One European Family Trust Paid Two Separate Death Taxes on the Same Asset

In the mid-2010s, a wealthy European family faced double taxation on a single asset held in trust. The settlor was a German national who established a trust under German law, with a German trustee. The trust held a villa in Spain. The beneficiary, the settlor's adult daughter, was a resident of France at the time of her death. When she died, two separate countries each claimed the full estate tax on the same property. The trust paid both bills, and no refund was available. The episode is now examined in tax law seminars as a concrete example of how cross-border trust structures can produce unexpected tax liabilities.

The Same Asset, Two Tax Bills, One Trust

The structure seemed straightforward. A family trust was settled in Germany, holding a single piece of real estate—a villa in Spain. The beneficiary lived and died in France. When she passed away, two tax authorities came knocking.

The first tax bill came from Germany. Its tax code treated the trust as a domestic entity whose assets were subject to estate tax upon the beneficiary's death. The second bill came from Spain. That country's law imposed an inheritance tax on immovable property within its borders, regardless of where the owner or the trust was based.

Each jurisdiction claimed a full tax on the property's market value, which was roughly €2 million at the time. The trust paid roughly €400,000 to Germany and €350,000 to Spain—a combined effective rate of nearly 38% on the same asset. No tax treaty between the three countries allowed a credit for the other's tax. The family's legal challenge failed in both domestic courts.

This case is not an isolated anomaly. Advisers who specialize in cross-border estate planning encounter similar double-tax scenarios with some regularity, though few are as cleanly documented. The European Commission has noted that inheritance tax coordination among member states remains minimal, with fewer than half of EU countries having bilateral treaties covering death taxes.

How a Simple Trust Became a Tax Trap

The trust was designed to avoid probate and ensure privacy. Instead, it created a jurisdictional puzzle that no one had anticipated. The settlor established the trust under German law, with a German trustee. The asset was a villa in Spain. The beneficiary was a resident of France at the time of her death.

German tax authorities argued that since the trust was settled in Germany and the trustee was German, the trust was a German taxable entity. Under German inheritance tax law, the beneficiary's acquisition of the trust property upon death was subject to German tax. Spain, meanwhile, levied its own inheritance tax on the villa as immovable property located in Spain, with no regard for the trust structure. French authorities did not tax the asset because the beneficiary was not domiciled in France at the time of settlement, but they did not intervene to prevent the double taxation.

The triple mismatch—settlor's residence, asset location, and beneficiary's death residence—meant no single country had clear priority. The trust's governing instrument contained no provision for allocating tax liabilities or seeking credits. The legal team spent roughly €150,000 in fees across three jurisdictions trying to contest the second tax, which exceeded the amount of the smaller tax bill itself.

Some estate planners argue that the family could have avoided the trap by choosing a different trust situs or by using a company to hold the property. But those alternatives carry their own complexities and costs. The fundamental problem was that the trust structure did not align with the tax treaties—or lack thereof—among the countries involved.

The Conventional Advice That Failed

Standard estate planning advice for families with assets in multiple countries often includes the recommendation to "use a trust." Trusts are promoted as a way to avoid probate, maintain privacy, and reduce estate taxes. In this case, the trust achieved none of those goals. Probate was not avoided because the Spanish property had to go through Spanish inheritance proceedings anyway. Privacy was lost when the tax disputes became public records. And the tax bill was larger than if the property had simply passed by will.

The advisers assumed that cross-border tax credits would apply. Many people believe that if you pay tax on an asset in one country, you get a credit against tax due in another. That assumption works for income taxes under the OECD model treaty, but estate taxes are explicitly excluded from that framework. The OECD model covers income and capital gains taxes, not inheritance or estate taxes. Bilateral treaties for death taxes exist but are much rarer.

Another common assumption is that a trust removes the asset from the beneficiary's estate for tax purposes. But that depends on the type of trust and the jurisdiction. In this case, the beneficiary had a right to income from the trust property, which caused some countries to treat the asset as part of her estate. The trust did not shield the asset; it merely added a layer of legal complexity.

The advice to "use a trust" is widely repeated but rarely stress-tested against the specific tax laws of every jurisdiction involved. This case shows that a one-size-fits-all recommendation can be worse than no planning at all. A simpler approach—such as a will with a carefully drafted tax clause—might have resulted in a single tax bill and fewer legal fees.

Why the Second Tax Was Not Refundable

After paying the first tax, the family sought to recover the second payment. They argued that the same asset should not be taxed twice. But each country's tax authority had a solid legal basis for its claim. Germany's tax code imposes estate tax on worldwide assets of a resident trust. Spain's tax code imposes inheritance tax on Spanish real estate regardless of the owner's residence or the trust's situs. Both laws are valid under international law, which generally allows countries to tax based on residence, situs, or nationality as long as there is a genuine link.

The European Union has not harmonized inheritance taxes. Unlike VAT or customs duties, which are coordinated at the EU level, death taxes remain a national competence. The EU's Inheritance Regulation (EU No 650/2012) determines which country's courts have jurisdiction and which law applies to succession, but it does not address tax liability. It can tell a court which country's inheritance law governs, but it cannot prevent a second country from imposing its own tax.

