With this article we explain the principle of chain joining. In addition, we inform about requirements and deadlines that are important in the option of chain joining. Furthermore, we explain how you design a chain join, when a chain join is allowed and allowed and why you can save here.

The free transfer of assets to another person is subject to inheritance tax or gift tax in Germany. There are a few ways to get around them. Here we show you more information about the method of chain joining. This is a model that allows you to save the gift tax that would otherwise arise from a conventional transfer of assets. We also give you an explanatory example and explain when this model is particularly worthwhile.

2nd principle of chain linkage

The chain gift is used in the transfer of assets that would normally trigger an inheritance tax or gift tax in the amount to be transferred. Thus, instead of transferring the assets to the beneficiary in a single transaction, the assets are first distributed to intermediaries by donation. It is important here that the transfer of the assets to these intermediaries takes place on a scale that is ideally small enough to not bring about a tax on the intermediaries themselves. In other words, the order of magnitude is within the limits of the allowances of the respective intermediaries. Once this intermediate step has taken place, in a second step the intermediaries transfer the assets previously received without control to the final receiver. Since several transmissions now take place here, the final receiver is able to claim the allowance due to him for each individual one.

3. Admissibility of chain linking

Before we illuminate the details of the chain link, we will go into legal aspects. When the tax offices first came into contact with the model of chain gifting, they doubted the legality of the model. After all, it seemed as if this was a form of abuse of rights as defined in § 42 AO. In the meantime, however, the Bundesfinanzhof has confirmed in the highest instance the legality of the chain donation. However, this is subject to certain conditions.

4th prerequisites for chain joining

4.1. A question of trust

The most important prerequisite for the use of chain joining is a question of trust. Can one trust that the intermediaries will actually pass on the assets to the intended final recipient? Finally, it is a lawful transfer of assets in which the intermediaries may receive substantial amounts of assets. However, no legal obligation to forward must be made, as this is an exclusion criterion when considering legality. It is therefore trusted that the intermediaries will then actually pass on the received assets voluntarily to the intended final recipient.

From this point of view, chain joining seems to be more of a model used among close family members. Another aspect that speaks for chain joining at the family level is the advantageous amount of allowances. In any case, right at the beginning of the consideration of whether a chain addition comes into question, this aspect should receive the full attention of the carrier. Only if the answer to this is certainly positive, the further planning is worthwhile. However, if there is a risk that the trust could be abused, the regular taxable transfer is certainly preferable to a potential complete default. This alternative consideration should then also include the expected amount of the inheritance tax or gift tax. In the event that this remains within a reasonable framework, unnecessary risks should be avoided.

4.2. The ten-year period

Furthermore, the planning of the chain donation must take into account the fact that the intermediary himself does not incur any inheritance tax or gift tax. On the one hand, this is conditional on the assets being within the limits of the allowance that the intermediary can use. However, this may also be subject to deadlines. If the chain donation takes place within a period of ten years in which the donor had already transferred property to the intermediary, this must be taken into account. This condition must of course also be met for the transfer from the intermediary to the final recipient. If one of these points is disregarded, all property transferred in this way within the last ten years is subject to inheritance tax or gift tax.

4.3. Distribution of assets

The number of intermediaries is determined by the amount of assets to be transferred and the amount of usable estate tax exemptions on the part of both the intermediary and the final recipient. If a transfer of assets between the parties involved in this direction has already taken place within the past ten years before the chain donation, this can be compensated by a sufficiently high number of intermediaries.

4.4. Date of transfer to final recipient

In this section we once again refer to the legality of the chain link. It is only permitted if the first transmission to the intermediaries from the second to the final receiver does not take place in one step. It is certainly the easiest way for everyone involved to handle both matters in a single appointment with the notary, but this carries the risk that this will be regarded as abuse of rights by the tax office. A court case could then be the result. Even if the court ruling confirms the legality of the chain link, such a procedure still entails considerable effort and would have been avoidable.

We therefore recommend a time-delayed forwarding of the assets to be transferred to the final recipient. A few days may be enough to dispel the suspicion of abuse of rights. Another measure which serves this purpose is the transfer of assets by intermediaries at different times. This lays the foundation of an independent transfer of assets. In this way, the tax office lacks the basis to present a chain link as an abuse of rights.

