Understanding inheritance tax and acting correctly

 Extract from the interview:

Welcome to the 47th Berlin Property Talk. Today's topic is inheritance and taxes. Our guest today is our notary Tobias Scheidacker.

Tobias Scheidacker: Inheriting and giving are closely linked. As the saying goes: inheriting is giving with a cold hand, while gifting is giving with a warm hand. Both actions are often similar from a tax perspective, particularly with regard to inheritance tax. Whether you give away assets during your lifetime or pass them on after your death, there is a lot of overlap from a tax perspective. It is important to plan these processes correctly, both legally and in terms of timing, in order to maximise the benefits. For example, there are regulations that make it possible to transfer assets and still retain the income. There is also the well-known 10-year time limit in inheritance law. With careful planning, you can use these regulations to your advantage. It is worth finding out in detail and, if necessary, seeking legal advice in order to make the best possible decision.

Achim Amann: Before we delve deeper into the topic, I would like to briefly talk about your impressive career. You've been working in the notary's office for several years now. But before that you were a lawyer, right? I gathered from our preliminary discussion that you specialised in tenancy law in particular. You told me that you worked in this field for almost two decades.

Tobias Scheidacker: In Berlin, you can be both a lawyer and a notary. I have both qualifications. But since I was admitted as a notary, my work has clearly focussed on notarial work rather than legal work.

Achim Amann: Let's start with the first question. "Can you explain the different types of transfer and in particular emphasise the advantages for the testator?"

Tobias Scheidacker: Well, there are different ways in which assets can be transferred. I suppose 'method of transfer' could mean 'gift versus bequest'. There is also the possibility of appointing someone as your heir or leaving someone a legacy.

When making a gift, you have the advantage that you can do this several times, especially with regard to tax aspects. There are tax-free allowances that are renewed every ten years. So, if someone has a large fortune, it might make sense to start making gifts early.

On the other hand, there is also the approach of spending everything you have earned in the course of your life and leaving only the rest. However, if you give away assets, they belong to the donee and can no longer be sold. One disadvantage of leaving only as an inheritance is that it can be less favourable from a tax perspective to transfer everything at once. In short, the choice between gifting and bequeathing depends on the testator's objectives.

Achim Amann: "If someone makes a gift of less than 12,000 euros and no tax is payable, does this have to be reported to the tax office? And what happens if you don't fulfil this reporting obligation?"

Tobias Scheidacker: As notaries, we are obliged to notify the tax office of any gifts that we notarise, regardless of the amount. The relevant regulations can be found in §34 of the Inheritance Tax Act and §8 of the Inheritance Tax Implementation Ordinance. As soon as a gift is notarised, the first thing we do is report it to the tax office. The situation is similar with property purchase agreements.

As far as the exemption limit is concerned: As a notary, I have no overview of whether gifts have already been made in the last ten years that would have to be added to the current gift, or whether any are planned in the future. The tax office will want to determine this themselves.

The general rule is that no tax return is required for gifts of less than €20,000. However, if there is a reporting or declaration obligation and this is not fulfilled, this would be an omitted tax return. This is a punishable offence and can lead to further costs.

Achim Amann: Yes, they then send you to a lawyer for criminal law, criminal tax law.

Tobias Scheidacker: Yes, that's right.

Achim Amann: "Question: I would like to bequeath my two apartment blocks to my son. But I absolutely need the usufruct right, as the rental income is my pension. My two daughters should not be taken into account because they already received properties years ago. Is that feasible?"

Tobias Scheidacker: The question consists of two parts. Firstly, is it possible to continue to receive the income from the property? Secondly, how can I ensure that I distribute my assets to my children appropriately so that my daughters, who have already received property, are not taken into account again?

To the first part of your question: Yes, that is definitely possible. The so-called "usufruct" is exactly the right instrument for this. With usufruct, you retain economic ownership of the property but transfer legal ownership. In concrete terms, this means that your son is entered in the land register as the owner of the property. Nevertheless, he does not receive the rental income or other income from the property - this continues to go to the holder of the usufruct, i.e. you. This can be stipulated in the gift agreement and will then be noted in the land register: firstly, the change of ownership and secondly, the registered usufruct in the second section of the land register. Another advantage: from a tax perspective, this is often more favourable than a gift without usufruct. The reason: the value of the property is reduced by the reserved usufruct. This means that the tax-free amount for gift tax is not exceeded so quickly. An example: Let's assume the son has an allowance of 400,000 euros for gift tax purposes. If the father gives away a property worth 500,000 euros but keeps the usufruct for himself, it may be that the usufruct reduces the taxable value of the gift to such an extent that no gift tax is payable. However, this must be calculated individually. In the case of two apartment buildings, it may make sense to make the transfer in stages so that the tax-free amount can be utilised several times.

Regarding the second part of your question: If you do not want to include your daughters in this transfer because they have already received property, there are regulations that offset gifts against later compulsory portion claims. However, it can get complicated. One option would be to reach an agreement with your daughters in which they waive their compulsory portion. This would mean that if they were disinherited, they would not be entitled to the compulsory portion. If the two apartment blocks, which are the main assets, are transferred to the son, he would ultimately have everything. By waiving their compulsory portion, the daughters would not have to fear any further claims and the transfer of assets would be regulated in your favour.

 Achim Amann: But the children have to do that voluntarily, don't they?

Tobias Scheidacker: Yes, of course you can't force them to do that. In most families, parents rely on their siblings to get on harmoniously with each other and to avoid arguments over money. But if you have doubts or want to make sure that everything goes smoothly after your own death, waiving the compulsory portion would be a possible solution.

Achim Amann: And it matters where the two apartment blocks are located and what condition they are in.

Tobias Scheidacker: Yes, this can certainly be relevant, as can previous gifts. The age of the persons involved and any other possible heirs or beneficiaries can also play a role. This really requires personalised advice, where everything is looked at in detail: What is currently available? What has already been given away? How has the situation developed and how should it be organised in the future?

Achim Amann: How does it work if, for example, I want to give my son a present and come to you? Do I have to book an appointment first? And what about the costs? Is there an hourly rate or a consultation fee?

Tobias Scheidacker: If I do this in my capacity as a notary, then the fee is based on the Notary Fees Act. I have to admit, I don't know every fee rate by heart, but there are fixed rules for this. So it is prescribed by law. If the consultation then results in a notarisation, the consultation is basically part of this notarisation fee - so it is included. This means that clients receive advice and understand exactly what they are doing. So you don't pay separately for counselling and notarisation. If someone only wants advice and no notarisation follows, then there is a separate fee for this.

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