Estate Planning for U.S. persons with Property in Germany: German Situs Will or Global Will?

Estate Planning for U.S. persons with Property in Germany: German Situs Will or Global Will?

This article provides a brief overview of the benefits of a German situs will for U.S. persons with property located in Germany and provides a short introduction to a variety of planning considerations in German-American estate planning matters.

Multijurisdictional Will and Situs Will

A multijurisdictional will (also referred to as “global will”) addresses the administration and distribution of the testator’s worldwide assets. A (separate) situs (also referred to as “supplemental will”) will specifically addresses assets with a “situs” in a particular legal jurisdiction and is generally used in conjunction with a principal will.

Benefits of a German Situs Will

Should a testator domiciled in the U.S. own assets in Germany and the U.S., there are strategic, pragmatic and legal reasons for using a separate situs will. The advantages of a German situs will may include:

  • Ensuring validity of the will with respect to form;
  • The use of German legal terminology may avoid complications in the proceedings for obtaining a German certificate of inheritance;
  • Translation costs and incorrect translations may be avoided;
  • The administration of the German estate may be more efficient.

Ensuring validity of the will as regards to form

While most U.S. wills are recognized as being valid with respect to form in Germany, making a Will which complies with the formalities of German law will ensure that there are no exceptional circumstances which will would prevent Germany from recognizing the U.S. will. Pursuant to § 2231 BGB, the testator can choose between two forms of regular wills

Use of German legal Terminology and translation Costs

A German situs will that is drafted in German or is bilingual and utilizes German legal terminology (even if U.S. law is applicable) provides the German probate court with clarity with respect to the testator’s wishes and the effects of the U.S. will. Furthermore, a German language or bilingual will can result in significant savings and misunderstandings due to inaccurate translations as a translation is unnecessary.

More efficient Administration

In many situations, a German certificate of inheritance or executorship is necessary to settle the estate in Germany. However, if the situs will is notarized in front of a German notary (notarial will) and the heirs can be identified from plain reading of the will, no certificate of inheritance is necessary in order to register the heirs as new owner of real estate in Germany in the German land registry (Grundbuch).

Even if the estate does not include real property, a German situs will can result in a more efficient administration.  These efficiencies often result from the fact that German institutions (e.g. banks) must recognize a German will if it is sufficiently clear from the text of the will, who has the power to marshal the estate assets which are in their possession.

Please note: Unfortunately, some German institution are reluctant to recognize a (German) will if foreign law governs the will. As a matter of precaution, the testator should grant post-mortem power of attorney (Vollmacht auf den Tod) to the person called to settle the German estate. 

Importance of proper Preparation

The use of a German situs will should be part of a greater estate plan that should be coordinated with the U.S. will and will substitutes. The following should issues should be considered:

  • Scope of the German situs will and the U.S. will;
  • (Partial) Revocation (Widerruf) / non-revocation of the U.S. will;
  • Clear use of legal terms (e.g. does “issue” include adopted children);
  • Deduction of testamentary disposition in the U.S. will from forced heirship claims arising out of the German estate;
  • If the German executor (Testamentsvollstrecker) and the U.S. personal representative are not the same persons: Responsibility for filing the German inheritance tax return (Erbschaftsteuererklärung) and payment of the German inheritance tax (Erbschaftsteuer);
  • Clear responsibilities regarding the liability for estate debts and costs of administration;
  • Power to take transfer funds from German to the U.S. estate or vice-versa (if necessary);
  • If the beneficiaries under the German will and the U.S. will are not the same persons: Who shall bear the estate debts, costs of administration; and
  • Applicable law / choice of law clause (Rechtswahlklausel), e.g. in order to avoid the German forced share (Pflichtteil)

Alternatives to a German Situs Will

There are several estate planning instruments that allow U.S. persons with property in Germany to accomplish their estate planning goals without having to resort to making multiple wills. Some options include:

Principle Will / Global Will

If a U.S. will also covers German assets, the beneficiaries will generally require a German certificate of inheritance (Erbschein) or German certificate of executorship (Testamentsvollstreckerzeugnis). However, this outcome may be avoidable if there is combined with German Will substitutes and other German estate planning instruments. 

