Tax-free gifts to children or friends: what you need to know about this

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Different allowances

Tax-free gifts to children or friends: This is what you need to know

Ulrike Low

Giving with a warm hand: Those who decide to make gifts of money, material assets and real estate during their lifetime usually experience what becomes of the present. © Photo: Andrey Popov/imago images

Nuremberg – It’s better to give than to bequeath? Those who start estate planning in good time can pass on more assets tax-free through gifts during their lifetime than through a will.

Those who want to divide their assets among their heirs during their lifetime should hurry: Every ten years, gifts remain tax-free within personal allowances. Children and stepchildren can receive 400,000 euros from their parents, a grandchild 200,000 euros. Spouses can give each other even half a million euros, plus the co-ownership share in the owner-occupied house plus inventory.

Germans are rich. Not every single one, of course – but all the net assets of private households add up to 14.1 trillion euros for 2018. One trillion, that’s a thousand billion. Or a million million. Or a one with twelve zeros.

Some of this 14.1 trillion euros is given away or inherited every year, but exactly how much is known unfortunately no one exactly. The figures given by the Federal Statistical Office only include taxable inheritances and gifts. Who remains under theuppigen free allowances, does not appear in the statistics.

The German Institute for Retirement Provision is cited particularly frequently: According to this, a total of 3067 billion euros will be inherited in the ten years from 2015 to 2024. According to the study, about 1400 billion change hands as cash, bank deposits and securities, and just under 1300 billion in the form of real estate. Around 340 billion comes in the form of tangible assets, from jewelry to carpets.

If there is talk of allowances and the active structuring of asset succession, this initially sounds like a luxury problem. Can only dream of it, who earns its money by beastly work? This is not quite true: The amount of the allowances depends on the degree of kinship. Only the part of the gift above this value must be taxed. But those who live together unmarried can only transfer 20,000 euros to their partner without the taxman taking a bite out of it.

Norbert Gieseler is involved in inheritance and family law as Vice President of the German Association of Lawyers, Notaries and Tax Consultants. He works in Nuremberg as a specialist lawyer for tax law and does the math: Max Meier and Eva Muller live unmarried in a property worth 400,000 euros. If Max dies, he can bequeath his half to Eva (and vice versa) by will. In this case, the tax-free amount is 20,000 euros, and Eva (who is not related to the testator) must pay tax on 180,000 euros in tax class III at 30 percent.

A gift can also be reclaimed

Friends and acquaintances, as well as brothers and sisters, nieces or nephews – no matter how close they are to the donor – must pay taxes on gifts of more than 20,000 euros. However, close relatives pay 15 percent tax for each additional euro, i.e. only half as much as friends and acquaintances.

One could, in view of this calculation, as Max Meier and Eva Mueller nevertheless still come on the idea over the marriage to think – however expert Gieseler advises the partners to donate in this case mutually the respective house half to itself. Only the costs for the notary, the entry in the land register and the land transfer tax are incurred.

Max Meier and Eva Muller should not let go of this gift completely, however, but should (in a figurative sense) hold on to the loop around the gift – and agree on a right of reclamation in the event of death. This avoids taxes and also the sudden inheritance by relatives.

Tax advantage: usufruct lowers the value of the property

Example loan: If children want to build, the parents can buy the property and finance the construction. To use allowances, part can be given away, and part of the sum run as a loan and flow back through rent payment. Parts of the loan can be waived every ten years.

Example of usufruct: Parents should not give away the property they occupy themselves without contractually agreeing to "usufruct" to grant a usufruct. This means the right of the Mustermann parents to continue to live rent-free on the first floor of the house, even if the building already belongs to the son living on the second floor. Also the incomes, for example by tenants in the attic, are entitled to the parents sample man as usufructuaries – in addition these rent incomes can be part of their age precaution.

Attorney Gieseler: "The value of the real estate sinks by the usufruct reservation, fiscally a plus point. It should be noted here: The ten-year period during which those entitled to a compulsory portion could file a claim does not begin until the end of the usufruct, i.e., usually upon the death of the donor."

Usufruct – the model functions comparably also for securities. In the case of a usufructuary securities account, the donor reserves the right to use the income from the securities account for life, and ownership of the securities account passes immediately to the donee. The advantage: the tax value of the gift is reduced.

Actively shaping the succession of assets during one’s lifetime instead of stipulating it in a will is the trend, says Norbert Gieseler. If you make a gift, you can even get your assets back: It may also turn out that the donee is not in a position to manage the assets transferred to him sensibly – for example, because he is threatened with insolvency or is plagued by an addiction. In the same way, the donor himself can unexpectedly find himself in a financial predicament. And last but not least, of course, it may be that you simply regret making the gift.

Gifts to minors can also be contractually structured in such a way that access to the assets is not fully possible.

Tax-free: Allowances can be used again every ten years. Married persons do not use up any allowance if one of them transfers the co-ownership share in the owner-occupied house to the other during his lifetime. This remains tax-free between spouses.
Reclaiming: Donors can reserve the right to reclaim a gift. If this is agreed upon for real estate in a deed of gift, this is also recognized for tax purposes.
Advice: It is worth going to a lawyer, notary and tax advisor when it comes to assets, company ownership or complicated family relationships – for example, because the children are estranged or come from different connections. The fee is often only a fraction of the savings.

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