Inheritances can quickly become a tax burden, especially when larger assets are involved. However, with the right planning and appropriate measures, inheritance tax can be significantly minimized. It is often forgotten that there are also tax-relevant gifts between spouses, parents and children. The German Inheritance and Gift Tax Act makes no exception here.
Early gifting: make the most of your tax-free allowances
Legislation allows assets to be given away tax-free every ten years within the tax-free amounts. Within this period, high tax-free amounts can be utilized without inheritance tax or gift tax becoming due. The
Chain gift
With this strategy, the assets are not transferred directly to the desired recipient, but are transferred via several people in a tax-optimized manner. For example, one parent can first give assets to the other parent, who then passes them on to the children. As separate tax-free allowances apply to each of these gifts, a larger sum can be transferred tax-free to the children or their spouse in this way. This method is particularly advantageous for large estates, as the allowances can be used anew for each person involved. However, the success of this strategy depends on careful planning in order to structure and time the gifts correctly.
Transferring real estate at an early stage
Property ownership is often a significant part of the estate. The transfer of real estate during one’s lifetime makes it possible to make effective use of allowances. Parents can transfer real estate to children or grandchildren using the applicable allowances. It is important that the property is
Granting a right of residence or usufruct
When parents transfer their property to their children, they can reserve a lifelong right of residence or usufruct. This has several advantages: Firstly, the property remains at the value at the time of transfer for tax purposes, and secondly, the usufruct reduces the market value of the property, which significantly reduces the tax burden. Although the property remains in the possession of the children, the parents can continue to use it.
Do you have any questions on this topic?
Sale of the family home only after a 10-year period
If the family home passes to the heirs, they can inherit it tax-free under certain conditions. The prerequisite for this is that the spouse continues to live in the house or the children use it themselves as their main residence – for at least ten years. However, if the heirs decide to sell the house before the ten years have expired, the tax exemption no longer applies. It is therefore advisable to plan the sale well and consider the tax consequences.
Berlin will: avoid the tax trap
The Berlin will is a widespread form of spouse’s will in which spouses appoint each other as sole heirs. The disadvantage is that the first spouse to die often does not use his or her tax-free allowance, and the children are threatened with high inheritance tax on the death of the second partner. Alternatives such as “two-step inheritance” help to avoid this trap. In this case, children inherit part of the assets after the death of the first parent and the tax-free amount of both parents is used in full. One option is to include the children in the inheritance plan at an early stage, for example by making gifts during their lifetime.
Marital property swing for spouses
Married couples can transfer assets in a tax-advantageous way by means of the so-called property regime swing if the assets are unequally distributed between the spouses. In this case, the matrimonial property regime is changed from community of accrued gains to separation of property and back again, whereby the tax-relevant accrued gains can be transferred between the spouses and the assets can be equalized between them tax-free. The advantage of this is that the tax-free allowances for children and grandchildren can be optimally utilized. This arrangement is often combined with the so-called “spousal swing”, in which larger cash assets can be transferred tax-free between spouses through tax-free sales.
Planning company succession at an early stage
There are special tax allowances and benefits for entrepreneurs when transferring business assets. However, these regulations are linked to strict conditions, such as the continuation of the business for several years after the inheritance. By planning succession in good time, entrepreneurs can significantly reduce their tax burden when transferring the business. The aim should be to take advantage of the regulations in such a way that both the business is continued and the inheritance tax burden is reduced.
Reduce administrative assets
When bequeathing companies, the distinction between administrative assets and tax-privileged business assets plays a key role. Administrative assets, such as rented real estate or securities, are not subject to the tax benefits that apply to business assets. In order to minimize the tax burden, these assets should be reduced or restructured as far as possible prior to the inheritance. This can be done, for example, through gifts or by reorganizing the company. It is important that the company has as few administrative assets as possible in order to benefit from the tax advantages for business assets.
Securing favored business assets
Business assets are particularly favored and can be transferred tax-free upon inheritance under certain conditions. However, in order to receive the preferential treatment, the business must be continued for at least five years (in some cases seven years) after the transfer. In addition, the payroll must not be reduced excessively in order not to lose the tax exemption. It is therefore essential to plan the business structure in such a way that these requirements are met and the preferential business assets are retained.
Do you have any questions on this topic?
For large assets: appoint a family foundation as heirs
Foundations offer a good opportunity to preserve assets in the long term. Establishing a foundation can be particularly useful for larger estates. The foundation can serve the purposes of the testator for generations to come. The foundation also offers a number of tax advantages.
Using family companies
By founding a family company, such as a GmbH or a family partnership (e.g. GbR or KG), assets can be passed on to the next generation in a structured and efficient manner. The company shares can be given away piece by piece without immediately incurring inheritance tax or gift tax. This is particularly suitable for family businesses that are to remain in the family. Control over the assets remains secure.
Moving abroad
Moving abroad can help to avoid or reduce German inheritance tax, as many countries have significantly lower tax rates or even no inheritance tax at all. It is important that the testator actually moves their place of residence and center of life to the desired country and is therefore no longer subject to German tax liability. However, both foreign and German tax regulations must be carefully observed, as double taxation may occur in some cases. It is advisable to check in advance which countries offer favorable tax conditions and which deadlines and requirements must be met in order to take advantage of these benefits.
Our recommendation
The regulations on German inheritance tax and gift tax are complex and constantly changing. Early advice is therefore essential. As your experts, we will help you to develop the right strategies for your individual situation and to exploit the optimum allowances and applicable tax exemptions and structuring potential. Particularly in the case of larger assets or company shareholdings, it makes sense to take advantage of all legal options in order to reduce the tax burden. If you have any questions on this topic, please feel free to contact us at any time.
The author: Timo Unterberg
Anyone who knows me knows that tax law is my passion! When I am not advising young growth companies and medium-sized corporate clients on restructuring, financing issues or corporate succession, I am on the road as a lecturer in tax consultant training and continuing education. I also regularly write tax-related articles for specialist journals.
