Judgment of the Federal Fiscal Court on July 31, 2024 – Case No. II R 13/22
When it comes to inheritance tax, utilizing tax exemptions is crucial. However, if a father effectively waives his inheritance rights vis-à-vis his parents, this does not entitle his son – the grandchild of the testator – to claim the higher tax exemption applicable to children in the event of inheritance. This was clarified by the Federal Fiscal Court (Bundesfinanzhof, BFH) in its judgment of July 31, 2024 (Case No. II R 13/22).
Inheritance tax exemptions vary depending on the degree of kinship. According to the economic law firm MTR Legal Rechtsanwälte, which advises on inheritance and tax law, spouses and registered civil partners can currently claim an exemption of €500,000. Children and stepchildren are entitled to an exemption of €400,000, while grandchildren are granted an exemption of €200,000.
Importance of Tax Exemptions in Inheritance Tax
These exemptions should be taken into account when planning an estate to minimize the tax burden on heirs. This must also be considered when drafting a will. While a will can bypass statutory succession and, for example, designate a grandchild as an heir, the lower tax exemption applicable to grandchildren will then apply.
This cannot be circumvented by having a child waive their inheritance rights. Inheritance tax law deviates from civil law in this regard. The waiver of inheritance rights by a child does not result in the child being treated as “deceased,” thereby allowing their descendants to claim the higher exemption of €400,000, as illustrated by the BFH ruling.
Waiver of Inheritance Rights by the Testator’s Child
In the case at hand, the grandfather had designated his grandson as an heir to one-quarter of his estate in a will. The son of the testator had previously waived his statutory inheritance and compulsory share rights through a notarized agreement. The extension of this waiver to other descendants was explicitly excluded.
After the grandfather passed away, the inheriting grandson applied for an inheritance tax exemption of €400,000, the exemption applicable to children. He argued this was justified by the civil law fiction of predecease under § 2346 (1) sentence 2 of the German Civil Code (BGB). According to this provision, a child who waives their inheritance rights is treated as if they had predeceased the testator at the time of inheritance. The grandson argued that this fiction should allow him to claim the higher exemption of €400,000. However, the tax office rejected this argument and granted the grandson the exemption for grandchildren, amounting to €200,000.
BFH Confirms €200,000 Exemption for Grandchildren
The grandson’s lawsuit against this decision was unsuccessful before the Lower Saxony Tax Court, and the BFH dismissed the appeal against the tax court’s ruling.
The BFH reasoned that, under § 16 (1) No. 2 of the Inheritance Tax Act (ErbStG), a tax exemption of €400,000 applies to children and the children of deceased children. The phrase “children of deceased children” is to be understood as referring to situations where the children of the testator are actually deceased. The fiction of predecease under § 2346 (1) sentence 2 BGB does not result in a child who has waived their inheritance rights being treated as a “deceased child” for inheritance tax purposes. Accordingly, the exemption for grandchildren of €200,000 applies in such cases.
The BFH further explained that the legislature intended to grant higher exemptions primarily to the children of the testator, as this reflects the closest familial bond. In the case of grandchildren, this bond is less direct, warranting a lower exemption. Only if the children of the testator are already deceased can grandchildren benefit from the higher exemption. Thus, the higher exemption is only available to “orphaned grandchildren.”
Exploring Structuring Options
This decision highlights that a higher exemption cannot simply be passed on to the next generation through a waiver of inheritance rights. However, inheritance law offers various structuring options to optimize the transfer of assets for tax purposes.
MTR Legal Rechtsanwälte advises on inheritance tax and other aspects of inheritance law.
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