Inheritance and gift taxes are crucial topics for many families in Germany. Proper tax planning can save significant costs and ensure efficient wealth transfer to the next generation. But what tax allowances exist, how do tax classes work, and what strategies can help minimize the tax burden? In this article, we explain everything you need to know about inheritance and gift tax.
Basics of inheritance and gift tax in Germany
The Inheritance and Gift Tax Act (ErbStG) regulates the taxation of wealth transfers. While an inheritance occurs after a person's death, a gift can be made during a person's lifetime. In both cases, the state imposes taxes if certain tax allowances are exceeded.
- The amount of tax depends on three factors:
- The tax class of the heir or recipient (based on the degree of kinship)
- The value of the transferred assets
- The applicable tax-free allowances
Tax rates range between 7% and 50%, depending on the tax class. Smart planning can help significantly reduce or even eliminate these taxes.
Tax classes and allowances
Tax classes for inheritance and gift tax differ from standard income tax classes and significantly affect the tax burden. There are three tax classes:
- Tax Class I (lowest tax rates): spouses, registered partners, children, stepchildren, grandchildren, parents, and grandparents (for inheritances, not for gifts)
- Tax Class II: siblings, nieces, nephews, step-parents, parents-in-law, and divorced spouses
- Tax Class III (highest tax rates): all other individuals (e.g., friends, unmarried partners, distant relatives)
Tax-free allowances are significantly higher for close relatives:
- Spouses and registered partners: €500,000
- Children and stepchildren: €400,000
- Grandchildren: €200,000
- Parents and grandparents (for inheritances): €100,000
- Siblings, nieces, nephews, life partners, distant relatives: €20,000
These allowances apply per gift or inheritance and can be used again every ten years. A long-term strategy involving staggered wealth transfers can lead to significant tax savings.
Tax-optimized wealth transfer
Those with substantial assets should consider how to pass them on in the most tax-efficient way. The following strategies help reduce the tax burden:
- Gifts instead of inheritance: since tax allowances can be used every ten years, it makes sense to transfer wealth gradually. Over several decades, a family can transfer significant amounts tax-free.
- Usufruct rights (Nießbrauch): if a property is gifted, the donor can retain a lifelong right of residence or usufruct. This reduces the taxable value of the property because the donor's right to use the property lowers its market value.
- Business succession: the taxation of business assets offers significant advantages. Under certain conditions (e.g., continuing the business for at least seven years), a partial or complete tax exemption may be possible.
- Gradual transfers: instead of transferring real estate or financial assets all at once, step-by-step gifts can be advantageous. For example, parents can gift their children €400,000 tax-free every ten years.
Common pitfalls to avoid
Despite the opportunities for tax optimization, there are risks to be aware of:
- Delaying planning: if all assets are transferred only upon death, high tax payments may result. Early gifting can prevent this.
- Poor contract drafting: gifts should be carefully planned. For example, when gifting real estate, it should be clearly defined whether the donor retains a right of residence or rental income. Otherwise, the tax office may challenge the tax advantage.
- Lack of documentation: all gifts should be recorded in writing. High-value gifts must be reported to the tax office to avoid future problems.
- Business succession without a tax review: if a company is transferred, it is essential to check whether the conditions for tax exemptions are met. Otherwise, substantial additional payments may be required.
Conclusion: act now and save taxes
Proper planning of inheritance and gift taxes can bring significant tax benefits. Those who act early can transfer wealth tax-free in stages and protect family assets in the long term. Early gifts, usufruct arrangements, and strategic business succession are particularly effective in avoiding taxes. A tax advisor can help determine the best strategy for each individual case.
Share this article:
