Most families do not talk about inheritance until there is an emergency. And when that emergency arrives, the room for tax manoeuvre is minimal, because what should have been done had to be done years earlier. Succession planning is neither a morbid subject nor one reserved for large fortunes. It is simply making decisions with enough time for them to take effect.
These are the main strategies available, their advantages and their limits.
Why planning during your lifetime makes the difference
Inheritance Tax is calculated on the value of the assets at the time of death. If the estate has grown significantly, because property has appreciated, or because there are investments with latent gains, the taxable base will be higher and so will the tax.
Planning during your lifetime allows you to transfer part of your estate progressively, taking advantage of the reductions and allowances available in each Autonomous Community, spreading the transfer over time and structuring the assets in the most tax-efficient way.
"The best time to plan an inheritance is when there is no rush at all. The second best time is now."
The most effective strategies
Lifetime gifts
Transferring assets to the heirs during your lifetime, instead of waiting for the inheritance. In the Valencian Community, gifts between parents and children also carry a 99% allowance in Gift Tax for the first €100,000 per donee.
The key is spreading it out: several gifts in different years let you use the reductions multiple times. The limit is that they cannot be made in fraud of creditors or empty the estate needed for the donor's support.
Life insurance with a designated beneficiary
Life insurance with a designated beneficiary does not form part of the estate; it passes directly to the beneficiary, with distinct tax treatment. In many Autonomous Communities there is a specific reduction for life insurance that can be very significant.
It is a particularly useful tool for guaranteeing immediate liquidity to the heirs, to pay taxes, for example, without having to sell assets at an unfavourable moment.
Succession agreement
In some Autonomous Communities, not under common civil law, but in Catalonia, the Balearic Islands, Galicia, Aragon and the Basque Country, it is possible to agree during your lifetime how the inheritance will be distributed through a notarial succession agreement. It has the advantage of fixing the value of the assets at the time of the agreement, not at the time of death.
If the assets are going to appreciate significantly, transferring them through a succession agreement now can mean a very relevant tax saving in the future.
Family business: the 99% reduction
The transfer of a family business, or of shares in a company that meets the legal requirements, can benefit from a 99% reduction in Inheritance Tax. The requirements are strict: the business must be active, a family member must perform management duties with significant remuneration and the shareholding must exceed certain thresholds.
Structuring family wealth through a company can be a very efficient strategy in the long term, but it requires planning years in advance so that the requirements are consolidated at the time of the transfer.
Optimising the will
A well-drafted will is not just a document that distributes assets, it is an instrument of tax planning. The choice of the type of legacies, the designation of usufructs, the distribution among heirs to equalise taxable bases or the inclusion of substitution clauses can generate significant tax differences.
A will without tax optimisation can cost the heirs far more than necessary, even with the testator's very same intentions.
The limits of planning: the reserved share (legítima)
The freedom to plan an inheritance is not unlimited. The Civil Code establishes the legítima (reserved share), the portion of the inheritance that must by law go to the forced heirs (children and descendants, and failing them parents and ascendants). Under common civil law, the children's reserved share represents two thirds of the estate.
Any succession planning must respect these limits. Gifts made during your lifetime are also counted for the purpose of calculating the reserved share, what is known as collation, so that an excessive gift to one of the children can create conflict with the others when the inheritance is opened.
Succession planning requires individual analysis. The right strategies depend on the specific estate, the family composition, the Autonomous Community of residence and the time horizon. What is optimal for one family may not be for another.
When is the time to act
The practical answer is: the sooner, the better. Some strategies, such as setting up a family business or starting a plan of spread-out gifts, need years to consolidate and generate the maximum tax saving. Others, such as reviewing the will, can be done at any time.
At Equus Capital, the succession law team analyses each estate and family situation to design the most efficient transfer strategy. First consultation free and with no obligation.