Usually, the recipient of an
inheritance receives an asset of positive value; this being almost universally
the intention of testators, in making Wills.

However, even in the post- financial
crisis period in Spain- where property values are gradually increasing in most
areas now- many inheritance situations arise in which a very careful analysis
has to be carried out. This is required, to ensure that there is, in fact,
positive net value to the beneficiaries. Surprisingly frequently, the net value
to the beneficiaries in Spanish inheritance cases can in fact, prove to be
negative.

Some examples of potentially
problematic cases are:

1. Negative Equity Cases. In the years leading up to the financial crisis (in
particular 2001-2007), Spanish banks became very relaxed about the loan to
value ratio on new mortgages. In many cases, loans were made which exceeded
100% of the property’s value/ purchase price- funds being made available to borrowers
also to cover purchase costs and taxes; and property improvement works/ furnishing,
for example.

The drop in the Spanish
property market during the period 2007-2013 in many areas of Spain was so
severe, that in many cases, values of mortgaged properties fell to 50% of the
loan amount secured against the property. Even after a few years of recovery,
many Spanish property owners remain in negative equity, even though they
maintain mortgage payments, so as not to lose their home- and in the hope that
values will eventually increase to the level at which there is positive equity.

In any Spanish inheritance
case where there is a mortgage (especially what appears to be a high mortgage
amount relative to the property’s estimated value), it is essential to obtain a
professional independent valuation of the property as early as possible in the probate
process. Apart from anything else this valuation will be used to carefully
assess the taxes and costs which will be payable in the Spanish inheritance process.
In addition, there are taxes and costs which would be payable in the Spanish
property sale process (if the property were to be sold on the open market).

Total Spanish property sale
taxes and costs can amount to approximately 12% of gross sale price; and total
Spanish probate taxes and costs can often be between 5-10% of Estate value. So,
the combination of all these taxes and costs can significantly erode the net
value of an inherited Spanish property, which is then intended to be sold on
the open market.

It is incumbent upon the
Spanish probate professional representative to carry out this assessment; and
to advise beneficiaries accordingly. Failure to advise beneficiaries that the
net value to be inherited is negative (if that is the case); and as to the
options which are therefore available to the beneficiaries, would be a serious
dereliction of the professional’s responsibility to the client.

2. Equity Release Cases. This is a specific type of situation within the
negative equity genre of case. There was particular growth in sales of equity
release packages in the pre- financial crisis period in Spain; and the percentage
of negative equity situations arising from equity release cases is still
particularly high. In any Spanish probate case where there is an equity release
loan, it is essential at the outset, to obtain a completely up to date
statement from the lending company/ bank; and to get comprehensive details as
to the calling in/ redemption of the loan, to be able to make early calculations;
and advise beneficiaries as to the viability of inheriting.

3. Low Asset Value Cases. In many Spanish probate cases- particularly where
there is no real estate interest in the Spanish Estate, there remain other
minor assets, such as a vehicle or a bank account in the name of the deceased.
In some circumstances, a simplified Spanish probate process is possible;
avoiding the complexity and cost of a Notarial Deed- but not a fiscal
declaration, which is always required. But in many other Spanish probate
cases (and every case where there is a real estate interest in the Spanish
Estate), the ‘full blown’ Spanish probate process is legally necessary- including
the execution of a Notarial Deed. As such, the basic costs of the Spanish
probate process are such that, in many cases, they exceed the value of the
assets in question.

Solutions

The role of the Spanish
probate legal representative in cases where asset values fall short of
inheritance taxes and costs, is to advise the beneficiaries as to the options they
have available to them.

In some cases, although it
may appear wasteful or irresponsible, it is advisable and safe to take no
action; so neither to inherit nor to renounce.

In other cases, renunciation
is advisable. But even formally to renounce a Spanish inheritance entitlement,
the Spanish legal representative may need a Power of Attorney signed by the beneficiaries-
and possibly also the execution of a Spanish Notarial Deed. Both of these
processes involve costs on the part of the beneficiaries- (aside from the professional
charges of the legal representative). So, costs still need to be carefully
evaluated, even in the event of a renunciation of a Spanish inheritance
entitlement.

Finally, and very much a
last resort (and ensuring, of course, that the very strict Spanish law
professional conduct rules and fiscal compliance details are fully adhered to);
some Spanish legal representatives are willing in certain cases (by specific
written agreement with the beneficiaries), to step in; claiming the inheritance
in the name of the beneficiaries, but then to retain for themselves an asset.

This can be a feasible
solution where the cost to the beneficiaries to inherit would otherwise exceed
the net value of the inheritance. If the legal representative does not have to incur
third party professional charges, then it is possible that there could still be
a net benefit to the legal representative of receiving the asset in place of
the beneficiaries- at least then leaving a ‘clean’ situation. And assuming the
financial situation allows that, with at least some financial compensation then
being paid to the beneficiaries by the legal representative.

The above is non-exhaustive,
general advice. The Legal 4 Spain team is always
available to provide preliminary advice on a no- obligation basis in relation
to Spanish inheritance cases.