Gifts to minors and inheritance tax in Germany, Digi Mart USA News: Giving money and property away during one’s lifetime rather than passing it on after death has long been a proven strategy for wealthy people to save on inheritance tax. Amid uncertainty over a possible inheritance tax reform, this approach is currently gaining popularity.
The focus is not only on transfers to adults but also to children.
“We are currently increasingly handling gifts to minors,” says Kerstin Linder, a lawyer specializing in inheritance and tax law at the law firm Heussen. Depending on the child’s age and the type of assets being gifted, however, the process is often more complicated than many people assume.
Two lawyers explain what gift givers should consider and why such considerations are especially important right now.
What could change in inheritance tax? A few weeks ago, the Federal Constitutional Court considered whether the exemption rules for inherited business assets are constitutional (case reference: 1 BvR 804/22). Business heirs can benefit from tax relief worth millions, while private inheritances face significantly lower tax-free allowances.
Between an aunt and nephew, as in the court case, the allowance is only 20,000 euros.
When the constitutional judges announce their decision in a few months, it could prompt a reform of inheritance tax. Many legal experts are confident that such a reform could lead to a higher tax burden not only for business heirs but also for wealthy private individuals.
A concept paper from the SPD parliamentary group, published at the beginning of the year, pointed in this direction and caused a stir. “Many of our clients are currently bringing forward asset transfers they had already planned in order to still benefit from the existing legal situation,” says lawyer Linder.
Which gifts can be made tax-free? Current tax-free allowances mainly benefit close relatives. Spouses can receive up to 500,000 euros tax-free every ten years, and additional arrangements can allow even more.
A child can receive up to 400,000 euros tax-free from each parent every ten years. For grandchildren, the allowance is 200,000 euros from each grandparent.
For everyone else, including acquaintances and friends, the allowance is only 20,000 euros. Taxes apply above these thresholds.
Tax rates depend on the family relationship and the value of the gift.
What is special about gifts to minors? Children under seven are considered legally incapable of contracting (section 104 of the German Civil Code, BGB). If they are to receive a gift, their parents with custody must represent them legally.
Between their seventh birthday and their 18th birthday, children have limited legal capacity. “During this time they may act independently only if a transaction is merely legally advantageous for them,” says Julia Roglmeier, a lawyer specializing in inheritance law at the law firm RPE.
If this is not the case, for example because the gift may create legal obligations, children aged seven and older also need the consent of their legal representative (section 107 BGB). However, this cannot always be the parents.
The family court often appoints a supplementary guardian (section 1809 BGB).
How does the family relationship to the child matter? In the first case, when parents want to transfer assets to a child, they find themselves in a dual role as both giver and legal representative of the recipient. “This can lead to a conflict of interest,” says lawyer Linder.
So-called self-dealing transactions are therefore prohibited. If a gift is not “merely legally advantageous,” a supplementary guardian must be appointed.
For children under seven, this applies to any gift from the parents, even if the child suffers no legal disadvantage, for example with cash assets. Married parents are regarded as a unit: if the mother gives the child something, the father cannot represent the child, and vice versa.
In the second case, grandparents often want to transfer assets to grandchildren early. Here too, parents may not represent their children in gifts that are not purely advantageous, because they are related to the grandparents in a direct line and a conflict of interest could arise.
It would be different if assets were transferred from an aunt to a niece. In practice this constellation plays a minor role, partly because it carries only a 20,000-euro tax-free allowance.
Most often, parents or grandparents want to transfer assets to their children and grandchildren. Whether a supplementary guardian is necessary then depends largely on whether the gift carries obligations for the child.
Depending on the circumstances, approval from the family court may also be required.
When is a gift not “merely legally advantageous”? “Rented apartments are often gifted,” says lawyer Roglmeier. Through the gift, the child becomes a landlord with extensive obligations.
The child also becomes a member of a homeowners’ association. For this reason, such gifts are not purely advantageous.
“If a rented apartment is gifted, a supplementary guardian is always required, and regularly also approval from the family court,” the lawyer says. The case is less clear when an apartment that is used by the family is gifted.
Case law has also reached different conclusions in the past regarding the transfer of partnership interests to minors. This applies in particular to the transfer of fully paid-in limited partnership interests, says Linder.
To plan a gift well, Roglmeier advises coordinating the process early with a notary or lawyer. Once a concrete contract draft exists, the appointment of a supplementary guardian and court approval must be requested from the responsible family court.
The court then reviews the transaction in detail for its legal permissibility.
Who is appointed as supplementary guardian? Ideally, a person to serve as supplementary guardian should be proposed at the first contact with the family court. “This does not necessarily have to be a lawyer, but courts often prefer people with a legal background,” says Roglmeier.
If the court does not follow the proposal, it appoints a person from a list of supplementary guardians. That list usually includes lawyers who have agreed to take on this task and with whom the court regularly works.
What exactly does a supplementary guardian do? When a gift agreement is concluded, a supplementary guardian takes over legal representation of the child. The guardian reviews the contract and its effects on the child.
Once the gift agreement has been concluded and carried out, the guardian’s role ends. To avoid costly planning mistakes, Roglmeier recommends: “The notary’s draft should be submitted to the family court in advance with a request for a preliminary review.” This allows the court’s or the supplementary guardian’s requested changes to be incorporated flexibly into the draft.
Only once the court indicates that the contract can be approved should the final notarization appointment take place. This prevents the family from being left with high notary costs if the court unexpectedly refuses approval.
If shares in a company are gifted, a supplementary guardian may again be needed after the gift agreement is carried out, to exercise the child’s rights at shareholders’ meetings, where the parents also take part as shareholders. “In this case, a supplementary guardian is appointed again, this time with the task of exercising shareholder rights,” says Linder.
Whether such an appointment is actually necessary depends on the individual case and the planned resolutions.
How much does a supplementary guardian cost? Compensation for a supplementary guardian is generally a matter for negotiation. “Lawyers usually bill based on the value of the gift,” says Linder.
For a gift worth 400,000 euros of average difficulty, the fee under the German Lawyers’ Remuneration Act (RVG) is around 5,200 euros. Notary costs and, where applicable, court costs are added.
The accompanying costs of a gift to minors can therefore be high. “If a 16-year-old child is to receive a gift, I would advise, when in doubt, to wait two more years and transfer it exactly on their 18th birthday,” says lawyer Roglmeier.
For younger children, people are more likely to accept the additional costs.
