Inheritance tax planning

Inheritance planning, will, contract of inheritance, inheritance disputes

Many ignore this topic and therefore also a preventive inheritance tax planning through a will or a contract of inheritance. Not only the provisions of the German Civil Code (BGB) regarding the inheritance law are to be observed, but also the numerous succession relevant regulations in other fields of law, such as in family law or in the trade or company law and last but not least the inheritance tax law.

Here at PNHR you will find a bundling of legal and inheritance tax law expertise. Very important is the regulation of the business succession, whereby peculiarities for shareholding are to be observed.

In parallel, to a reasonable inheritance law planning one also always has to think about a health care proxy and a patient's provision.

Finally, we advise the heirs after the death in respect of their liability including the possibilities of the disclaimer of the inheritance and the limitation of liability. Of course, we assist with the formalities of opening of will and the granting of certificate of inheritance and if necessary inheritance disputes.

Heirs and giving

 


Avoiding capital transfer tax by the bequest of art

Collecting art does not only support personal and ideational enrichment, it also opens up opportunities to lower the individual tax load.
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Avoiding capital transfer tax by the bequest of art

Collecting art does not only support personal and ideational enrichment, it also opens up opportunities to lower the individual tax load. This way works of art become not only attractive for its own sake. Instead it can act as a taxation instrument. Our goal is fulfilled, when the passion of the collector and tax-benefits go hand in hand.

Our experience shows, that there is no asset in the law of heirs and giving, which is as beneficial for being transferred as artworks.

In the worst possible case, a bequest is done by transferring money. Here, there is neither the option for a lower valuation, nor for a factual tax exemption. Hence, cash remains cash.

In contrast, an artwork is difficult to grasp for the financial authorities. Keeping this in mind, the financial administration allows a modest valuation. A potential appraisal report, e.g. done by a known art institute, will therefore ascertain an unpretentious value for tax purposes. For reasons of precaution, the calculated sum is subject to downward adjustments.

Taking a further step, the lawmaker grants tax exemption of 60% for high quality artworks, in exceptional cases even 100%. To benefit from this, a couple of prerequisites have to be met. Among others, the conservation of the artwork has to be of public interest. This is often given if a museum requests the artwork as a long-term loan. Not uncommonly, taxes of heirs and giving can be reduced in a dimension of 70%, compared with a cash transfer.

These actions are in need of a detailed planning. Typical pitfalls are obviated by corresponding design of wills, giving- and leaving contracts. The appeal of giving during one’s life is the fact that tax benefits can be utilized. Simultaneously, the benefactor can reserve extensive rights for oneself, up to a free right of withdrawal. Thus the giving can be reversed if an inheritance dispute requires such action.


Giving with usufruct reservation – crediting the compulsory portion?

Close relatives, such as children or the parents of the deceased and also the spouse can not be completely economically excluded from the inheritance. They are at least entitled to a compulsory portion.
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Giving with usufruct reservation – crediting the compulsory portion?

Close relatives, such as children or the parents of the deceased and also the spouse can not be completely economically excluded from the inheritance. They are at least entitled to a compulsory portion. To circumvent this compulsory portion claim, often the way of donating asset components inter vivos is chosen. The goal of this procedure is that the respective assets do not become part of the inheritance and thus can not be a basis for the calculation of a compulsory portion.

This donation of course implicates, that the asset is leaving the capital of the donor and becomes the property of the donee. In order to reduce the disadvantages of such capital transfers or avoid them totally, sometimes a design is selected where the donor secures a usufruct reservation on the given object or, regarding a property that is used by the donor, a right of residence in rem. However, this can be problematic:

A donation is only excluded from the calculation of the compulsory portion claim, if more than 10 years pass by in between the donation and the decease of the donor. In case the donor dies in between the span of 10 years, the entire donation is considered in the first year before the case of inheritance and within each additional year before the case of inheritance to each 1/10 less.

However established law practice requires not only a juridical asset transfer to occur, but also an economic asset loss. This is not given, when the subsequent decedent reserves every opportunity of use and enjoyment of the object. The Federal Court has decided, that the enjoyment of the given object is not waived, when the donation included an unlimited usufruct reservation. Same applies, by the jurisdiction of the Higher Regional Court of Munich, when a life estate of an entire property is granted. A different case can apply, when the donor reserves a subordinate right only, e.g. life estate of a single apartment in a multi-family house. Thus the design must consider the individual circumstances. Still, in case the donor reserves the enjoyment of the given asset, the 10-years-period does not begin and the person entitled to a compulsory portion can involve the value of the asset in his or her claim for calculating the compulsory portion for numerous years.


