Trusts in Spain - do they work?

Many readers are understandably motivated by the wish to avoid taxes that they see as unfair.  In the context of UK domiciles living in Spain perhaps the most feared is Inheritance Tax (IHT) and this motivates planning to avoid it.
The complication for UK domiciles resident in Spain is that their estate will always remain assessable to IHT in the UK with assets passed to Spanish residents also assessable to Spanish IHT.  For most couples there are two key issues, firstly how to pass assets without tax to the surviving spouse resident in Spain on first death? And secondly how to pass assets to UK beneficiaries on second death without paying UK IHT?
The ability to legitimately reduce UK IHT has become harder and harder over recent years and a further tightening will see the rate of tax payable by discretionary trusts increase to 40% from next April.  In addition some of the new measures are backdated to assets placed into trust after  March 17, 1986.

The Spanish Position
Spanish IHT is relatively easy to avoid for expatriates provided assets are kept outside of Spain.  This is because it is the recipient of a bequest, as opposed to the estate of the deceased as is the case in the UK, who is taxable.  The easiest way to achieve this is for assets to be put into a discretionary trust whereby the legal owners of the assets, the trustees, are non-Spanish residents.
The difficulty with this is that it is necessary to relinquish legal title and control of the assets to the trustees; in addition there are the inevitable initial and ongoing fees.  An alternative to this approach is to retain legal title and control of the assets during one’s lifetime but make them subject to a trust which only becomes active on the death of the individual.
For those expatriates who have already established a trust my advice is they should ensure that the trust deed empowers a family member or close confidant un-associated with the trustees to replace the trustees after their death.  This is because disputes between professional trustees and family beneficiaries are too numerous to calculate  and what may seem like sound planning can end up costing more in litigation and other fees then would have been payable in the first instance.

The UK position
The problem for most expatriates in establishing a trust during their lifetime is that in order for it to have any practical effect on their UK IHT position they must exclude themselves from receiving any future benefit from the capital.  While some are wealthy enough to be able to afford this, most are not.  Also, if on the death of the settlor, the surviving spouse were to become entitled to the capital, this would drag the money back into assessment in Spain.
Discretionary settlements can avoid the tax implications of capital passing to a Spanish resident beneficiary, however most discretionary trusts sold in Spain at this time are simply using a person’s tax-free allowance in advance of their death, and incurring unnecessary expense for the individual.  Also, transfers over an individual’s tax-free limit are taxable immediately at the rate of 20%, and there is a ten-yearly tax charge made on discretionary trusts.  For these reasons, in most cases, expatriates should retain legal title and control of assets during their lifetime but make them subject to a trust which only becomes active on their death.
My colleagues and I have reservations about the way trusts are being marketed to expatriates in Spain; they are not a universal tax planning panacea and it is evident to the trained eye that much of the “planning” relies on short-term non disclosure rather than the use of legitimate tax mitigation strategies.  This means that inappropriate trusts are storing up tax liabilities for surviving beneficiaries. 
Trust planning should stand on its own