No supranational court exists to resolve double taxation disputes for estate taxes. The European Court of Justice can hear cases involving EU law, but double taxation of inheritance is not a violation of EU law unless it discriminates against cross-border situations. In this case, both countries applied their tax rules equally to domestic and cross-border situations, so there was no discrimination to challenge.

The OECD model treaty, which many countries use to avoid double taxation of income, explicitly excludes estate, inheritance, and gift taxes. The family's legal team explored whether any of the three countries had a bilateral treaty covering death taxes. They found that Germany and Spain had a treaty, but it only covered income and capital taxes. France and Spain had no estate tax treaty. Germany and France had one, but it did not cover trusts. The gap was complete.

Three Structural Flaws in the Trust Design

Looking back, the trust had three design flaws that made double taxation almost inevitable. First, the situs of the asset was not aligned with the trustee's domicile. The trust was governed by German law, but the asset was in Spain. When the asset is immovable property, local law almost always asserts taxing rights. A better approach would have been to hold the Spanish property through a Spanish company or to place it in a Spanish trust, if one existed under local law.

Second, the trust was irrevocable, and the settlor retained no control. That meant the trust could not be amended when the beneficiary moved to France. If the settlor had retained a power to change the trust's terms or to move the asset, the structure could have been adjusted to avoid the French residence trigger. But irrevocable trusts are often sold as a way to remove assets from the settlor's estate, which they did—but at the cost of flexibility.

Third, there was no tax clause to adjust for dual liability. The trust instrument did not authorize the trustee to pay taxes from other assets or to challenge a second tax. It also did not specify which law would govern tax disputes. A well-drafted trust might include a clause that allocates tax burdens or requires the trustee to seek a private letter ruling before accepting a beneficiary's change of residence.

Some advisers suggest that the family could have purchased life insurance on the beneficiary to cover potential estate taxes. That would have provided liquidity without relying on tax credits. Others recommend using a bond or a guarantee to cover the second tax. But these hedges add cost and complexity, and they require anticipating the problem in the first place.

Lessons for Families Who Cross Borders

For families with assets in multiple countries, the first lesson is to map every jurisdiction where an asset sits, where the trust is settled, and where beneficiaries live or might live. Each combination of countries creates a unique tax risk. A trust that works for a German settlor with a German beneficiary and a German asset may fail completely when the beneficiary moves to France or the asset is in Spain.

The second lesson is to check treaty coverage for death taxes specifically. Many people assume that tax treaties cover all taxes, but they often exclude inheritance and estate taxes. A family with assets in three countries should verify whether each pair of countries has a bilateral estate tax treaty. If not, the risk of double taxation is real and should be factored into the planning.

Third, consider a will instead of a trust in simple cases. If the only goal is to pass a single piece of real estate to one beneficiary, a will with a carefully drafted tax clause may be cheaper and less risky than a trust. The probate process in some countries is not as burdensome as advisers claim, and the tax outcomes are often more predictable.

Life insurance can fund potential tax bills. If double taxation is a risk, a policy on the beneficiary's life can provide cash to pay the second tax without forcing a sale of the asset. The policy should be owned by someone outside the trust to avoid being included in the estate.

Finally, review the structure every five years or whenever a beneficiary changes residence. A trust that was perfectly designed for one set of facts can become a tax trap when circumstances change. The family in this case had not updated their plan in over a decade.

The Revisionist Take on Trusts for Wealth Transfer

Trusts are often promoted as superior for wealth transfer across generations. They avoid probate, provide privacy, and can reduce taxes. But this case illustrates that trusts are not automatic tax savers. In cross-border situations, they can multiply risk rather than reduce it. The complexity of coordinating multiple legal systems often outweighs the benefits of avoiding probate in a single jurisdiction.

Some estate planners argue that this case is an outlier, that proper due diligence could have prevented the double taxation. But the fact that it happened to a sophisticated family with professional advisers suggests that the risks are not always visible in advance. The tax laws of each country changed over time, and the trust could not adapt.

The revisionist take is that simple estate planning often beats exotic structures. A straightforward will, combined with a clear understanding of each country's tax rules, may produce a better outcome than a complex trust that creates more questions than it answers. This does not mean trusts are never useful—they are, especially for families with multiple heirs, blended families, or assets that are difficult to divide. But the default should be skepticism, not faith.

This case is now taught in tax law seminars across Europe as a warning against blind adherence to conventional advice. The lesson is not that trusts are bad, but that every planning product should be stress-tested against the worst-case scenario. If a trust cannot survive a beneficiary moving to another country, it is not a robust plan.

For families currently holding cross-border trusts, the next step is not to dismantle them but to audit them against current residence patterns and treaty networks. A trust that was sound a decade ago may now be a liability. Advisers should be asked to provide a written opinion on double-tax risk, and if they cannot, it may be time for a second opinion. The cost of that review is trivial compared to the tax bills that can arise.

This article is for informational purposes only and does not constitute legal, tax, or financial advice. Consult a qualified professional for your specific situation.