The “Berliner Testament”

The joint and mutual will of spouses has its advantages; however it is not always the path to choose.

Setting up a “Berliner Testament” (to be translated as “the Berlin will”) means that both spouses agree to be each other’s only heir and assign the common children for being the remainders. Such a will has advantages for families, but can still harbor pitfalls.
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The “Berliner Testament”: Smart solution or source of problems?

The so-called “Berliner Testament” is commonly used for the joint and mutual will of spouses and is further considered as the “normal” estate planning arrangement among married couples. However, this design often entails legal or tax issues to the detriment of the children.

Setting up a “Berliner Testament” (to be translated as “the Berlin will”) means that both spouses agree to be each other’s only heir and assign the common children for being the remainders after the decease of the lastly deceased spouse. This design of a mutual will can also be set up by homosexual couples in a registered civil partnership, but not by couples who live together without a marriage certificate. The “Berliner Testament” can either be drawn up commonly visiting a notary or written and signed by one of the spouses. The partner is then required to also sign and date the document. When commonly drawing up a will, the mutual assets remain in the family. Such a “Berliner Testament” can not be changed after the decease of one of the spouses, if this option has not been explicitly agreed on in the will.

A will like this can harbor pitfalls, if it is not adjusted to the respective situation of life. It is advantageous, that the spouses secure each other financially. The outliving partner is able to dispose of the entire assets and does not enter a potentially problematic community of heirs. In case of the presence of under aged children, the spouse is not forced to engage, for example in the sale of a property, to deal with the guardianship court.

The will can also involve stepchildren in the devolution upon death, who would come away empty handed in the case of juridical succession. When they are involved as heirs in the will, they gain an equally high allowance of € 400.000,00 as biological children.

Yet, the provision stating that children only inherit when both parents are deceased can also lead to major disadvantages. In the case of the death of one parent, they are virtually disinherited, but could still claim their compulsory share. To avoid this, many “Berliner Testamente” incorporate a penalty clause. It says that children, who claimed their compulsory share after the death of one parent, do only receive this compulsory share and nothing more, when the second parent deceases.

“Disinheriting” the children can also have tax inconveniences, as the children’s allowances of € 400.000,00 for each child are “lost” within the first succession. Without a “Berlin Testament” the children could claim their allowance both after the decease of the first parent and again after the death of the outliving. In contrast, with a “Berlin Testament” solely the outliving parent inherits and thus the allowance of the children forfeits. In this case is has to be considered, whether the children should inherit or bequeath assets after the decease of the first parent. It also is to consider, that the “Berliner Testament” binds beyond death. If one spouse died, a change of the will is only possible if it was commonly conceded. In that case, the estate can not be distributed differently as stated in the mutual agreement. If the outliving spouse wishes to consider a third party, perhaps later born grandchildren, he or she can not do so. Therefore it is often going to be useful to add clauses to such a will, which overrule or constrain the stare decisis.

Conclusion:

A “Berliner Testament” can be a smart action, but it is no “passe-partout” for all cases of inheritance. Before drawing up such a will the interest- and asset-situation of the potential testator should be examined and alternatives of design should be discussed.


The will in favor of handicapped persons

When handicapped individuals use social support (e.g. within assisted living), they have to bring in inherited assets in order to cover their social assistance demand.
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The will in favor of handicapped persons

When handicapped individuals use social support (e.g. within assisted living), they have to bring in inherited assets in order to cover their social assistance demand. Not before their assets are used down to a spare amount of € 1.600, respectively € 2.600, the welfare authorities are man-dated to pay (again).

If parents or grandparents inherit assets to their child or grandchild, that should be save from the access of welfare authorities, it is recommended to create a so called “Behindertentestament” (will of handicapped persons). This will in favor of handicapped persons is been recognized by the Federal Court multiple times by now. Characteristic for this will is that the handicapped child is only named pre-heir and a lifelong will execution is arranged for the pre-heritage. The portion of inheritance of the pre-heir should be set above the statutory share. Under specific circum-stances of the death of the first parent, also the arrangement of waiving the statutory share is to be considered. The will needs to mention a will executor, who receives instructions as detailed as possible (so called administrative instruction) on how to support the handicapped child with the assets of the heritage. The actual design of a will in favor of handicapped persons can bear diffi-culties for laymen. Thus it is strongly recommended to be advised by a notary or lawyer. For do-ing so, we are happy to support you with our distinct knowledge.


