by Stefan Rullkötter, Euro am Sonntag
S.Becoming a billionaire as a teenager – this is not only possible in Germany with an ingenious business idea on the Internet, but also as a beneficiary of great family wealth. In recent years, according to the latest information from the federal government, 90 children under the age of 14 have been transferred tax-free to 90 children under the age of 14.
German inheritance and gift tax law has made these arrangements possible since 2009. At that time it was legally cemented that Germany is and will remain a tax haven for company heirs. The core of this tax reform were transfers from companies to the next generation, in which as far as possible no jobs should be lost.
Heirs of companies with up to five employees therefore generally do not pay inheritance tax. Successors of larger companies can also save themselves the tax: since 2009, business assets – after deducting an extra tax allowance of 150,000 euros – are 85 percent spared from inheritance or gift tax if the company is continued for at least five years and the sum of wages and Salaries of employees reached at least 400 percent of the previous wage bill during this period. If heirs continue the company for at least seven years, they can have the business assets fully exempt from inheritance tax.
A modification requested by the Federal Constitutional Court provides that, since July 2016, the beneficiaries’ private assets can in principle also be used when paying inheritance tax on businesses. However, this obligation only applies to business assets of EUR 26 million or more.
At least in these cases, it must always be checked individually whether heirs of large companies cannot pay at least part of the tax from their private assets. Only if the company inherits more than 90 million euros is no “exemption” from this tax possible. “This made the transfer of businesses even more complicated,” complains Munich lawyer Anton Steiner, President of the German Forum for Inheritance Law.
In practice, problems are caused by the distinction between “bad” administrative assets and “good” productive assets. Since 2016, full exemption from inheritance tax has only been possible if the administrative assets do not account for more than 20 percent of the business assets. If a business has acquired or reallocated administrative assets from its own funds within two years prior to an inheritance or a gift, the tax benefits of the business assets also cease to apply. The Federal Fiscal Court recently decided this for inheritances and gifts in the years 2007 and 2010 to 2012 with five new judgments (Az. II R 8/18, 13/18, 18/18, 21/18 and 41/18).
In practice, difficulties also arise from a rigid “capitalization factor” with which the tax office calculates the amount of goodwill. To do this, the company’s operating result is multiplied by 13.75 – regardless of whether the relevant period was an exceptional business period or an average year.
Abuse of design foiled
The latest inheritance tax reform to date also provides for measures to combat unlawful structures. So-called cash GmbHs, with which large financial assets under the corporate shell could be inherited and given away tax-free since 2009, are no longer permitted. In addition, leisure and luxury items such as vintage cars, yachts and works of art that are held as business assets are allocated to administrative assets. This means that these assets are no longer tax-privileged for company successors.
Two groups receive additional tax advantages subject to certain conditions: The heirs of family businesses can obtain an additional exemption of business assets of up to 30 percent if, after deduction of income tax, they do not distribute more than 37.5 percent of the profit from their own company or from the operation can be removed. And those who have inherited agricultural and forestry operations can claim an allowance for financial resources amounting to 15 percent of the business assets, provided that the heir continues to run the company full-time.
Should the next inheritance tax reform take place after 2021, an effect is foreseeable: asset succession will be brought forward so that those affected can still benefit from more favorable tax rules. It was from 2014 to 2016, when tax-relevant assets of more than 100 billion euros per year were transferred in this country – far more than in the four years that followed.
Saving tips for all donors and heirs
If you think about your own inheritance succession at an early stage, your descendants can often save taxes on inheritances and gifts. The most effective tax arrangements:
Use chain gifts within the family
The transfer of assets between spouses is tax-free up to 500,000 euros. In addition, each spouse can give their children up to 400,000 euros tax-free. However, if one of the spouses is not wealthy, he or she does not use the gift tax allowance. This is how it can be used: The wealthy spouse first transfers part of the assets to the partner. They can then pass on their assets to the children tax-free. The tax office accepts such chain donations if one partner is free to use the donated assets. A period of shame should therefore elapse between the two donations. It is also better not to pass the same amount on to the next generation. Otherwise there is an abuse of design (Federal Fiscal Court, Az. II R45 / 11).
Take advantage of tax allowances every ten years
With a long-term strategy, even high assets can be transferred tax-free to the next generation. Gift tax allowances can be used again every ten years. Anyone who opens an account and custody account in their name immediately after the birth of their child can give again tax-free after the tenth birthday and again at the beginning of 20. With generous amounts, the offspring are financially out of the woods.
Skip a generation when giving gifts
Grandparents can make their grandchildren happy while they are still alive by making optimal use of their allowance of 200,000 euros. For example, if a father wants to bequeath 500,000 euros to his offspring, the tax office will receive nothing if he bequeaths 400,000 euros to his daughter and 50,000 euros each to his two grandchildren. If, on the other hand, the daughter receives all of her assets, she has to pay 11,000 euros in taxes.
Avoid tax disadvantages in a wild marriage
Many couples live together on principle without a marriage license. In the case of inheritance or donation, however, this fear of marriage becomes an expensive pleasure. If an illegitimate partner receives assets as a gift or is considered an inheritance in the will, the tax authorities often strike: The inheritance tax allowance of 20,000 euros is low and the tax rate in the most expensive class III is high at 30 percent. This is particularly disadvantageous in the case of jointly managed bank accounts and unequal income levels. The tax office may assume that half of the account balance will be donated. Solution: Avoid joint accounts, keep separate cash registers and give each other a power of attorney in an emergency so that the illegitimate partner is not left financially on dry land in the event of illness. Clear agreements are also necessary if unmarried couples acquire property together and only one person bears the interest and principal payments. The couple should state in writing beforehand that the other partner will finance other expenses of the cohabitation in order to compensate – otherwise the tax authorities can quickly accept a donation here too.
Make family contracts strategically
If parents want to give their daughter and son-in-law property as a present, this costs unnecessary taxes in the case of a direct transfer. From the point of view of the in-laws, the partner-in-law is classified in the expensive tax class II. It is fiscally more advantageous if the parents initially transfer the property to their daughter alone. In the more tax-efficient class I, she can then transfer a share of the ownership of the property to her husband tax-free, ruled the Federal Fiscal Court (Az. II R 37/11).
Giving away insurance instead of cash
Giving away life insurance is cheaper than cash because the policies only add two thirds of the surrender value to the tax calculation. If endowment insurance has been saved for many years and with high premiums, potential donors should think about this arrangement in good time before the end of the contract and the payment of the expiry benefit.
Claim a tax bonus for care services
Heirs who cared for a deceased person for free or for little money before their death receive an additional 20,000 euros as an inheritance tax allowance. The testator does not have to have been in need of care or have had a care level (Bundesfinanzhof, Az. II R 37/12). The tax exemption is only granted if appropriate care services have been provided. Proof of type and scope as well as collected documents can be provided in the maintenance diary. The benchmark: the care allowance from the statutory long-term care insurance
Use adoption as an inheritance tax saving model
Childless people can adopt the children of a brother or sister. Instead of the expensive inheritance tax class II, the adopted nieces and nephews are then classified by the tax office in the cheaper class I. Because through adoption, they become relatives in direct line and can receive tax-free assets of up to 400,000 euros. However, the adoption courts check carefully whether there is also a family connection between the children and the uncle or aunt.
Image sources: Daniela Staerk / Shutterstock.com, filmfoto / Shutterstock.com