Disclaiming an Inheritance in order to avoid German Inheritance Tax

Disclaiming an Inheritance in order to avoid German Inheritance Tax

There are various ways to reduce the German inheritance tax (Erbschaftsteuer) if the testator contacts us prior to his death. However, there are few ways to reduce the tax bill if the testator died withouth seeking prior consultation. The article outlines how a disclaimer can be used to reduce the German inheritance tax.

Basic Principles

Upon devolution of an inheritance, which is generally due to the death of a person, the estate passes as a whole to the heir (Erbe) or the heirs. See § 1922 BGB.

Acceptance of the inheritance (Erbschaftsannahme) is not required for the inheritance to pass to an heir (Erbe); however, any heir may disclaim the inheritance. See § 1942 BGB. If the inheritance is effectively disclaimed, it is deemed that the inheritance did not devolve on the person disclaiming it (§ 1953(1) BGB).

Further information: You will find further information on disclaiming an inheritance in the article "Disclaiming an inheritance under German law".

The claim of a legatee comes into existence (called "devolution of the legacy") on the devolution of the inheritance, notwithstanding the legatee's right to disclaim the legacy (§ 2176 BGB). The legatee can no longer disclaim the legacy after he has accepted it (§ 2180 BGB).

Tax Effects of a Disclaimer

In the event that assets are acquired mortis causa (by reason of death), e.g. by inheritance (Erbschaft) or legacy (Vermächtnis), as a matter of principle inheritance tax becomes chargeable on the date the testator dies (§ 9(1)(1) ErbStG). However, in the event that an heir disclaims the inheritance (or the legatee disclaims the legacy), the liability to pay taxes will lapse retroactively. If a tax assessment notice assessing the inheritance tax has already been issued, then the disclaimer constitutes an event with retroactive effect within the meaning of Number 2 of the first sentence of § 175(1) of the German General Fiscal Code (AO); the tax assessment notice has to be cancelled in that case. In the event of cancellation, any inheritance tax that has been paid must be refunded.

With regard to the person inheriting in place of the person who has disclaimed the inheritance, i.e. a subsequent heir (Nacherbe), an heir whose share of the inheritance passes to him or her through accrual, or an intestate heir (gesetzlicher Erbe), the tax is chargeable from the date on which the inheritance was disclaimed.

Please note: If an heir accepts the inheritance (by an act on the part of the heir, or by the heir's failure to disclaim timely) and the estate is distributed on the basis of an invalid disclaimer, the acquisition of the person who receives the share of the "disclaiment", is subject to gift tax (in addition to the inheritance due on the heir’s share). The same holds true, if the heir enters into a Deed of Variation under the laws of the UK. 

Use of a Disclaimer for the Reduction of the German Inheritance Tax 

Disclaiming the inheritance can often result in significant inheritance tax avoidance. This is particularly true when the disclaimant is elderly and the inheritance would be taxed a second time at her death. 

Example: Elke (70 years old) inherits from her mother EUR 1.2 Mio. Elke has 3 children: A, B and C.  As Elke is a successful business woman and holds substantial wealth, she does not need the inheritance from her mother. As she wishes to save the tax on the inheritance from her mother (tax free amount: EUR 400,000. Exceeding amount taxed at a rate 19 %; tax due: EUR 152,000.--) and reduce the tax triggered by her own passing, Elke disclaims the inheritance. As each of the children receives EUR 200,000 tax free and, due to the smaller amount received per capita, the tax rate is only 11 % the tax due is now only EUR 22,000 for each of the children (total: EUR 66,000). Furthermore, additional taxes are saved when Elke dies and the children inherit from her. 

Under German inheritance, partial disclaimers are only permissible in exceptional cases. However, if no partial disclaimer is permitted, it is possible to agree that a lump sum payment will be granted in return for a person disclaiming the inheritance. Such a lump sum payment, which the person disclaiming the inheritance receives in return for waiving the inheritance, is subject to inheritance tax pursuant to § 3(2)(4) ErbStG. The lump sum payment is deemed to have been provided by the testator, i.e., the tax-free allowance and the tax rate are to be determined based on the relationship between the testator and the person disclaiming the inheritance.

The heir who succeeds the person disclaiming can deduct the lump sum payment as part of the obligations of the estate in accordance with § 10(5)(3) ErbStG.

Rejecting a claim under a life-insurance policy

If a person rejects his or her entitlement to a claim under a contract that benefits third parties (e.g. from a life-insurance policy) in accordance with § 333 BGB, this right is deemed not to have been acquired, and no inheritance tax is to be assessed. See Finance Court of Lower Saxony (Finanzgericht Niedersachsen), July 7, 1999, case number: III 357/91

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