International Inheritance Taxation in Andalucia: Foreign Life Insurance and Trusts

The Tax Treatment of Foreign Life Insurance in Andalucia

If the deceased had a life insurance policy in a foreign country and you are the beneficiary, you should know that in Andalucia, this amount is not taxed as income on your personal income tax (IRPF). Instead, it's included in the Andalucian Inheritance and Gift Tax (Impuesto sobre Sucesiones y Donaciones, ISD). This is a crucial point, as many people mistakenly believe it's declared as ordinary income.

Andalucian law provides for a specific tax reduction for this type of inheritance. Each beneficiary of a death benefit life insurance policy can apply a reduction of €9,195.49 on the amount received. This reduction is a state-level provision, although some autonomous communities in Andalucia can improve upon it. It's important to remember that this deduction only applies if the policyholder and the beneficiary are close relatives (groups I and II of kinship).

When you receive the payment, you must include the amount in your self-assessment of the ISD, clearly identifying it as a life insurance benefit.

Example:

Imagine María, a resident of Valencia, receives an inheritance from her father, who lived in Argentina. Among the inherited assets is a life insurance policy taken out in Switzerland, of which María is the beneficiary. The Swiss insurance company pays her €150,000.

Since María is a tax resident of Andalucia, she is obligated to declare that €150,000 in her Inheritance Tax self-assessment in Valencia.

Because her father passed away and she is the beneficiary, María can apply the €9,195.49 reduction for the life insurance, which lowers her taxable base. The final amount she pays will vary depending on the applicable law.

Additionally, because the deceased was not a resident of Andalucia, María can apply the regulations of the Valencian Community, benefiting from the tax bonuses this region offers for direct heirs.

It is crucial to get a certificate from the foreign insurance company that confirms the amount paid and the date of death. This document will be essential to attach to your tax return and to justify the amount received to the Tax Agency. While life insurance is often exempt or minimally taxed in many countries, Andalucia generally does not allow for a deduction of foreign taxes paid, as it lacks double taxation treaties for inheritances with most countries. Therefore, the bulk of the tax burden will be settled in Andalucia.

The Complex Taxation of Foreign Trusts in Andalucia

The case of trusts is considerably more complex because this legal entity, which is so common in Anglo-Saxon law, as mentioned by ImpuestosHerencias.es, is not recognized in Andalucian civil law. However, for tax purposes, when a foreign trust distributes assets to a beneficiary residing in Andalucia, this transaction can be considered a lucrative acquisition that will be subject to either Inheritance or Gift Tax, depending on the circumstances.

The key is to distinguish the nature of the trust.

1. Taxation of a Testamentary Trust (Created by Inheritance) in Andalucia

If the trust was created by the deceased in their will to manage and later distribute their assets to beneficiaries (for example, a trust for children to receive income or capital when they reach a certain age), the acquisition of the assets is considered a result of death.

In this scenario, the General Directorate of Taxes (Dirección General de Tributos) has interpreted that the moment the trust distributes capital to a beneficiary residing in Andalucia is comparable to an inheritance. Therefore, the beneficiary must pay the Inheritance Tax as if the assets had come directly from the deceased, even though they actually came from the trustee (the trust manager).

Example:

Carlos, a resident of Madrid, is the beneficiary of a trust created by his grandmother, a resident of the United Kingdom. The trust was established after his grandmother's death to manage the inherited assets. At age 25, Carlos receives a distribution of €500,000. At that time, he must declare this amount in the Inheritance Tax in Madrid. Although the money comes from the trust and not directly from his grandmother, the Tax Agency will treat it as an inheritance and apply the tax bonuses and reductions of the Community of Madrid.

2. Taxation of an Inter Vivos Trust (Created during Life) in Andalucia

If the trust was established by the deceased during their lifetime, and the deceased is no longer the owner of the assets (having already transferred them to the trust), the distribution of assets to the Andalucian beneficiary could be considered a gift. In this case, the beneficiary would be subject to the Gift Tax. However, in practice, the line separating both taxes is very fine, and the Tax Agency tends to treat the transaction as an inheritance if the distribution occurs due to the death of the creator.

In any case, it is essential that the Andalucian beneficiary obtains the complete trust documentation: the trust deed, the rules for distribution, and, if applicable, the death certificate of the creator. All of this documentation must be apostilled and translated to be presented to the Tax Agency.

Steps to Correctly Declare Assets Received Through a Trust in Andalucia

• Identify the legal nature of the acquisition: Determine whether the income is from a life insurance policy or a trust distribution. In most cases, it will be a single payment, which means a single ISD declaration. In the case of periodic income from a trust, it may be necessary to declare each distribution received.

• Submit the Inheritance Tax form: This must be done within six months of the taxable event. For a life insurance policy, the period begins on the date of the insured person's death. For a trust, the period begins at the moment the assets are distributed to the beneficiary.

• Apply the regional regulations: If the deceased lived outside of Andalucia and had no assets in Andalucian territory, the heir who resides in Andalucia can apply the tax regulations of their autonomous community. This is great news, as it will allow you to benefit from the tax bonuses or reductions that each community applies. For example, in Andalusia or Madrid, very generous bonuses are applied to the tax payable.

• Do not forget the life insurance reduction: If the income is from a life insurance policy, be sure to subtract the €9,195.49 reduction from the taxable base, as long as it's applicable. Some autonomous communities, like Catalonia, increase this amount, so it's vital to know the regulations that apply to your specific case.

• Attach supporting documentation: It is crucial that you attach all relevant documentation to the self-assessment form, such as the certificate from the insurance company or the trustee, which indicates the amount given and the date of the transaction. If the trust document is very long, the Tax Agency might request a simple translation of the most relevant clauses.

What if you already paid taxes on the trust in a foreign country?

It is possible that the insurance company or the deceased's country withheld or charged you some type of tax before you received the money. Unlike with Personal Income Tax, where Andalucia has multiple double taxation treaties, these treaties are scarce for inheritances. Therefore, in most cases, the amount paid abroad cannot be deducted from what you owe in Andalucia.

Being the beneficiary of a foreign life insurance policy or trust involves a series of unavoidable tax obligations in Andalucia. The good news is that these benefits are taxed under the Inheritance and Gift Tax, which allows you to apply the same reductions and tax bonuses as any domestic inheritance. The key is to submit the documentation correctly and on time, as the Tax Agency expects the declaration of any assets a Andalucian resident receives, regardless of whether their origin is domestic or foreign.

Have you received an inheritance of this type and need help managing the tax declaration? Getting advice from a tax expert is the best way to ensure a smooth process.