For wealthy parents, it is often a challenge to optimize their wealth succession, including taxation. Some of them wonder whether it can be useful to make a gift at the birth of their children. The answer we give in our consulting practice to such frequently asked questions depends on the type and amount of assets. And if a family foundation is not an option, then we also know other solutions. We discuss these in the following article.

1. Gift at the birth of a child – Introduction

At the end of their lives, many wealthy couples face the challenge of transferring their wealth to their offspring as tax-free as possible. After all, they want it to give the children as much financial freedom as possible and now they continue the assets. Preserving it and, best of all, increasing it is the main reason why wealthy people are constantly dealing with this topic. It seems only logical that their children should also keep this so.

So the question is how to achieve the goal, namely a tax-free transfer of one's own assets. If you are looking for information on this, you will quickly find out that you can transfer certain assets tax-free over a ten-year period. It is therefore obvious to assume that one should start early with particularly large assets. So even a gift at the birth of your own child makes sense? That is the question we want to answer.

2. Gift at birth: use of allowances

Let us first of all follow the obvious approach, namely the use of the allowances as often as possible. § 16 ErbStG contains the provisions on the amount of the allowances granted by the legislature to the recipients in the event of donation or inheritance. It also contains the provision that you can transfer EUR 400,000 tax-free to your own children during this period. So it is exciting when you calculate how much wealth you can transfer tax-free to your own children, if you start with the gift already at the time of birth.

Suppose that when a child is born, each parent transfers EUR 400,000 to the newborn. This amounts to a total tax-free amount of EUR 800,000, which makes full use of the allowances for the first ten years. After the age of ten, the second round follows. Once again, father and mother each donate EUR 400,000 to their now ten-year-old child. And on the twentieth and thirtieth, perhaps even on the fortieth birthday, we repeat the process again. In the end, the parents handed over a total of EUR 4,000,000, without even a cent in taxes.

But is that enough? Anyone who has greater fortunes than a few million to inherit at some point, this design may seem at best a successful start. A meaningful design looks different in this case. But if only a limited portfolio of assets is to be transferred, then it can make sense to start with the gift of assets at the birth of the child.

3. Alternative to Gifting Property at Birth

3.1. Gift of assets: Significance of business assets

In general, the larger a private asset is, the smaller the share of cash. Sure, it is still considerable then, so they allow for a luxurious lifestyle. However, very often operating assets take up a much larger space in the asset structure. This also makes sense because the division of assets into different asset classes protects against lump risks and thus helps minimize the risk of significant asset losses.

This connection must also be taken into account when transferring assets. Fortunately, this accommodates us in the transfer of larger assets. Anyone who gives or inherits or receives business assets in particular can use various tax exemption regulations. The good thing is that they also work without the use of allowances.

3.2. Transfer of assets up to EUR 26 million

The first of these approaches involves the transfer of beneficiary assets. This concerns the operating assets already mentioned. Although some conditions still have to be met, but if they are met, the transfer can even be completely tax-free in the end. For this we apply §§ 13a, 13b ErbStG. However, this condition may be accompanied by a significant restriction. These tax exemptions based on the rule or option exemption can only be claimed up to an asset of EUR 26 million. In addition, taxes are again incurred.

Transfer of assets over EUR 26 million

That is only half the truth. Because with § 28a ErbStG, the legislature has also subsequently introduced the so-called protection requirements test. This applies if beneficiary assets within the meaning of § 13b ErbStG are transferred in the amount of at least EUR 26 million. If the recipient is able to meet the criteria for preserving the business assets, he/she will be relieved of the inheritance or gift tax on this transfer. However, this only applies up to the amount in which you have your own funds to pay the tax actually incurred. If, for example, a recipient has his own assets of EUR 100,000 and he receives about EUR 30 million using the relief needs test, he is obliged to pay half of his EUR 100,000 in tax.

4. Gift of large fortunes at birth

Now a newborn man is by nature at first destitute. That his parents are very wealthy in our view is irrelevant. Therefore, it is quite tempting to think about whether you make a very extensive donation at birth and use the spare needs test. Finally, there is then no available assets at the child, with which the tax could be paid even rudimentarily.

However, this also means that you will forgo this fortune for practically the rest of your life. More serious is also the prospect that the child will decide independently on the transferred property from the age of majority, without being sure that you can exert any influence on it. In addition, there is the question of whether one might have more children in the future. Would it be fair to them if the firstborn child received most of the property by donation at birth?

5. Gift of assets at birth – conclusion

At first glance, a gift of assets right at the birth of one's own child seems tempting from a tax point of view. Thus, a considerable saving of gift tax – thus indirectly also of inheritance tax – is quite possible. You only have to pay attention to what conditions the inheritance and gift tax law demands.

On the one hand. On the other hand, a lot depends on the decision whether to transfer assets to a descendant immediately at the birth of a descendant. As long as the child is still a minor, one retains control over the transferred assets. After all, as a parent you are entitled to represent the minor child. But as soon as the child is grown up, he can decide for himself what to do with the fortune. The question is therefore not so much whether one can transfer assets to one's own children by gift at birth, but whether one should. And this is not a tax question that we can answer here.