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14. June 2022 | severance pay after divorce – transferring money tax-free to spouses (this contribution)

The spouses may agree, under the marriage contract, that a spouse will receive a “separation” after the divorce. This payment is tax-free under certain conditions. Therefore, property can be transferred to the spouse tax-free by means of this severance payment. Our article clarifies when the severance pay after the divorce is tax-free and what further design considerations are attached to it.

The term severance pay in connection with marriage sounds strange, but best describes where the payment actually goes. In the marriage contract, everything can be regulated in principle due to private autonomy. So it is also possible to arrange a kind of “separation” after the divorce. Therefore, the marriage contract may provide that, when the marriage ends, one spouse has a payment claim against the other spouse if the marriage has held for a certain period of time. Of course, the claim can also be proportionate, and thus higher, the longer the marriage has lasted. For example, the marriage contract may stipulate that one spouse will receive 2 million euros if the marriage lasted 20 years. Otherwise, the amount shall be reduced pro rata.

It is important that in addition to the severance payment after the divorce, the statutory pension compensation, in particular the compensation for profits, is excluded. Why becomes clear in the further course. Therefore, the severance pay alone may regulate the provision of the spouse after the divorce.

Professional advice on the design of the severance payment in the marriage contract?

But then there is the question of how such a severance payment after the divorce is to be treated for tax purposes. In particular, it would be conceivable that the severance payment constitutes a gift within the meaning of § 7 (1) ErbStG. By definition, there is a gift for each free donation. In this connection, we must, above all, discuss the issue of non-remuneration.

The characteristic of non-remuneration is in particular the distinction to a so-called lump-sum payment. In the case of the latter, the criterion of gratuitousness is affirmed and therefore a gift is assumed. Flat-rate severance payments are payments which are made immediately upon conclusion of the marriage contract for the waiver of the consequences of divorce, in particular the statutory compensation for profits. The waiver of the positive divorce consequences could therefore justify a payability. Nevertheless, the compensation for profits only arises at the time when the community of profits ends. It is not yet clear whether and to what extent the profit compensation arises. In particular, the person entitled to severance pay may even be obliged to compensate himself at the end of the marriage. Therefore, the amount and existence of a consideration is not certain. Therefore, the flat-rate severance payment cannot be paid at all. For this reason, it also constitutes a taxable gift.

But it is different with a severance payment after divorce. In this case, the payment entitlement arises from the severance payment only with the divorce. The paying spouse was not obliged to conclude the marriage contract or to settle the compensation claim. The acquisition is free of charge, but only if it is not dependent on any compensation for the acquisition. This is countered if the payer considers his contribution, albeit erroneously, to be remunerated.

In the case of a severance payment after the divorce must be paid only if the waiver of the divorce consequences actually comes into effect. Therefore, the obligation to pay does not arise in advance, but only and only if the waiver is provided in return at the time of the divorce. The payment entitlement is therefore suspensive within the meaning of § 158 (1) BGB. Only upon the occurrence of the condition does the entitlement to a full right arise. It is not clear at the beginning whether the waiver will occur. In the further course, however, the renunciation becomes concrete as a result of the divorce. A lump-sum payment, on the other hand, is paid even if the marriage lasts until the end of life. It is therefore not clear that the waiver actually occurs in return.

In addition, in the severance payment after the divorce, all legal claims are individually contractually modified. A contract that regulates all conceivable divorce consequences strives for a comprehensive balance of all conflicts of interest. The severance payment is therefore embedded in comprehensive contract agreements on the legal consequences of a marriage. Therefore, it is precisely not possible to split off individual power as individual power.

Under these arguments, a severance payment after the divorce is paid, so that it is not subject to the inheritance tax and gift tax.

As stated above, a severance payment after divorce is tax-free. It is now questionable whether design possibilities result therefrom. First of all, it can be acknowledged that a statutory compensation for profits is always limited to a certain amount. Why this is the case and how this amount is calculated, we explained in another post. But at the beginning of the marriage it is not clear how much this amount is and who has to pay the amount. All this can be clarified and determined in advance by way of the marriage contract through a severance payment after the divorce. If the specified amount is higher than the amount of the profit compensation, you can transfer more assets to your ex-spouse tax-free than would be the case under the statutory property regime.

Such constellations would also be conceivable by way of a property swing. However, the marriage contract must be regulated very precisely. In particular, the severance pay must not then depend on a divorce. We are happy to advise you on this.

Should you play with the idea of providing for a severance payment in the marriage contract, you should condition its occurrence on the date of the divorce. Only in this way can the tax savings be claimed. In the case of a so-called lump sum compensation, however, only the general allowance between spouses of 500,000 euros according to § 16 paragraph 1 number 1 ErbStG applies. In addition, gift tax applies.