General information about the compulsory portion
The beneficiaries of a compulsory portion will be the biological or adopted children and the children of children who have already passed away, as well as a spouse. In the case of childless persons, the parents of the deceased person will also be beneficiaries of a compulsory portion, something that is not infrequently overlooked. The beneficiaries of a compulsory portion are entitled to half of their statutory portion of the inheritance.
Gifting and an augmented compulsory portion over a time period of 10 years
The relevant estate for the calculation of the compulsory portion can be reduced through lifetime gifting. However, for a period of 10 years after the gifting, the beneficiary of a compulsory portion would be entitled to have their compulsory portion augmented by adding back the gifted assets to the estate for the calculation of the compulsory portion. This entitlement to an augmented compulsory portion decreases by 1/10 for each year that has elapsed since the gifting. After 10 years, the gifting will thus no longer be taken into consideration for the calculation of the compulsory portion.
Example: A father, F, has two sons, A and B, of whom B has fallen out of favour with his father and has been disinherited in F’s will. In order to also reduce B’s compulsory portion, F signs over most of his wealth (a property worth € 400k) via a lifetime transfer to his son A. If F were now to die, 6 years after the gifting, then the gifted property would still be taken into account for the calculation of the compulsory portion at a value of €160k ( (€400k minus 6/10).
Start of the 10-year time period
In the respective cases it will thus be in the interest of the transferor that the 10-year period will be initiated together with the gifting. However, there are two important exceptions to this:
(1) A gift to a spouse – When a gift is made to a spouse, the period is only initiated when the marriage is dissolved (divorce or death). Therefore, gifts made to a spouse are not normally a suitable way to limit entitlements to compulsory portions. The only case where there would be an effect is if an appreciation in value were to occur subsequent to the gifting.
(2) Reserved right of use – According to case-law, the period will also not be initiated if the donor “has not yet forgone the use of the object of the gifting”. This is always the situation where the usufruct has been reserved. However, if the donor reserves for themself the right to reside in the gifted property then, for the start of the time period, the extent of the right to reside would be important. If the right encompasses the entire gifted property then, in terms of content, this would approximate a usufructuary right and would not initiate the time period. This was recently clarified by the Munich court of appeals in its ruling of 8.7.2022 (case reference: 33-U-5525/21). However, if the right to reside encompasses merely a part of the property then this would generally not inhibit the start of the period of time. However, there is unfortunately no clear answer to the question as to what extent of the residential right would be detrimental and it would depend on the circumstances of the individual case. For example, the Federal Court of Justice accepted that continued use of one floor in a three-storey house would initiate the time period.
Recommendation: If compulsory portion considerations do not play a role, and in the case of gifting where the main focus is on making use of gift tax allowances multiple times, then a reserved right of use could however be an appropriate means to reduce the taxable value of the enrichment. Here, it is a case of the sooner you tackle this with appropriate measures, the greater the tax effect will be.