Designing and avoiding before and after the event of death
Any acquisition due to death is generally subject to inheritance tax. The different tax classes, allowances, benefits and valuation approaches offer enormous tax saving potential. Arrangements to reduce inheritance tax are possible before the inheritance and immediately afterwards as well as during the inheritance tax return.
You can find detailed information on gift tax for donations among living persons here: Gift tax
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Inheritance tax advice from lawyers and tax consultants
Advice in the area of inheritance tax is provided by specialized tax consultants and attorneys specializing in german tax law. The focal points of consulting are:
- Tax-optimized estate planning, in particular through wills and lifetime gifts
- Development of a long-term succession of assets within the family with the aim of avoiding inheritance tax
- Measures to reduce inheritance tax after the occurrence of the inheritance
- Preparation of inheritance tax returns
- Representation vis-à-vis the tax authorities, in particular in the event of objections and legal action against the inheritance tax assessment
- Inheritance tax valuation of real estate
- Inheritance tax valuation of companies
- Advice on how to take advantage of the allowances for inheritance tax
The questions of its tax treatment are as complex as the inheritance itself. For this reason, the tax lawyer works together with lawyers for inheritance law, company law, family law and real estate law, depending on the case.
Transactions subject to inheritance tax
In particular, the following assets are subject to inheritance tax in Germany:
- Payments on asserted claims for compulsory portions
- Acquisition through donations on death
In addition, there are a large number of other incidents subject to inheritance tax, which are not always immediately apparent as such. An overview is provided here in § 3 of the German Inheritance and Gift Tax Act (ErbStG).
Tax rates and allowances for inheritance tax in Germany
The tax burden in the case of german inheritance tax depends very much on the personal relationship between the donor and the presentee. Below is an overview for important groups of people:
- Spouses and registered partners: Tax class I, tax rate: 7-30 percent, tax-free amount: 500,000 euros, pension-free amount: 256,000 euros
- Children and stepchildren: Tax class I, tax rate: 7-30 percent, tax-free allowance: 400,000 euros, pension allowance: up to 52,000 euros (depending on age)
- Grandchildren: tax class I, tax rate: 7-30 percent, tax-free amount: 200,000 euros
- Parents: Tax class I, tax rate: 7-30 percent, tax-free amount: 100,000 euros
- Siblings, nephews, nieces: Tax class II, tax rate: 15-43 percent, tax allowance: 20,000 euros
- Children-in-law: tax class II, tax rate: allowance: 20,000 Euro
- Life partners, friends, business partners etc.: Tax class III, tax rate: 30-50 percent, tax allowance: 20,000 Euro
Special tax features for real estate
Real estate such as houses and apartments usually belong to the essential valuable components of an estate. For real estate, there are some special features regarding inheritance tax.
Therefore, when planning the succession of property and submitting the inheritance tax return, the benefits of real estate should be taken into account. These include, above all, the tax exemption for residential property further used by the heir (§ 13 para. 1 no. 4b and 4c ErbStG) and the 10 percent valuation discount for rented residential property (§ 13c para. 1 ErbStG). It is particularly important to make use of the tax options when valuing the properties.
Beneficiary business assets
If a company or shares in a company are transferred by way of inheritance, the special concessions for business assets apply. The current regulation in the inheritance tax law is the result of a political compromise based on the specifications of the Federal Constitutional Court.
These complex regulations continue to offer extensive exemption of corporate succession from inheritance tax for many companies. However, it is necessary to know the conditions of the benefits and, if necessary, to create the conditions for tax exemption.
Especially in the case of the dissolution of a community of heirs, the possible income tax consequences must also be taken into account. This can be the case, for example, in the case of a company spin-off.
Notification of the inheritance, submission of the inheritance tax return
Inheritances, legacies, compulsory portion payments etc. must be reported to the german tax office within three months to the Gift Tax Office (§ 30 ErbStG). Since the layman is usually neither aware of the obligation to notify nor the corresponding deadline, such notifications are in practice rather the exception. The tax offices will of course still learn about the inheritance. After all, they receive inheritance tax notifications from the banks and insurance companies holding the account as well as notifications from the probate courts or notaries.
The tax office of the deceased's place of residence will then regularly contact the known parties involved with the request to submit an inheritance tax return. If an attorney for tax law is appointed, an extension of the deadline for submitting the inheritance tax return is usually generously granted. He checks the tax optimization possibilities, for example, for married couples the specialist for inheritance tax returns checks whether the specifically calculated gain compensation can prevent or reduce inheritance tax.
Berlin Testament in case of inheritance
The Berlin Testament is probably the most frequently created will in Germany. In the Berlin Testament, the spouses appoint each other as sole heirs and their children as final heirs.
The Berlin testament is fiscally disadvantageous with regard to the utilization of the tax-free amounts and the so-called tax progression. Therefore, even before the inheritance is made, a more favorable form of the will should be considered - for example, through additional bequests in the first case of inheritance.
After the inheritance: immediate measures for tax reduction
Only a few inheritance cases were optimally designed in advance with regard to inheritance tax. In order to avoid a too high tax burden, the possible must then be brought out in the inheritance tax return. In some constellations, however, it is still possible to legally intervene in the distribution of the estate in such a way that a very significant positive tax effect is achieved.
- One option is the disclaimer of the heir within 6 weeks. In this way, the estate can be distributed to other persons who are, for example, in a more favorable tax class and, if necessary, several allowances can be used. If a compensation is paid in return for the disqualification, which is considered an obligation of the estate, there are other options.
- Another possibility is the assertion of claims for a compulsory portion. This is especially true in cases of the Berlin will, in which the spouses initially appoint each other as sole heirs (see above). Here it should be examined whether the children can use their personal inheritance tax allowances by (amicably) claiming their compulsory portion.
- In the case of spouses in the matrimonial property regime of the community of gain, the sole heir can in some cases also provide for an improvement in inheritance tax by refusing and at the same time claiming the equalization of gain and the so-called small compulsory portion.
Tax evasion with the inheritance tax
As with other types of tax, missing or incorrect information quickly leads to the criminal offence of tax evasion in Germany. No risks should be taken here and all necessary information should be given to the lawyer in charge of the inheritance or the inheritance tax return. From the point of view of criminal tax law, the instrument of self-denunciation as well as the criminal and tax law statutes of limitations for inheritance tax evasion are of practical relevance.
Non-tax aspects of wills
Even if dealing with one's own death is not always easy, without a will no family and no entrepreneur should be. Especially when real estate, businesses are inherited, should not be left to chance or legal succession.
If the heirs are minors, if necessary a supplementary guardian is appointed by the court and he then makes the decisions for the child. If the family home can no longer be financed after death and a sale has to take place, for example, the complementary caregiver will demand that the proportionate purchase price be transferred to a separate children's account.