Pension plans and pension schemes do not form part of the estate.
The accrued rights under the plan pass to the person previously designated by the deceased participant in the express beneficiary designation form of the insurance contract or pension plan.
If the participant did not designate any beneficiary when taking out the pension plan or afterwards, the beneficiaries will be those expressly designated in the will, if any. Where there is both an express designation and a will, the more recent designation prevails.
If there is no express designation in the will either, the pension plan beneficiaries will be those indicated in the plan’s specifications, which normally coincide with the legal heirs in a preferential and exclusive order (that is, spouse and descendants). Failing that, the testamentary or intestate heirs of the participant.
These economic rights are not subject to Inheritance Tax, but to personal income tax (IRPF) at the time of redemption. The death benefits derived from pension plans and pension schemes are considered earned income (IRPF): beneficiaries will be taxed on them at their applicable marginal rate, since they increase the general taxable base.
In life insurance, the roles of heir and beneficiary may coincide, although they need not, and in many cases they do not. Where the designated beneficiary or beneficiaries are not lawful heirs, the heirs cannot claim any amount from that insurance as it does not form part of the estate, except if the premiums were paid in fraud of the heirs’ rights, in which case they may claim the amount of those premiums from the insurance beneficiaries.
If the beneficiary is one of the heirs, the insurance payout need not be included in the inventory of the deceased’s assets either, since that amount never entered the deceased’s estate. However, if at the time of death of the insured there was no specifically designated beneficiary, nor rules for determining one, the capital will form part of the deceased’s estate and must be included in the inventory of assets. The distinction as to whether the insurance forms part of the deceased’s estate also has consequences for the taxation of the benefit received:
A.- If the beneficiary is one of the heirs, they must include the amount received from that insurance in their Inheritance and Gift Tax return (Form 650).
B- If no beneficiaries have been designated, since the benefit enters the deceased’s estate and forms part of the inheritance, it must be included in the Inheritance Tax, but not as a separate benefit in the heir-beneficiary’s return, rather in the list of the deceased’s assets in Form 660 of the Inheritance Tax. The heirs to whom that benefit is allocated will settle this tax based on the total value of the share of the estate allocated to them (including the life insurance benefit), with the usual reductions and exemptions.
The question arises: What happens with the premiums paid by the deceased during their lifetime? Should they or should they not be counted among the estate assets?
The Insurance Contract Act allows reimbursement of the premiums paid if the contract was concluded in fraud of those entitled to the forced share (Article 88.1 of the Insurance Contract Act). We may encounter situations in which a life insurance contract has been concluded solely to harm the forced shares, generally through an immediate life annuity with a single premium, with a death capital of the same amount. In such cases, the courts hold that the insurance premiums must be counted and treated as a donation subject to collation, except for social insurance or mutual-type insurance.