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Gifting and bequeathing – Securing tax advantages through planning

Transferring assets to the next generation early on makes it possible to achieve big tax advantages while still providing for the future of the donor. In the following section we give a brief overview of gifting arrangements that is then supplemented by aspects to be considered in the case of inheritance.

Make good use of tax allowances

The burden of inheritance and gift tax can be avoided or reduced through various tax allowances that are newly granted every ten years and, therefore, it is possible to fully utilise them several times. The amount of the tax allowances will depend on the relationship between the donor and the beneficiary. The tax allowance for gifts between spouses is € 500,000 while in the case of gifting to a child this amount is € 400,000. Grandparents are able to hand over € 200,000 to their grandchildren free of tax. The tax allowance for siblings, nephews, nieces and life partners is € 20,000. If and insofar as the assets exceed the tax allowance, then by gifting incrementally over time it would thus be possible to generate a substantial tax saving.

Providing pension benefits in the case of succession planning

In the course of succession planning, particularly among small and medium-sized enterprises, businesses are frequently transferred in return for pension benefits. This form of accelerated inheritance has the advantage that the donor obtains financial security via a lifetime annuity.

The reservation of usufruct in the case of properties

If properties are gifted to future legal heirs during the donor’s lifetime, then this can be done while reserving so-called usufructuary rights; in this way, the donor is able to continue using or renting out the gifted property, although they would still be entitled to the rental income.

Property from the decedent’s estate (family home) where there is own use

If legal heirs themselves live in a property from the decedent’s estate for at least ten years after inheriting it then no inheritance tax will be incurred. However, the prerequisite for this is that they have to have moved into the property within six months after the accrual of the inheritance. Moreover, during that ten-year period, they are not allowed either to sell, or rent out, or lease out the property. For children, the tax exemption is limited to a living area of 200 sq m.

Disclaiming an inheritance

The renunciation of inheritance can be advantageous if the estate is indebted. The same applies even if the estate is worth so much that the personal tax allowances would be  significantly exceeded. This is because if, for example, a spouse who has been appointed as the sole heir renounces the inheritance in favour of the children that the couple had together then the inheritance would be split up among (potentially) several people and all the family members who are beneficiaries could then use their tax allowances. 

Recommendation: In order not to miss out, the person who renounces their claim can get their children to promise an appropriate financial settlement.

Take account of the compulsory portion

Gifts that were arranged in the last ten years prior to the death of the donor are wholly or partially included in the decedent’s estate and, thus, increase the amount of the entitlement to a compulsory portion that the disinherited could subsequently claim.

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