Inheritance and Estate Tax in German-American Estate Matters - FAQ

Inheritance and Estate Tax in German-American Estate Matters - FAQ

As lawyers specializing in Germany-U.S. probate law, we routinely provide legal analysis and represent U.S. citizen and residents with regard to inheritances in Germany including the taxation of the estate. This article addresses the most frequently asked questions pertaining to German inherence taxation and U.S. estate/inheritance taxation with respect to Germany-U.S. estate matters.

Does Germany have an Inheritance Tax?

Yes, Germany levies inheritance tax (Erbschaftsteuer) based on the German Inheritance and Gift Tax Act (Erbschafts- und Schenkungssteuergesetz, ErbStG).

What is the fundamental difference between U.S. federal estate tax and the German inheritance tax?

Germany taxes each heir and beneficiary individually. In contrast, the U.S. taxes the estate as an entity. Tax rates and exemptions vary depending on the relationship to the decedent and the amount inherited. The beneficiary must pay the German inheritance tax and not the estate.

When does Germany tax U.S. assets?

Germany taxes the worldwide estate, including U.S. assets, if either the beneficiary or the deceased was a German tax resident (Inländer) at relevant times and the German-American Double Taxation Agreement does not prevent Germany from taxing the U.S. assets.

Does the Germany-U.S. Double Taxation Agreement prevent Germany from taxing U.S. assets?

Under the Germany-U.S. Estate and Gift Tax Treaty, Germany may tax the inheritance if the beneficiary or the decedent maintained a fiscal domicile in Germany. The inheritance may also be taxed if the concerned assets are referenced in Articles 5 to 8 of the Treaty (e.g real property or business participations in Germany).

Is German inheritance tax imposed on assets located in Germany if the beneficiaries and the decedent were U.S. citizen or U.S. residents?

With some exceptions, U.S. citizenship does not prevent Germany from taxing the entire inheritance regardless if the decedent and/or beneficiaries are German tax residents. Furthermore, Germany may always tax “situs assets”, as defined in Art. 5 to 8 of the Treaty (e.g. real property located in Germany).

What are the inheritance tax rates in Germany?

German inheritance tax rates range from 7 % to 50 %, depending on the relationship to the decedent and the value of the share in terms of the net inheritance. 

What are the inheritance tax-free exemptions in Germany for 2020?

German inheritance tax-free exemptions range from EUR 20,000 to EUR 500,000, depending on the relationship between the decedent and the beneficiary and the value of the net inheritance. 

Does a beneficiary residing in the U.S. get the full tax-free exemption?

Yes, if the total estate is subject to German inheritance tax. If only the German “situs assets” are taxed, the tax-free exemption will only be granted proportionally.

What is the inheritance tax- free exemption for a child of the Decedent?

A child of the decedent inherits EUR 400,000 tax free. 

Is there an exemption for the Family Home?

The family home (Familienheim) of the surviving spouse (or registered same-sex partner) is completely tax exempt, if it is located in the European Union or European Economic Area. However, the surviving spouse (with some exceptions) must personally use it as principle home for another 10 years after death. Children may also benefit from the tax exemption. However, if the living space exceeds 200 square meters, the portion exceeding 200 square meters is subject to taxation.

Is there a marital deduction for the inheritance of the surviving Spouse?

As a general rule, Germany taxes the transfer to the surviving spouse and there is no marital deduction. However, the spouse benefits from a relatively high tax-free allowance and other exemptions.

What is the tax-free amount for the surviving spouse?

The tax-free amount for the surviving spouse is EUR 500,000. Furthermore, if the spouses were married under the German default property regime of community of accrued gains (Zugewinngemeinschaft), the value of the claim for equalization of accrued gains (Zugewinnausgleich) is tax exempt. Finally, an additional tax-free exemption of up to EUR 256,000 is granted to the spouse if he/she is not entitled to an inheritance tax-free pension payments upon the death of the first dying spouse. 

Is a transfer to a U.S. based trust subject to German Inheritance Tax?

Germany taxes the transfer to a foreign pool of assets (Vermögensmasse ausländischen Rechts) if the aim of such foreign pool of assets is to bind assets. Thus, Germany taxes the transfer to many (family) trusts. 

Do I have to report the inheritance in Germany?

In many situations, the beneficiaries (and not the personal representative) are obliged to report the transfer to the local inheritance tax office within three months after notice of the taxable transfer of property upon death. 

Do I have to file a German inheritance tax return?

The inheritance tax office can request any beneficiary or executor to file an inheritance tax return (Erbschaftsteuererklärung). Once the request is received, the identified individual must file an inheritance tax return. Generally, the inheritance tax office asks the beneficiary or, if there is an executor (Testamentsvollstrecker), the executor to file the inheritance tax return. 

When is German inheritance tax due?

The tax becomes due upon receipt of the tax assessment (Erbschaftsteuerbescheid) by the person who has filed the tax return (e.g. executor or beneficiary). Generally, the assessed tax is due within one month following receipt of the tax assessment. 

Does the U.S. tax the estates of U.S. citizens and residents (Green Card Holders)?

The U.S. imposes estate taxes on the worldwide assets of U.S. citizens and residents. However, the vast majority of such individuals will never need to file an estate tax return and/or pay estate taxes as the taxation is only triggered on assets valued at or above $11,580,000 (2020). For assets valued above the aforementioned amount, taxation at rates of up to 40%. For those subject to estate taxation, FORM 706 must be filed by the fiduciary of the concerned estate.

Does the U.S. tax an inheritance in Germany?

U.S. inheritance tax does not attach to inheritances of non-U.S. situs assets received from non-resident aliens, e.g. a German citizen, resident in Germany.

Does the U.S. credit the German inheritance tax?

The U.S. does credit any German inheritance tax imposed on German situs assets against the U.S. federal estate tax. However, as the U.S. does not tax German situs assets unless the decedent was a U.S. citizen or U.S. resident and due to the current high unified credit, the German inheritance tax can often not be offset against any U.S. tax.  However, should the assets receive income, that income will be subject to U.S. taxation and German taxes may be credited against certain income pursuant to the double taxation treaty.

Does the U.S. recipient of an inheritance in Germany have to report the gift?

This issue is dependent on the amount and/or nature of the gift. U.S. persons may be required to file an informational return; Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. U.S. person is defined as a U.S. citizen or U.S. resident for tax purposes.

U.S. persons (and executors of estates of U.S. decedents) must file Form 3520 to report: certain transactions with foreign trusts; ownership of foreign trusts under the rules of sections 671 through 679; and receipt of certain large gifts or bequests from certain foreign persons (more than $100,000 from a nonresident individual or a foreign estate).

If Form 3520 is required but not timely filed, the U.S. person will be subject to substantial penalties for not reporting the gift. The initial penalty for non-reporting is at least $10,000. 

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