Country Guide: Germany

In Germany, the laws regarding inheritance are complex, and it is essential to have a basic understanding of the laws and regulations to maximise your inheritance.

Effective inheritance planning requires careful consideration and planning. Why is this so? It’s necessary to ensure your wishes are carried out effectively and legally.

In this article, we will discuss some practical steps that you can take to maximise your inheritance in Germany.

Understand German Inheritance Laws

German inheritance laws are primarily based on the civil code, and it is essential to have a basic understanding of these laws to make sure your assets are distributed as indicated or according to your wishes. The German inheritance law distinguishes between three different forms of inheritance:

1. Testamentary succession (testamentarische Erbfolge)
2. Statutory succession (gesetzliche Erbfolge)
3. Contractual succession (vertragliche Erbfolge)

In general, testamentary succession allows you to distribute your assets according to your wishes, while statutory succession applies when there is no will or testament.

Contractual succession involves an agreement between the donor and the recipients regarding the distribution of the assets.

The most common form of contractual succession is the inheritance contract (Erbvertrag), which can be used to determine the distribution of the assets before the donor’s death.

Make a Will

Writing a will is one of the most effective ways to ensure your wishes are fulfilled. A will is a legal document that outlines your wishes regarding the distribution of your assets after your death.

In Germany, there are two types of wills: handwritten and notarised. A handwritten will must be written entirely by hand, dated and signed by the testator (the person making the will). A notarised will must be made in the presence of a notary public and signed by the testator and two witnesses.

Making a will is particularly important if you have specific wishes regarding the distribution of your assets or have complex family situations, such as second marriages or blended families.

Consider Gifting

Gifting can be an effective way to maximise your inheritance in Germany. You can gift assets during your lifetime to reduce the value of your estate and minimise any inheritance tax liability.

In Germany, gifts are taxed under the same tax (Erbschaftsteuer- und Schenkungsteuergesetz, ErbStG) as inheritances, using the same tax classes, rates, and personal allowances described below. There is no annual gift exemption in Germany. Instead, each recipient has a personal allowance that can be used once every 10 years (the ’10-year aggregation rule’ under §14 ErbStG). For example:

• Spouse or registered partner: €500,000 per 10-year period
• Each child: €400,000 per 10-year period
• Each grandchild: €200,000 per 10-year period
• Parents: €100,000 per 10-year period (for gifts, parents receive only €20,000)

All gifts made within any rolling 10-year period to the same recipient are aggregated. If the cumulative gifts exceed the personal allowance, the excess is taxed at the rates shown below. Strategic gifting over multiple 10-year periods can therefore transfer substantial assets tax-free.

Use Life Insurance

Life insurance can be a particularly valuable tool for inheritance planning in Germany. Life insurance policies can give your beneficiaries a lump sum payment upon death to pay off any debts or expenses and provide financial security for your beneficiaries.

In Germany, life insurance proceeds paid to beneficiaries upon death are subject to inheritance tax. There is no special standalone life insurance exemption. The proceeds fall under the standard ErbStG rules and are covered by the beneficiary’s ordinary personal allowance (for example, a surviving spouse would use their general €500,000 allowance). Structuring the policy ownership carefully can help to optimise the tax treatment.

Take Advantage of Legal and Tax Advice

Effective inheritance planning requires careful consideration and planning. Therefore, it is essential to seek professional advice to ensure your wishes are carried out effectively and legally.

Professional advisors, such as lawyers and tax professionals, can provide valuable advice on inheritance planning and help you navigate Germany’s complex laws and regulations.

Minimise Inheritance Tax

By definition, an inheritance tax is a tax that is levied on an estate’s value after a person’s death. In Germany, inheritance tax (Erbschaftsteuer) is levied on each beneficiary’s share of the estate, not on the estate as a whole.

German inheritance tax is calculated on the taxable value of each beneficiary’s inheritance, which is the value received minus the personal allowance for that beneficiary’s tax class. The tax rate is progressive within each class. Germany divides beneficiaries into three tax classes:

Personal Allowances

• Spouse or registered partner: €500,000
• Children and stepchildren (per child): €400,000
• Grandchildren: €200,000
• Great-grandchildren and parents (on inheritance): €100,000
• Siblings, nephews/nieces, step-parents, in-laws, divorced spouse, and all others: €20,000

Tax Class I – Spouse, children, grandchildren, parents (on inheritance)

Progressive rates on the taxable amount after the personal allowance:

• Up to €75,000: 7%
• €75,001 to €300,000: 11%
• €300,001 to €600,000: 15%
• €600,001 to €6,000,000: 19%
• €6,000,001 to €13,000,000: 23%
• €13,000,001 to €26,000,000: 27%
• Above €26,000,000: 30%

Tax Class II – Siblings, nephews/nieces, step-parents, in-laws, divorced spouse

Progressive rates on the taxable amount after the €20,000 allowance:

• Up to €75,000: 15%
• €75,001 to €300,000: 20%
• €300,001 to €600,000: 25%
• €600,001 to €6,000,000: 30%
• €6,000,001 to €13,000,000: 35%
• €13,000,001 to €26,000,000: 40%
• Above €26,000,000: 43%

Tax Class III – All other beneficiaries (including unrelated persons)

Rates on the taxable amount after the €20,000 allowance:

• Up to €6,000,000: 30%
• Above €6,000,000: 50%

Property Valuation

A 2023 valuation reform (following a 2021 Federal Constitutional Court ruling and subsequent amendments to the Bewertungsgesetz, BewG) significantly increased the standardised property valuations used for German inheritance tax purposes. Many German properties are now valued considerably higher than before for ErbStG calculations. This is particularly relevant for individuals inheriting German real estate, as the higher valuations may push inheritances above the personal allowance thresholds that would previously have sheltered them.