Life insurance I! Beneficiary or not?

A case of legal foot race

When a policyholder (precariously) registers a person in the insurance contract as the beneficiary in the case of decease, it is assumed that the insurance company is going to pay out the death benefit to this individual. However, this is not always the case.
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Beneficiary or not? A case of legal foot race

When a policyholder (precariously) registers a person in the insurance contract as the beneficiary in the case of decease, it is assumed that the insurance company is going to pay out the death benefit to this individual. The Federal Court nevertheless decided in a couple of similar cases that this doesn’t need to apply. In particular situations the payment is disbursed to the individual who first gets in touch with the insurance company.

This related to the following case:

The deceased policyholder had registered his first wife as beneficiary of his life insurance in the case of his death. After the policyholder died, the insurance company contacted the second wife, who was also the sole heir of the deceased, asking her for the address of the first wife. The second wife did not tell the address to the insurance company and further investigations remained initially without results. The spoken of second wife, who had only been informed about the policy by the investigating insurance company, now revoked the order to inform the first wife about the decease and the right to benefit. Now, the insurance company paid out the benefit to the second wife. Eventually, the first wife learned about her initial right to benefit and sued both the second wife and the insurance company. She held the opinion that the insurance company had been required to pay out the amount assured.

The Federal Court disallowed the lawsuit. The insurance company had been correct to pay out the sum to the second wife. It was argued, that the grant of the right to benefit has to be seen as an offer to an endowment of the death benefit. The beneficiary does not gain a right of claim towards the insurance company, but the policyholder tasks the insurance company to offer the beneficiary an endowment after his death. This offer of endowment has to be explicitly accepted, so a contract of donation can come into existence. Regularly the grant of a right to benefit would be an endowment and the insurance company is tasked to offer this endowment to the beneficiary. As the endowment is, according to German law, a contract, it has to be accepted by the beneficiary. However, as it was stated by the Federal Court the task to offer the endowment can still be overruled by the legal successors of the deceased. The second wife could thus keep the money.

The Federal Court did nonetheless not decide, whether in a case like this damage claims can be brought to the insurance company’s attention, when it did not try to inform the initial beneficiary to the best of its abilities.

Conclusion:

For answering the question who receives the death benefit of a life insurance, it can indeed matter who contacts the insurance company first – the beneficiary with an acceptance declaration, or the heirs with a revoke. First come, first served.


Life insurance II! Right to benefit unclear after divorce!

Who receives the money? The first or the second wife?

Recently, the Federal Court made an important decision. In the court decision it made clear, that for the question whether the first or later wife of a deceased man has the right to benefit of a life insurance, the date of closing the contract matters.
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Right to benefit of life insurances: Decision in the „widows fight“

Only recently the Federal Court has made a crucial decision for the question of the right to benefit of life insurances. In its decision of July 22, 2015 (BGH, reference IV ZR 437/14) it made clear, that for the question whether the first or later wife of a deceased man has the right to benefit of a life insurance, the date of closing the contract matters.

The Federal Court had to decide in the case of a widow, who had sued a life-insurance company. The company had paid out the amount assured to the ex-wife of the deceased. The policy itself was issued even before the first marriage of the man. The right to benefit of the policy was set down in writing in the year 1997, stating that in the case of his death “his widowed wife” was supposed to receive the money. At this point in time he was in his first marriage.

The marriage got divorced. As he married for the second time, the husband called the insurance company. He wanted to ensure, that his new wife would get the money in the case of his death.

The Federal Court decided that the telephone call had been no valid change of the right to benefit. A written statement would have been necessary. This confirmed the past lawmaking of the Federal Court, whereupon in the case of insurances the individual should be seen as the “widowed spouse”, who had been married to the deceased when the policy contract was issued or when a valid change of the right to benefit was done. In the shown case, this individual was the ex-wife.

Making this decision, the Federal Court did oppose the impression of the lower courts. They had decided, that literally only the individual who was married to the deceased spouse in the moment of his dead was actually “widowed”.

Conclusion:

To ensure that the right to benefit is due to the person who the policyholder wishes to benefit in the case of death, the insurance company has to be informed in written form and unambiguously.


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