Spanish Probate- Dealing with Onerous Spanish Assets
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:
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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.
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.
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