decide how you want to distribute the assets, always within the limits established by law. For example, you can decide if you want to leave any of your heirs more than the rest, and even which assets each one gets (again, without ignoring the “thirds” established by the Civil Code).

In this way, if you are married, you can establish that your spouse gets the usufruct rights to all your assets with a “will for each other and what is left for the children”.

Likewise, you will be able to bequeath a part of the inheritance to whomever you wish, whether or not that person is a forced heir, thanks to the third that you can dispose of freely. Without a will, everything will go to your heirs.

A will allows you to bequeath your assets the way you want and not the way the law dictates. In addition, it is also a tool for saving time and money.

For starters, it saves money when processing the inheritance, since you do not have to draw up the deed of declaration of heirs, which is done before a notary public.

Gifting assets while you are alive

Gifts are a way of anticipating an inheritance during your lifetime. In fact, an heir cannot receive more assets through gifts than they are entitled to from the estate, and if they do, the other heirs may challenge the inheritance.

A gift is an alternative to inheritance that has its advantages and disadvantages, from a tax and management point of view.

In fiscal terms, a gift is also taxed. This is paid through Inheritance and Gift Tax, and it is the same as for an inheritance, but is accounted for in the gift section of the tax. Just as with an inheritance, the person who receives the goods or money pays.

As a general rule, gifting is more expensive than bequeathing, but it all depends on the Autonomous Community in which the recipient (the person receiving the gift) lives, what is being gifted, and the purpose for which the gift is made. And there are various allowances that you should be aware of.

The most common question here is usually: is it better to gift your home or to leave it as an inheritance? Again, the general rule is that it is usually better to inherit than receive a property as a gift.

On the one hand, inheritance tax rates are lower. On the one hand, inheritance tax rates are lower. On the other, when gifting a property, the giver will pay the same taxes as if they were selling the house (on the difference between the purchase price and the sale price). With an inheritance, the deceased does not pay taxes.

That being said, a gift can be a way to save taxes if planned properly. You will understand why in the last point.

Use the right financial products

Just as there are different financial products depending on your risk profile, there are also those that allow for better estate planning.

Life-savings insurance is the best example, as it allows you to designate who will receive the money in case of death, something that mutual funds or a stock portfolio, which will be divided among all the heirs, do not allow.

In this article we explicitly address which financial products to use to plan your legacy.

Preparing for the payment of taxes

Inheriting assets involves paying taxes and it is important to plan for this. In other words, make sure that your heirs will have enough funds to pay the taxes, and also ensure that they will have to pay as little as possible.

It is possible to prepare for the first eventuality by leaving some money in a current account so that the heirs can use it, although life insurance or money from investments such as shares or investment funds would also work for this. When the time comes, your heirs could request access to this capital to pay the Inheritance Tax, which is a requirement for accessing the inheritance.

And how can you pay less tax when you inherit something? One way to reduce this tax bill is to advance part of the estate through a gift. This is because, in an inheritance, the more you receive, the more you pay. By giving a gift you affect the progressive nature of the tax, since you reduce the taxable base (the total amount you inherit and which is used to calculate the tax).

Making it easier when you pass away

Finally, one of the advantages of thinking in the long term is that you can make life easier for your loved ones.

In the same way that taxes have to be paid, there are also a series of expenses to be met and arrangements to be made when someone dies. The average cost of a funeral in Spain is 3,700 euros according to the OCU (Spanish Organization of Consumers and Users), although there are huge variations between the different Autonomous Communities.

You can plan these expenses by leaving money in cash, through a life or death insurance policy that, in addition to covering the expenses, will take care of death-related paperwork, such as requesting a widow’s pension or informing the Social Security, for example.

In the end, planning your estate will help you to think about your future, and that of your loved ones when the time comes.

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