In an earlier post we informed about the legal obligation to report an inheritance or gift. This time we inform about the calculation of the inheritance tax, the tax brackets and the allowances as well as other aspects in connection with inheritance costs.

The taxation of an inheritance or gift takes place taking into account an allowance that is not taxed. Thus, only the share of an inheritance or a gift that is above the respective allowance is taxed. The amount of the allowance depends on the relationship between the participants (donor and recipient or testator and heir). In principle, the closer the relationship of the participants, the higher the allowance.

In the case of an inheritance between spouses or cohabiting partners, another allowance is credited, the so-called special allowance. He grants the survivor an additional allowance of EUR 256.000.00. If the death also transfers pensions to the still living partner, however, the tax-free share is reduced.

A similar rule applies to the children of a decedent or donor to whom tax class I applies (see below). where the special allowance is differentiated according to the age of the children; The older the child, the higher the special allowance. Here, too, the tax-free share of pensions transferred to children as a result of death is being reduced.

2. Accounting of inheritance costs (lump sum of inheritance costs)

In the case of inheritance, in addition to the allowance, inheritance costs are also relevant, which reduces the taxable share of the inheritance. In addition to funeral costs, inheritance costs also include costs related to the will (e.g. opening of a will, applying for an inheritance certificate). Also deductible are also costs incurred when submitting the inheritance tax declaration. On the other hand, such costs, which occur in an appeal or even in legal proceedings against an estate tax ruling, are not tax-reducing effective.

The law also provides for a so-called lump sum of EUR 10,300.00 per death. Up to this limit, proof of the actual costs is not necessary. If the costs are higher, a consideration is only possible if it can be proven. If several heirs are involved in an inheritance, a division of the inheritance fee is made. Their respective amount depends on the share of the individual participants in the inheritance. In the case of contributions above the flat-rate share, each heir must prove this.

By the way: If the costs of inheritance exceed the inheritance, there is, under certain conditions, the possibility of considering them as exceptional burdens in the income tax. One of the prerequisites is that the inheritance assumes the costs for moral reasons. This means that both family members and friends or long-term neighbors are entitled to this opportunity.

The tax rate depends on the one hand on the family relationship and on the other on the value of the taxable acquisition. Depending on the family relationship, taxpayers are assigned one of three tax classes. The control class I has the lowest control rates. They are at least 7 % and at most 30 %. In tax class II, they range from 15 to 43% and in tax class III from 30 to 50%. Which of these staggered percentages applies depends on the value of the taxable acquisition. This value is also staggered in several stages.

In order to present the previous, very general information regarding the allowance and tax bracket a little more concretely, we have prepared three tables. They are based on the legal requirements of the Inheritance Tax and Gift Tax Act.

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4. Crediting of previous gifts to inheritance tax

4.1. Personal allowance

Within ten years, one can only fully claim an allowance for gifts or inheritance between two persons once. In this way, the legislator wants to prevent a division of a taxable asset into several smaller and thus no longer taxable transfers. However, this only applies to transfers that the beneficiary always receives from the same donor and any subsequent testator. The allowances are therefore always sent to a donation or Inheritance relationship tied between two specific persons (asset transfer from person X to person Y).

4.2. Tax influence of previous gifts on an inheritance

If more than one gift and perhaps also an inheritance takes place within a period of ten years in such a constellation of persons, then the previously acquired values are taken into account in the calculation of the current gift or inheritance tax. This may lead to the tax office charging a tax later on for earlier tax-free gifts. For this reason, the tax office also expects the amount and time of previously inflowed assets when the acquisition is submitted.

5th Tax Savings Model for Inheritance Tax: Chain Giving

The question remains whether gifts whose total size exceeds an allowance are also possible without taxation. A legally flawless tax savings model for this is the so-called chain gifting. For this purpose, further persons are interposed between the donor and the gifted person, who act as intermediaries (e.g. transfer of assets from person X to persons A and B and these each to person Y). The purpose of this is that the final recipient of the transfer receives more than just an allowance. Each intermediary thus grants the final recipient its own allowance. Therefore, if there are enough people available as intermediaries, a gift of any amount can be transferred to the beneficiary.

However, in the case of an intended chain donation, it must be noted that the tax office could complain of this as an abuse of design, which may lead to a legal dispute in court. However, the Bundesfinanzhof ruled that the circumstances must be taken into account in a chain donation (BFH, Az. II R37/11 of 18.03.2013). So it depends on a well-considered approach, in which one should resort to the good advice of a tax consultant.