Effectively utilize structuring options
Anyone wishing to transfer assets to relatives during their lifetime should take gift tax into account. To reduce the tax burden, the legal structuring options offered by the German Inheritance and Gift Tax Act (ErbStG) should be used. Thoughtful planning can significantly lower the tax burden.
To transfer assets in a tax-optimized way, lifetime gifts can be a sensible option. When making gifts, it is important to act prudently and with foresight to make effective use of the allowances for gift tax and noticeably reduce the tax burden, according to the business law firm MTR Legal Rechtsanwälte, which provides advice, among other things, in tax law.
Utilize gift tax allowances
Making use of personal allowances is a key lever for tax optimization when making gifts during one’s lifetime. As with inheritance tax, the allowances for gift tax depend on the relationship between the donor and the recipient. Spouses and registered civil partners can gift each other up to €500,000 tax-free; children and stepchildren receive an allowance of €400,000 per parent, and grandchildren have an allowance of up to €200,000.
The tax advantage of giving gifts compared to inheritance primarily lies in the fact that the allowances can be used again every ten years. Anyone who starts transferring assets early can fully utilize the allowances multiple times and pass on considerable sums tax-free. Through forward-thinking planning, parents can transfer €400,000 to each child tax-free every ten years. In this way, large amounts can be passed on to each child tax-free. Another effective approach is to include several people. If both parents transfer assets, each child can receive €400,000 from each parent. Grandchildren, sons- or daughters-in-law, or other close relatives can also be strategically included to utilize their allowances and broadly distribute wealth.
Agree on usufruct reservation for real estate
In addition to staggering and spreading gifts, there are also ways to reduce the taxable value of a gift. A proven method is the so-called usufruct reservation. In this case, the donor, for example, transfers a property but reserves the right to continue living in it or to receive rental income. This reduces the taxable value of the gift, sometimes significantly. The value of the usufruct is deducted from the market value of the property. This often brings the taxable base below the allowance, so that no gift tax is due.
Matrimonial property regime shift and gift with consideration
For married couples, the so-called ‘Güterstandsschaukel’ (change of matrimonial property regime) can also be an interesting model. In this case, the marital property regime changes from community of accrued gains to separation of property and is later changed back. However, this option is legally very complex and should only be carried out with expert assistance.
Another option for tax optimization is to combine a gift with a consideration. For example, a property may be transferred in return for care services. Such so-called mixed gifts reduce the relevant taxable value, as the value of the consideration is deducted. This can also help to stay below the allowance or to reduce the tax rate.
Tax advantages for business succession
Special tax incentives also exist in the area of business succession. If business assets or an interest in a corporation are transferred, up to 85 percent or even 100 percent of the asset value can be transferred tax-free under certain conditions. A prerequisite is, among other things, that the company is continued for a certain period after the transfer, usually five to seven years, and that certain payroll requirements are met. These rules are designed to protect the economic substance of family businesses and make continuation easier. However, this requires careful planning and documentation.
Reduce compulsory share claims
Lastly, gifts can also be used to reduce compulsory share claims. However, the prerequisite is that they are made at least ten years before the donor’s death. This is because, when calculating supplementary compulsory share claims, a gift is considered 10% less each year. After ten years, it is completely excluded from the calculation.
Careful planning required
Thus, the tax burden for gift tax can be effectively reduced. However, optimization requires forward-looking planning and clever structuring. Those who start early can transfer assets to the next generation tax-free or at least with tax advantages.
MTR Legal Rechtsanwälte advises on gift tax and other tax law matters.
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