Lifetime Gifts

A common estate planning technique in Germany is to transfer assets, in particular real property, during the lifetime of the owner, to the next generation.

The main benefit of a lifetime gift (Schenkung) is the application of the unified tax-free exemption (e.g. EUR 400,000 for each child) of the German inheritance tax (Erbschaftsteuer) and German gift tax (Schenkungsteuer) which is available for a second time if the donor lives for more than 10 years after the making the gift. Commonly, the donor retains a usufruct (Nießbrauch) and/or a conditional or unconditional revocation right in order to protect himself from certain risks associated with the transfer (e.g. death of the donee or foreclosure proceedings in a gifted property). 

If drafted properly, the donee may even receive the step-up basis upon the donor`s death for U.S. capital gains tax purposes. 

For further information, please read our article Gifts in German Civil Law.

Payable on Death Account

Payable on death accounts (Vertrag zu Gunsten Dritter auf den Todesfall) and transfer on death accounts are permissible under German law. If the German estate consists solely of a checking account (Girokonto) and/or an investment account (Depot), a payable on death account may be a suitable solution.

Please note: The bank will only pay out to the designated beneficiary after the German transfer certificate (Unbedenklichkeitsbescheinigung) has been issued by the inheritance tax office. 

Joint Bank Account (Gemeinschaftskonto)

The balance of a German joint bank account (Gemeinschaftskonto) generally does not pass to the survivor. However, if the co-owner had agreed that each co-owner may dispose of the bank account (ODER Konto), the surviving co-owner will be able to dispose of the bank account even after the passing of the death of the other co-owner. However, unless there is a valid POD designation or he/she has been named as heir (Erbe), the heir(s) are beneficially entitled to the share of the first dying co-owner and may claim back from the surviving co-owner the amount taken from the account without beeing beneficially entitled.

Post-mortem and trans-mortem Mandate

Probate in Germany may be avoided by using a post-mortem mandate (Auftrag) and/or post-mortem power of attorney (postmortale Vollmacht). However, as a post-mortem mandate is not honored in every situation, they are s generally used in combination with other estate planning instruments, e.g. a (situs) will (Testament) or a bank power of attorney (Bankvollmacht). In many cases the mandatee (Auftragnehmer) also acts as the executor or is the (sole) heir. 

For further information please read our article Mandates in German Civil Law and their use in international Estate Planning 

Trusts

Trusts are virtually unknown in German Civil law and German law does not allow for the transfer of assets located in Germany to a trust. However, such a transfer does not necessarily have to be without effect. For example, a testamentary trust may be interpreted as a German legal instrument which has similar effects. For example, it may be interpreted as durable execution of the estate (Dauertestamentsvollstreckung)subsequent heirship (Vor- und Nacherbschaft), life estate / usufruct (Nießbrauch) or a combination thereof. However, as a German probate court would have to determine the German equivalent - which will delay the estate administration - and tax issues may arise (see article Taxation of U.S.-Trusts under the German Inheritance and Gift Tax Act) it is generally not advisable to use a (living) trust with respect to assets situated in Germany. 

If the decedent`s fiscal domicile is in the U.S., a trust may be an efficient instrument to reduce the German inheritance tax imposed by Germany on the transfer of U.S. assets (not German assets). For further information, please read our article U.S. Trusts in German-American Estate Planning

Family Foundation

A German family foundation (Familienstiftung) operates similarly to a trust. A foundation can be created during the lifetime of the founder or upon his death by way of a will. As the creation and administration of a German family foundation is relatively complicated and may trigger German gift tax (Schenkungsteuer) or inheritance tax (Erbschaftsteuer), one must determine if it is cost efficient and suitable in light of the facts.

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