Bequests and Gifts
For married couples, the so-called Berlin Will or spousal will is particularly popular. It offers the advantage that after the death of one spouse, only the surviving partner inherits initially, thus protecting them from the claims of other heirs. However, it also has the disadvantage that tax exemptions on inheritance are not optimally utilized. Therefore, it is important to consider other options, such as bequests or gifts.
In simple terms, a Berlin Will means that the spouses mutually appoint each other as sole heirs and typically designate their children as the final heirs. The children therefore only inherit after both parents have passed away. This provides the benefit that the surviving spouse is financially well protected against the claims of other heirs, and the assets are preserved, as the creation of a community of heirs is avoided. However, at the same time, the children’s tax exemptions are not fully utilized, making the Berlin Will often a disadvantage from a tax perspective, according to the law firm MTR Legal Rechtsanwälte, which offers advice in inheritance law.
Tax Exemptions on Inheritance Not Optimally Utilized
Currently, the inheritance tax exemptions are €500,000 for the spouse and €400,000 per child. If one spouse becomes the sole heir due to the will, the €500,000 exemption is quickly exhausted, while the children’s exemptions remain unused. The issue intensifies when the second parent also passes away, as the children then inherit the entire estate of both parents in one go. In many cases, the €400,000 exemption per child is insufficient.
To mitigate this tax disadvantage of the Berlin Will, other strategies such as bequests or gifts should be considered.
Bequests Offer Advantages
A bequest is characterized by the fact that it does not automatically go to the legal heir but must be stipulated by the testator in the will. With a bequest, the testator can specify that a particular asset from the estate, such as real estate, jewelry, paintings, cars, etc., should go to a particular person. No additional rights derive from this bequest for the beneficiary, and they do not become an heir as a result. Moreover, the bequest is not automatically granted after the testator’s death but must be claimed from the heir.
The advantage of a bequest is that it can be structured so that the children already benefit from the estate upon the first death, without jeopardizing the financial security of the surviving spouse. The beneficiaries of the bequest then have a claim for fulfillment against the inheriting parent. This tactic can help alleviate the inheritance tax burden.
To ensure that the surviving spouse is not financially burdened by the bequest, a so-called “super-bequest” can be set up. This allows the spouse to determine the conditions, amount, and largely the timing of the payout for the bequest. At the same time, they remain the sole heir and legal successor to the testator. However, from a tax perspective, the anti-avoidance rule under Section 42 of the Fiscal Code must be considered.
Reducing Tax Burden Through Gifts
Another option for optimizing tax exemptions is through lifetime gifts. The same tax exemptions apply to gifts as to inheritance, i.e., €500,000 for the spouse and €400,000 for the children. However, these exemptions can be fully utilized again every ten years. Through careful and forward-thinking planning, the inheritance tax burden can thus be significantly reduced.
Even without gifts and bequests, there are ways to mitigate the tax disadvantages of a Berlin Will. For instance, the surviving spouse could renounce the inheritance in favor of several children, thereby using their inheritance tax exemptions. The children could also claim their compulsory share, further optimizing the use of exemptions.
Inheritance law, therefore, offers various options. Each option should be carefully considered from both a legal and tax perspective, and the consequences weighed.
MTR Legal Rechtsanwälte offers advice on inheritance law and inheritance tax issues.
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