Issue – Partnership agreement with a continuation clause
In the case in question, a partner in a commercially operating partnership had died and the partnership agreement contained a so-called continuation clause. This stated that the deceased partner would exit the company and that the company would continue with the remaining partners. As per the agreement, the legal heirs, who were here simultaneously the remaining partners, were entitled to the financial settlement that was even higher than the value of the deceased’s partnership interest.
Inheritance tax treatment
The Federal Fiscal Court (Bundesfinanzhof, BFH), in its ruling of 8.6.2021 (case reference: II R 2/19), clarified such a constellation as follows.
- The legal successors do not inherit the partnership interest since the deceased is yet to exit the company. They inherit the entitlement to the financial settlement that forms a part of the acquisition upon death that is liable to inheritance tax. This is a financial claim against the company that has to be recorded at the nominal value.
- A claim for a financial settlement forms part of the private assets of the legal heirs. This also applies even if the legal heirs are, at the same time, the remaining co-partners. That is why the inheritance tax exemption provisions for business assets may not be applied in this respect.
- The partnership stake of the deceased partner accrues proportionately to the remaining partners. This can constitute taxable gifting on death. Although this would apply solely if and to the extent that the financial settlement to be paid is less than the assessed value for tax purposes of the partnership stake – that was not the situation in the present case, but should normally be so. The exemption provisions for business assets could generally be used for this here.
- In view of the financial settlement that was ‘too high, conversely, the heirs here wanted to claim a negative acquisition by accretion and offset it against the taxable financial settlement. The court however rejected this with reference to an unambiguous statutory provision.
Please note: It is generally recommended to ensure that the provisions in the partnership agreement and in the will are mutually compatible. In doing so, you should keep an eye on the tax consequences. In the case described above, it would have been significantly cheaper if the partnership agreement had permitted the partnership stake to be transferred to the legal heirs because then the exemption provisions would have been applicable.