A community of heirs is a so-called community of joint owners, which is comparable with a partnership (GbR [company under German civil law], OHG [German ordinary partnership] or KG [German limited partnership]). This means that, in accordance with their share of the inheritance, the individual co-heirs have joint interests in the entire estate and they administer it jointly. A co-heir may not, on their own, dispose of or sell an individual estate asset or item or their share of it.
The legal model provides for two ways that a community of heirs can be divided up or dissolved:
- either by actually distributing the estate assets or items among the co-heirs (if necessary also by making compensatory payments), or
- by selling the estate and distributing the proceeds that remain after deducting the debts of the estate.
However, an inheritance tax liability will arise regardless of whether or not the parties concerned have agreed on the division of the estate. Nor will the tax affect the community of heirs as such, but only the individual co-heirs. Consequently, it is possible that inheritance tax will have to be paid, but the person concerned will not be able to ‘get at’ the assets that they have inherited because they are jointly held by the community of heirs.
Please note: This is thus not the only point at which the question to be considered is what are the possible courses of action if it is foreseeable that the necessary agreement of all the co-heirs cannot be achieved.
Renunciation of the inheritance
Every co-heir has the option of renouncing their inheritance by making a declaration to the probate court. The renunciation has to be made within a period of six weeks after learning of the inheritance. In the event of a renunciation, from the outset, the person concerned will not be regarded as an heir. They will not be a member of the community of heirs, they will not be liable for any debt of the testator and will not pay any inheritance tax. By the same token, they will lose all legal rights to claim the assets in the estate of the deceased, which will accrue proportionately to the other heirs. Moreover, it will generally no longer be possible to claim a compulsory portion.
Please note: The renunciation option would therefore only be considered in the case of a modest (or over-indebted) estate.
Sale of the portion of the inheritance
While co-heirs are not able to dispose of individual estate assets or items, nevertheless, they are able to dispose of their share of the inheritance itself, in other words, their share in the community of heirs. A portion of the inheritance can be sold via an agreement that is authenticated by a notary to other co-heirs or even to third parties without the other heirs being able to prevent this.
Pre-emptive right to purchase
In the event of a sale to a third party, the co-heirs would however be entitled to exercise their pre-emptive rights to purchase – separately or collectively – by means of written notification to the vendor. The exercise period is two months from the date when the vendor provides notification of the contents of the purchase agreement. Those exercising their rights would then enter into a purchase agreement instead of the third party and would thus have to pay the vendor the purchase price that had been negotiated with the third party.
Inheritance tax is subject to the heir coming into possession of their portion of the inheritance. The tax would thus be incurred if the portion of the inheritance is subsequently sold. Furthermore, the sale could trigger an income tax liability if tax-relevant assets form part of the estate, for example, business assets, shareholdings or properties that the deceased had held for less than ten years. In addition, if properties are included in the estate then this may give rise to real estate transfer tax if the portion of the inheritance is not sold to co-heirs and no other exemptions are applicable (e.g., for a direct relation or spouse).
Waiving all rights and entitlements in the estate
Another option for leaving the community is to waive all rights and entitlements in the estate (in German this is referred to as Abschichtung); this does not involve the transfer of a portion of the inheritance but, instead, the co-heir waives their rights as a member of the community and leaves – normally in return for a financial settlement. In this respect, this variant thus also requires all the co-heirs to reach an agreement.
Please note: The tax consequences correspond to the issues discussed under section "Tax consequences". Real estate transfer tax would not be incurred.
Application to a German court for the estate to be distributed
Ultimately, a co-heir can unilaterally demand the dissolution of the community of heirs at any time and can also assert this right in court. However, from a legal point of view, such proceedings would be very demanding and, accordingly, time consuming and expensive. Frequently, properties that are included in the estate first have to be auctioned off in a forced sale and lower proceeds have to be accepted. Moreover, there would be a number of possible ways for reluctant co-heirs to hinder and delay the proceedings.
Please note: Therefore, legal action can only be a last resort when all the other options for getting out or for an amicable settlement have failed to yield any results.
The potential for disputes that is inherent in a community of heirs, as an involuntary association, can be avoided or lessened via testamentary arrangements. For example, an executor could be appointed to arrange the sale and distribution of the estate. Moreover, specific requirements for the partitioning of the estate could be set out in so-called testamentary provisions of distribution where certain assets can be designated to individual co-heirs.
Ultimately, consideration should be given to avoiding the formation of a community of heirs from the outset by appointing a sole heir who would become the legal successor of the deceased and would have every power of disposition. This would however not necessarily mean that they would be entitled to the entire estate. Other individuals can be remembered without further ado by bequeathing legacies to them. Following the testator’s death, the beneficiaries would then be entitled to have those assets, which were designated to them in the will, transferred to them by the sole heir and it would be relatively easy to enforce this through a court.
Please note: Nevertheless, existing entitlements to a compulsory portion of the estate as well as supplements to the compulsory portion, for example, should always be borne in mind. In view of the complexity of the issues, it is generally advisable always to seek expert advice prior to making any testamentary arrangements. Please do not hesitate to contact your PKF consultant in this respect.