Transferring Wealth: Inheritance & Gifting in Germany

Inheritance vs. Gift: The Difference

For tax purposes, inheritance and gifts are treated almost identically – the German Inheritance and Gift Tax Act (ErbStG) applies to both. Even so, there are important differences:

Inheritance (transfer of assets on death)

• Timing: Automatic upon the death of the deceased
• Flexibility: Limited by the will or inheritance contract
• Allowance: One-time, cannot be renewed
• Drawback: No longer possible to use the allowance more than once

Gift (transfer of assets during lifetime)

• Timing: Freely chosen, control can be retained
• Flexibility: Full flexibility, conditions possible
• Allowance: Usable again every 10 years
• Advantage: Multiple tax-free transfers possible

Bottom line: Those who plan early can use staggered gifts to take advantage of the allowances multiple times, often transferring millions tax-free.

Using Allowances: The 10-Year Rule

The personal allowances are the key to tax-free wealth transfer. The closer the family relationship, the higher the allowance:

Allowances by Degree of Kinship

• Spouse/registered partner: €500,000
• Children: €400,000
• Grandchildren (if the parents are deceased): €400,000
• Grandchildren (otherwise): €200,000
• Parents/grandparents (in case of inheritance): €100,000
• Siblings, nieces, nephews: €20,000
• Not related: €20,000

The 10-Year Strategy

After 10 years, the allowance renews in full. A married couple can therefore, every 10 years, per child:

• From father: €400,000 tax-free
• From mother: €400,000 tax-free
• Total per decade: €800,000 per child

Example: A couple with two children who starts gifting at age 50 can transfer a total of €4.8 million tax-free by age 70 (3 × 10-year periods × €800,000 × 2 children).

Inheritance Tax: Tax Classes and Rates

If the allowance is exceeded, inheritance and gift tax applies. The amount depends on the tax class and the value transferred.

Tax Classes

• Tax class I: Spouses, children, grandchildren, parents (in case of inheritance)
• Tax class II: Siblings, nieces/nephews, step-parents, children-in-law
• Tax class III: Everyone else (including unmarried partners without a registered partnership!)

Tax Rates (above the allowance)

• Up to €75,000: 7% (class I), 15% (II), 30% (III)
• Up to €300,000: 11% (I), 20% (II), 30% (III)
• Up to €600,000: 15% (I), 25% (II), 30% (III)
• Up to €6 million: 19% (I), 30% (II), 30% (III)
• Above €26 million: 30% (I), 43% (II), 50% (III)

Note for unmarried partners: Without a registered civil partnership, only the €20,000 allowance and tax class III apply (30-50% tax!). Marriage or a notarized agreement can make sense.

Lifetime Gifting: Strategies

Gifting during your lifetime is the most important tool for tax-optimized wealth transfer. Here are the proven strategies:

1. Staggered Gifting

Transfer your assets in 10-year tranches. The earlier you start, the more allowances you can use.

2. Chain Gifting

Transfer assets to your spouse first (€500,000 tax-free), who then gifts them on to the children. This doubles the usable allowance. Note: a time gap is required to avoid this being classified as abuse of legal structuring.

3. Skipping a Generation

Gift directly to grandchildren (€200,000 tax-free). For large estates, this saves an entire layer of taxation.

4. Retaining a Usufruct

You gift a property but retain the right of residence or the rental income. The usufruct significantly reduces the taxable value of the gift.

5. Agreeing a Right of Reclamation

With a notarized agreement, you can secure a right to reclaim the gift – for example, in case the child runs into financial difficulties or dies before you.

Transferring Property Tax-Efficiently

Property is often the largest asset. Special rules and planning options apply to it:

Owner-Occupied Property to a Spouse

Transferring the owner-occupied family home to a spouse is completely tax-free – regardless of its value! This applies to both gifts and inheritance.

Family Home to Children (in Case of Inheritance)

Children can also inherit the family home tax-free – but only if they live in it themselves for at least 10 years and the living space does not exceed 200 m².

Rented Properties: 10% Discount

Rented residential properties are only assessed at 90% of their value. So for a property worth 1 million euros, only €900,000 is taxed.

Usufruct Strategy

You gift the property but retain the usufruct (right of residence or rental income). The value of the usufruct significantly reduces the value for gift tax purposes – often by 30-50%.

Example: A 70-year-old gifts a property (worth €800,000) subject to a reserved usufruct. The usufruct reduces the value by around €280,000. Gift value: only €520,000 – completely tax-free for one child.

Compulsory Portion and Will

In Germany, no one can completely disinherit their closest relatives. The compulsory portion guarantees them a minimum share.

Who Has a Right to a Compulsory Portion?

• Children (and grandchildren, if the children are deceased)
• Spouse / registered civil partner
• Parents (only if there are no children)

Amount of the Compulsory Portion

The compulsory portion amounts to half of the statutory share of the inheritance. It is a purely monetary claim – not a share of the estate itself.

Drafting a Will Correctly

• Holographic: Entirely handwritten, dated, and signed
• Notarized: Legally more secure, opened automatically
• Berlin will: Spouses name each other as sole heirs

Reducing the Compulsory Portion

The compulsory portion is difficult to circumvent. Options include: waiving the compulsory portion in exchange for compensation, staggered lifetime gifts (no longer counted after 10 years), or compulsory-portion penalty clauses in a Berlin will.

Family Partnerships as a Planning Tool

For larger estates – especially those involving property or business holdings – a family partnership can be a sensible option.

Advantages

• Protection against fragmentation: Assets stay within the family
• Tax optimization: Company shares can be transferred in stages
• Retaining control: Parents retain control as managing directors
• Reducing the compulsory portion: Shares are often valued lower than direct ownership

Typical Structure

Parents set up a civil-law partnership (GbR) or a GmbH & Co. KG and transfer property into it. They then gift company shares to the children – staggered on a 10-year rhythm. The partnership agreement governs voting rights, restrictions on disposal, and protection against termination.

Important: This structure requires expert advice from a notary and tax advisor. The costs are worthwhile for estates of roughly €2-3 million or more.

Checklist: Planning Your Wealth Transfer

You should keep the following steps in mind when planning your wealth transfer:

Taking Stock

• List your total assets (property, investment accounts, bank accounts, holdings)
• Determine market values (for property: obtain an appraisal)
• Offset debts and liabilities

Analyzing Your Family Structure

• Who are the statutory heirs?
• Which allowances are available?
• Are there any special circumstances (unmarried partner, stepchildren)?

Developing a Strategy

• Create a timeline for staggered gifts
• Consider a usufruct or rights of reclamation
• For large estates: consider a family partnership

Implementation

• Draft or update your will
• Have gift agreements notarized
• Report gifts to the tax office
• Every 10 years: review your strategy and plan the next tranche

Frequently Asked Questions About Transferring Wealth