There are several ways to minimise inheritance tax in Germany, including:

Taking advantage of the 10-year gift cycle: Since personal allowances renew every 10 years, a programme of lifetime gifts can transfer substantial value to the next generation tax-free over time. For example, each parent can gift each child up to €400,000 every 10 years, meaning a couple can transfer €800,000 per child per decade without triggering any tax.

Making charitable donations: Charitable donations can reduce the value of your estate and minimise any inheritance tax liability. In Germany, donations to registered charities are tax-deductible and can be used to offset any inheritance tax liability.

Planning for business succession: If you own a business, it is essential to plan for business succession to minimise any inheritance tax liability. German law provides substantial reliefs for qualifying business assets (Betriebsvermögensbegünstigung), including potential exemptions of 85% or 100% of the business value under certain conditions. There are several options available, such as gifting shares or creating a company foundation, that can be used to transfer ownership of the business in a tax-efficient way.

You must seek professional advice to ensure your inheritance plan complies with German inheritance tax laws and regulations.

Consider Family Agreements

Family agreements can effectively minimise disputes and ensure your wishes are fulfilled once you pass away.

Family agreements can be used to outline your wishes regarding the distribution of your assets. They can provide a clear understanding of your intentions.

In Germany, family agreements can take several forms, such as a family constitution or a family pact. These agreements can help to minimise disputes and ensure your assets are distributed as you want them to be.

Keep Your Plan Up to Date

It is vital to keep your inheritance plan up to date to ensure that it reflects your current wishes and circumstances.

Changes in your life, such as marriage, divorce, the birth of a child, or a change in your financial circumstances, can significantly impact your inheritance plan.

Regularly reviewing your inheritance plan and making necessary updates can help ensure that your assets are distributed according to your current wishes and in a tax-efficient way.

Communicate Your Wishes

Communicating your wishes to your loved ones can help to minimise disputes and ensure that your assets are distributed according to your wishes.

By discussing your inheritance plan with your family, you can provide clarity and avoid misunderstandings.

It is necessary to communicate your wishes clearly and concisely and explain the reasoning behind your decisions.

By doing so, you can ensure that your loved ones understand your intentions and can make informed decisions.

Take Care of Your Debts and Liabilities

Taking care of your debts and liabilities is important when planning your inheritance in Germany. Any outstanding debts or liabilities can reduce the value of your estate and impact the amount of inheritance your beneficiaries will receive.

It is important to consider paying off any outstanding debts before your death to minimise the impact of debts and liabilities on your estate.

You may also want to consider taking out life insurance to cover any outstanding debts or liabilities arising after your death.

Consider Long-Term Care Planning

Long-term care planning is an important consideration when planning your inheritance in Germany. As you age, you may require long-term care, which can be costly and impact the value of your estate.

Consider long-term care planning to ensure you have access to high-quality long-term care and minimise the impact on your estate. This may involve setting up a trust or purchasing long-term care insurance.

Consider Estate Planning Across Borders

If you have assets in multiple countries, consider estate planning across borders. Different countries have different laws and regulations regarding inheritance and taxation, which can impact the distribution of your assets.

Thus, to ensure that your assets are distributed according to your wishes and in a tax-efficient way, seek professional advice and consider estate planning across borders.

Understand Your Options for Giving

In addition to traditional inheritance planning, there are other options for giving that can maximise the impact of your assets. Understanding your giving options can help you maximise your inheritance in Germany.

Charitable giving is popular for individuals who want to leave a legacy and make a difference in their communities. Charitable giving can also be a tax-efficient way to maximise your inheritance, as donations to charitable organisations are often tax deductible.

Other options for giving include setting up a family foundation or making gifts during your lifetime. These options can also provide tax benefits and allow you to impact your community more.

Consider Business Succession Planning

If you own a business, it is important to consider business succession planning when planning your inheritance in Germany.

Business succession planning can help ensure that your business is passed on to the next generation or sold tax-efficiently.

Business succession planning may involve transferring ownership of your business to a family member, setting up a trust, or selling your business to a third party.

It is important to seek professional advice when considering business succession planning to ensure your plan complies with German tax and inheritance laws.

Ultimately, maximising your inheritance in Germany requires a proactive approach to planning and a willingness to seek professional guidance.

This can involve working with a lawyer, tax advisor, and financial planner to develop a comprehensive inheritance plan tailored to your unique needs and circumstances.

In addition to seeking professional guidance, involving your loved ones in the inheritance planning process is essential.

By communicating your wishes and involving your family members in the decision-making process, you can help to ensure that your assets are distributed in a way that is consistent with your values and goals.

Remember, inheritance planning is not a one-time event. As your circumstances change over time, you must revisit your inheritance plan and make adjustments to meet your wishes.

With careful planning and the guidance of skilled professionals, you can maximise your inheritance in Germany and leave a lasting legacy for your loved ones.

By making a will, considering gifting, using life insurance, understanding German inheritance laws, taking advantage of legal and tax advice, minimising inheritance tax, and considering family agreements, you can maximise your inheritance in Germany and ensure that your assets are distributed according to your wishes.

However, please note that the information provided in this article is for informational purposes only and should not be construed as legal or tax advice.

It is essential to seek the advice and guidance of skilled professionals before taking any decisions to navigate these complex issues.