date | theme

24. July 2019 | Saving inheritance tax through chain gifting: deadlines and criteria

10. February 2021 | Property swing – transferring assets to spouses without gift tax

04. May 2021 | Empowerment needs test and save inheritance tax

15. December 2021 | Avoid gift tax when gifting large assets

29. December 2021 | Optimize donation: Transfer financial assets tax-free to spouses (this contribution)

In order to optimize a gift of financial assets between two spouses, one can include the home. Because the gift of a home to a spouse is neither taxable in the gift tax nor in the real estate acquisition tax. However, if you have transferred the home to the spouse by way of such a tax-free gift, you can sell it back to the spouse. In this way, the financial assets originally to be given away find their way to the goal. The sale of a home to a spouse is also tax-free, because there is also an exception in the Real Estate Tax Act. In this way, however, you can also optimize the further gift of financial assets to your own children. Finally, each child can use the double allowance.

When it comes to donations in Germany, the Treasury also sits at the table. Although the inheritance and gift tax law, which applies in these cases, grants some allowances. There is also a tax advantage for close relatives. Furthermore, a differentiated tax rate may also reduce the tax somewhat. But apart from that, the interest of the state in the financial participation in the transfer of assets in Germany is quite considerable. However, there are many ways to optimize taxes, especially in the area of gifts.

So now we set out to point out one of the many paths that can be followed to achieve this goal. We focus on the tax-free transfer of assets between spouses. But their children can also benefit from this, albeit indirectly.

The easiest way to demonstrate our design model, with which we want to optimize the gift between spouses, is with an example. For this we invent the couple Treu. Mr. Treu is an entrepreneur and has a liquid assets of EUR 10,000,000. He also owns a villa in Baden-Baden, which serves as a home for the couple. The value of the villa should be EUR 5.000.000. This villa is the only residence of Mr. and Mrs. Treu.

Mr. Treu would now like to leave part of his fortune to his wife. His wife will receive half of his money. He therefore considers achieving this by way of a gift. However, his tax consultant informs him that, apart from an allowance of EUR 500,000, the rest of the gift would be subject to gift tax of 19%. At this rate, the Treasury would therefore receive EUR 855,000 from the gift; So much money that he would rather give his wife. Just how?

This is where our design model is now applied. For this we recommend the couple Treu to transfer the home instead of the financial assets by donation. Although the value of the villa in our example should only seemingly coincidentally make up the amount of the actual financial assets to be given away, this certainly works with other value ratios.

Nevertheless, the first thought may be rather critical in response to our proposal, namely that it was by no means the goal to transfer any assets with that value. And the second thought may be that gift tax also applies when gifting a property in Germany. How then should the gift of the villa optimize the tax?

So two legitimate questions, to which we would now like to give a reasoned answer. First of all, an exception to inheritance and gift tax applies. Because the transfer of the home to the spouse by way of a gift is completely tax-free. This also applies to property transfer tax. So Mrs. Treu can freely dispose of the property after the transfer of the villa by her husband.

This also includes the sale of the villa. In this way, Mrs. Treu could then receive the EUR 5,000,000 in financial assets that her husband originally wanted to give her. After all, this also corresponds to the value of the property on the free market. However, this would probably lead to the fact that the married couple Treu would then have to find a new home. And that would also cost money. Either part of Mr. or Mrs. Treu's financial assets would then be used up. It is therefore clear that these measures alone cannot be the solution.

Nevertheless, at this point we recommend the sale of the villa by Mrs. Treu. However, the sale of the villa should go to a very specific person, namely her husband. After all, he still has the EUR 5.000.000, which he originally wanted to give his wife, at his disposal. And since the sale of real estate between spouses also does not trigger a real estate transfer tax, Ms. Treu can receive EUR 5,000,000 in financial assets without incurring any tax or her and her husband having to change their familiar living conditions. As promised, our tax design model thus helps to optimize the gift between two spouses by avoiding it altogether.

We can understand, if at first our readers may be amazed, that our design model is suitable in such a simple way to avoid taxes on a gift. Perhaps there is a little disbelief in the game. Therefore, we now look at the legal bases that allow us to optimize taxes in this gift. After all, we would like to convince you that this design model is right.

Let’s move forward. First of all, in our model we made the gift of the home. We were able to optimize the donation on the basis of § 13 (1) number 4a ErbStG. Because it says that the transfer of a family home to a spouse remains tax-free. The law defines the term family home as a built-up plot of land in which there is an apartment that is subject to its own use. And this is exactly what applies to the villa of our fictional married couple Treu. The advantage here is also that the law does not impose restrictive regulations regarding any other characteristics of the family home. Therefore, for example, the size or equipment of the home play no role in this regard.

Next, we look at the legal basis that allows the tax-free acquisition of the property between spouses. For this we look in § 3 number 4 GrEStG. And here, too, we find quite clearly the regulation that exempts the purchase of a property from the spouse. Since the type of acquisition is not subject to any restriction, the sale made by Ms. Treu to her husband without real estate acquisition tax is also possible.

Thus, in this situation, it is free to optimize the donation of EUR 5,000,000 in financial assets in this way for tax purposes. The only admission to this is that this design model is basically not a real gift of financial assets. But at least we gave something away, namely the home.

In addition, we would like to note that in this design model the property status of the spouses has no relevance. Whether there is separation of goods, community of goods or a community of added value, the prerequisites for implementing our model remain unaffected. In contrast, the property regime in the property regime swing as a design model is quite important.

Although the tax design model we presented here may primarily optimize the gifting of financial assets to spouses. However, based on this, the succession of assets can also be made advantageous by including any children.

If the spouses had children faithfully in our example, then in the initial situation only the father could have transferred financial assets to his children by way of a gift; Mrs Treu has no assets. As a result, the children could only use an allowance for gifts from the father. In this way, each child could receive only EUR 400,000 tax-free as a gift within ten years.

From the time when Ms. Treu also has financial assets in our example, each child could claim an allowance of EUR 400,000 for donations on the maternal side. Every child could look forward to tax-free gifts of EUR 800,000 every ten years! So our design model also serves in the long term to optimize the recurring gift of financial assets to their own children.

Furthermore, our design model has the advantage that the assets of the parents, which should pass on to the children by way of inheritance in the event of their death in old age, will hardly be large enough to require a high inheritance tax. In this way, we achieve as a secondary purpose that parents optimize the future inheritance tax of their children by early tax-optimized donation of their assets.

If you would like to receive further information on this, our contribution to chain joining is highly recommended. We recommend that all those who are interested in implementing our design models contact us by e-mail or Calendly. We are also happy to help you to optimize your gift or asset succession for tax purposes.