Augmenting the compulsory portion through gifting
In the case of gifts, there is a 10-year time period during which the gifts would still be allocated to the estate. For each year that elapses since the gifting this portion goes down by 1/10. However, this period would not be initiated if the gift is made to a marriage partner, or if the donor reserves a comprehensive right of use for themself (a usufruct, a right to reside). In such cases, the gift would thus still be fully taken into account for the calculation of the compulsory portion.
Does the reservation of usufruct constitute a gift?
Facts of the case
The Higher Regional Court of Saarbrücken recently had to rule on an unusual situation (ruling of 15.11.2023, case reference 5 U 35/23); in the specific case, a testator who had bowel cancer had transferred the house that she used to her grandson in return for consideration. The consideration consisted in the reservation of a lifelong usufruct for herself and a cash amount. Furthermore, in the transfer agreement, the testator established a lifelong gratuitous usufructuary right for her son (the father of the grandson) subject to the condition precedent of her death.
Upon the death of the testator the son’s usufruct came into effect. He had moreover been appointed as the sole heir, to the annoyance of his siblings. They viewed the usufruct donated to him as a gift and asserted their claims for augmented compulsory portions.
The decision - No claims for augmented compulsory portions
The OLG upheld the position of the heir and decided that the usufruct donated by his mother did not constitute a gift and, accordingly, claims for augmented compulsory portions did not exist.
Gifting requires not only an increase in the beneficiary’s net worth, but also a corresponding decrease in the donor’s assets. This was not the case here because, for the transfer of the house to the grandson, the testator had received an adequate consideration in the form of the reservation of usufruct and the additional cash amount.
The court also clarified that for the calculation of the value of the usufruct, despite the cancer, the use of official mortality tables as a basis was permitted because, when the transfer took place, the testator was still living in the house and there was nothing substantial to indicate that she would die soon. The usufruct that was granted to her son subject to the condition precedent of her death did not result in an outflow of assets for her and, therefore, also not in a reduction of the estate for which compensation would be required.
Additional information
The arrangement in the situation described above could definitely be considered in appropriate cases. Nevertheless, you should bear in mind that when the consideration of the grandson was calculated the usufruct for the father was not likewise taken into account because this would then have constituted a reduction in the testator’s assets. Moreover, the additional usufruct burden could be viewed as a gift from the grandson to his father - this was not something that the court had to decide in this case.
From a gift tax perspective, the testator’s gift was not taxable because a generous gift ‘at the expense’ of the donor would also be necessary for tax purposes (Section 7(1) no. 1 of the German Inheritance Tax Act), thus the disenrichment of the donor. This was not the case for the testator, nevertheless, in the relationship between the grandson and his father this could be accepted.