4.5. Transfer of real estate by chain donation

Transferring land and buildings by chain linking requires a slightly more differentiated view. A cash amount or business shares are relatively easily divided into smaller portions, so that they can remain within usable allowances in terms of value. For a property and especially for a building, this is a bit more complex. Here, the gift to a middle person with the highest possible allowance may be the best option. Often your own life partner or your own child comes into question. This closest family group also enjoys the cheapest tax bracket and thus also the lowest tax rates. Thus, even if the chain link entails taxation, the level of tax is at least the most favourable for this group of people. In-depth tax advice based on individual circumstances is therefore particularly important.

Another point is indirectly related to the chain gifting of real estate: the real estate acquisition tax. Here too, a direct relationship is a favorable factor. While the transfer of a property among third parties requires a real estate transfer tax, this is irrelevant between parents and their children. Unlike in the case of inheritance tax and gift tax, daughters-in-law and sons-in-law also belong to the group of persons for whom the transfer of land does not entail real estate transfer tax.

4.6. Possibilities of usufruct in a chain joining

A reserved usufruct or grant usufruct is the right of the bestower to continue to participate in certain advantages of the property to be given. An example of such usufruct is the transfer of a leased land where a share of the rent is due to the donor. The usufruct therefore constitutes an inheritance liability in connection with a gift. It thus reduces the value of the transferred donation. This reduction is determined according to a legally prescribed method in which the value of the consideration serves as a yardstick.

A usufruct can continue to exist as a right if the related object is given away again. Therefore, the usufruct must also be taken into account for tax reduction in the chain joining. A clever combination of chain yawning and usufruct can thus help to exclude a foreseeable gift tax, but at least significantly minimize it.

4.7. The Role of Siblings in a Chain Giving

If you want to include your siblings as intermediaries in a planned chain donation, you should know that their contribution can be rather small. On the one hand, this is due to the small allowance that siblings can use when transferring assets among themselves. It is only EUR 20,000 over a ten-year period. Furthermore, the tax rates for gift tax among siblings are between 15% and 43%. The tax rate is generally measured by the asset given away.

5th case of a chain link

The following example is intended to promote comprehensibility on the subject of chain joining:

Grandfather Kluge wants to transfer part of his fortune to his grandson Moritz during his lifetime. This includes a stock package worth EUR 15,000 and a plot worth EUR 395,000. In total, assets of EUR 410,000 are to be transferred. This amount significantly exceeds his grandson’s allowance of EUR 200,000. If the assets were now transferred directly, a gift tax of EUR 210,000 x 7% (tax class I) = EUR 14,700 would be expected.

Grandfather Kluge, however, follows the advice of his tax advisor. He talks to his son and daughter-in-law about his project and wins their support. So they meet at the notary on June 1. This initiates all necessary measures, so that both the share package to the daughter-in-law and the property soon after confirms the son as the new owner in the land register. Incidentally, the transfer of the property to the son does not entail any real estate transfer tax. On July 1, the daughter-in-law has meanwhile appeared at the notary to transfer the share package to the son by donation. And on September 1, the notarized transfer of the property from father to son takes place. Again, there is no real estate transfer tax.

Moritz receives all these assets without a gift tax being imposed on him. He uses the allowances of EUR 400,000 each for the two gifts by his parents. A remaining allowance of EUR 5,000 can be used with his father and EUR 385,000 with his mother for future transfers. Gifts that flow to him in the following ten years up to these individual amounts from father and mother are then also without tax burden for him.

6th Conclusion: Saving Taxes by Chain Giving

Chain donation offers considerable savings potential, especially when transferring larger assets within a family. Due to the high allowance that children receive when donated by their parents, they can also be used for transmissions over two or more generations. Even if this still leads to a gift tax, the beneficiaries benefit from the low tax rates applied to the taxation of relatives.

Another point should be at the forefront of planning in this context. Those who take the temporal factor into account in the transfer of their assets forward-looking can contribute to a tax-free gift as far as possible. The staggering of donations at intervals of ten years must therefore be planned as early as possible. However, it should also be noted that in the case of an inheritance that may occur in the meantime, gifts that were transferred from the deceased to the beneficiary in the ten previous years are also taken into account in the inheritance tax. This can therefore lead to a subsequent taxation of previously tax-free gifts.