Financial products for planning inheritance

Financial products for planning inheritance

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There are only two things that are certain in this world, death and taxes, said Benjamin Franklin, and they go hand in hand when it is time to depart this world.

The best way to save your loved ones from taxes and heartache once you are gone is to plan out what to do with your estate. If you are somewhat taken aback when you hear these words, don’t worry, it is normal.

On the one hand, we tend to avoid everything to do with death and, on the other, we have learned that estate planning and taxes are very complex. Nothing could be further from the truth. The reality is that most people can organize this quite simply, using just two tools: a will and certain investment products.

The will, a key tool

The first thing you need to know to organize your legacy is to find out how inheritance works in Spain.

In general, the Civil Code establishes that all estates are divided into three equal parts (in Catalonia, the Basque Country, the Balearic Islands, Aragon and Galicia there are some differences). These are the so-called ‘tercios’ (thirds), which are organized as follows:

  • The ‘tercio de la legítima’, which corresponds to the heirs apparent. And who are these heirs? In order, they are the children and descendants with respect to their parents and ascendants; the parents and ascendants with respect to their children and descendants; the widow or widower, who will have the usufruct right to a part of the inheritance; siblings; and in case there are none, the remaining relatives. This third will always be distributed equally among all the heirs apparent.
  • The ‘tercio de mejora’, which is distributed among those same heirs apparent, but which can be distributed as you state in your will. If there is no will, it will also be divided equally.
  • The ‘tercio de libre disposición’, which you can leave to whoever you wish in your will. If you do not have a will, this third will also be distributed equally among the heirs apparent.

As you can see, making a will is the best way to plan your inheritance. Without one, everything will be divided equally among your heirs.

With a will you can decide issues such as:

  • leaving one of your children a larger share of the estate for whatever reason.
  • which specific assets you leave to each of your children, as long as you respect the division by thirds that you have just seen.
  • bequeathing part of your assets to a third person who is not your heir.
  • and, most commonly, making a will “from one to the other and the rest to the children” (if there are any), with which you ensure that your spouse will not lack anything when you are gone.

Making a will is not expensive or complicated. You can do it from just under 40 euros according to the General Council of Notaries, and you don’t even have to make an inventory of your assets. All you need to do is decide what percentage of your future assets you will leave to each person.

That is why, if you have to choose one tool for planning out what will happen with your estate, make it a will.

Investments that can help you with inheritance

Beyond a will, there are other tools that can help you and your loved ones when the time comes. These are particular investment and savings products that will make it easier for you to plan the inheritance.

The first is savings insurance, which is structured around life insurance and which allows you to choose the beneficiary in the event of your death. In other words, you can decide who you want to receive the money you have been saving without having to indicate anything in your will, because the money is not part of the estate unless the payment of premiums would prejudice the rights of the heirs apparent.

Moreover, in such a case, only the insurance premiums can be claimed, not the insurance indemnity itself.

Other financial products with which you can plan your inheritance are pension plans and guaranteed retirement savings plans (Plan de Previsión Asegurado or PPA in Spanish). In addition to helping you to reduce the income tax you pay, these products also allow you to designate the beneficiary in case of death.

If you inherit a pension plan, this capital is not taxed under Inheritance and Gift Tax, but as Personal Income Tax (IRPF). In this sense, a pension plan is taxed in the same way whether you receive it or someone else inherits it.

Other financial products such as mutual fund portfolios, index funds and shares do not enjoy these benefits. All these are included as inheritance and are taxed under Inheritance Tax without you being able to choose who will receive them in the event of your death.

Other useful tips

Beyond your will and the investments you can make to plan your estate, there are some tips that will make life easier for your loved ones and help them pay less taxes:

Take advantage of the “capital gains tax on death”

Capital gains tax on death (‘plusvalía del muerto’, in Spanish) is the tax rule that applies to the inheritance of mutual funds, stocks and most financial products (not pension plans and savings insurance).

Very briefly, most investments are taxed as follows: you pay between 19% and 26% personal income tax on your capital gains, which is the difference between the value at which you buy a share or a fund and the price at which you sell it.

What happens when you inherit shares? The heirs do not have to pay income tax on that gain:  for them the purchase price is the value of the share that appears in the Inheritance Tax.

Have cash and money in a joint account

This is a way to help your heirs pay for the costs of your death. Bear in mind that the average price of a burial in Spain is around 3,800 euros.

Having some money in cash will help them to meet these expenses and others until the inheritance is settled, which will take about a month and a half, in the absolute best case scenario.

Along the same lines, having a joint account with the children or your spouse, where they appear as co-owners will facilitate their access to that money. In this way, they will have access to cash to maintain their standard of living, as in the previous case.

Have a death insurance policy

The main role of death insurance in Spain is not only to cover burial expenses (which it also does), but rather to offer a service to families upon the death of a loved one.

In addition to paying the expenses, this insurance will take care of all the formalities related to the burial, obituaries, formalities with the public administration and even the management of the will, making life easier for the relatives. This is the true value of this kind of policy, beyond the financial aspect.

In any case and in summary, if you want to start planning your inheritance, start by making a willThis will avoid conflict between your heirs and make sure that everything is the way you want it to be.