If you want to save your close relatives high inheritance taxes, you should think about making a gift during your lifetime. We clarify the most important questions about tax allowances, deadlines and effects on inheritance.
Donate or bequeath? This question moves many with increasing age. In principle, there is much to be said for passing on one’s assets to one’s spouse, children or other close relatives during one’s lifetime. On the one hand, high tax allowances beckon, which can be exhausted several times over if the gifting is started early on. On the other hand, the donor retains the reins in the distribution of his assets and can avoid disputes breaking out among the heirs after his death.
"By giving money away, parents can enable their children to buy their own home or build up a livelihood," says Wolfram Theiss, a specialist in inheritance and gift tax law in Munich. He is Chairman of the Inheritance Law Working Group of the German Lawyers’ Association. Children around the age of 30 can often make better use of this financial contribution from their parents than if they were to inherit the money decades later. In this way, parents can ensure that disagreeable relatives are left empty-handed when they inherit.
Which tax allowances apply in the case of a gift??
No matter whether inheritances or gifts: There are tax allowances in both cases. This means that taxes do not have to be paid until the amount exceeds a certain level. "The tax-free amount is the higher, the closer the kinship relationship is," explains Isabel Klocke of the Taxpayers’ Association.
Spouses can receive up to 500.000 euros inheritance without paying taxes. Children can receive 400.000 euros tax-free to his daughter in 2017 – from each of her parents. Grandparents can give their grandchildren 200.Leave 000 euros without the taxman intervening. There is also a tax-free allowance for stepchildren, siblings, nieces, nephews and cohabitants: it is 20.000 euros.
How often can the tax allowance be exhausted??
However, there is a significant difference between inheritances and gifts: "In contrast to inheritances, the tax allowances for gifts can be used up anew every ten years," explains Klocke. For example, if a father has given his daughter an amount of 400.000 as a gift, she does not have to pay taxes; the father can give 400 again to the daughter ten years later.Giving 000 euros as a gift without incurring taxes.
So if you start distributing your assets early on and pass them on to your descendants at ten-year intervals, you ensure that the beneficiaries end up paying less tax or none at all. This is particularly worthwhile in the case of large estates.
How do chain gifts work?
In the case of chain gifts, assets are gradually given to the children. It is possible, for example, for one spouse to give the other 500.000 tax-free and then both parents give 400 euros separately to their children.000 euros to their children. In this way, the parties involved benefit twice from the tax allowances.
What effects do gifts have on the compulsory portion?
"The gifts also automatically reduce the compulsory portion to which relatives such as children are entitled in the event of inheritance," says Theiss. But be careful: Gifts that were initiated in the last ten years before the death of the donor are counted as part of the estate and thus increase the claim to the compulsory portion.
"However, there is a so-called depreciation factor of ten percent," explains Theiss. If the donor dies in the first year after the gift, the compulsory portion is based on the total value of the estate. If he dies in the second year, the compulsory portion amounts to 90 percent of the asset, in the third year 80 percent. Only after ten years is the gift irrelevant for the compulsory portion.
Can gifts be reversed?
"A gift must be well thought out," emphasizes Theiss. Because it can not be so easily undone again. This is possible, if at all, only in exceptional cases, such as gross ingratitude.
How should gifts be documented?
Donations should be absolutely documented – with names of the involved ones, the object of the donation, date as well as signatures of all involved ones. In the case of money or objects, this is also possible informally – i.e. without a lawyer or notary public.
A gift of real estate must always be notarized.
What you should bear in mind when making a gift of real estate?
The decision to transfer a property you live in to your children should be well thought out. "From the moment of entry in the land register, the donor is no longer the master of the house," says Anja Hardenberg of Stiftung Warentest in Berlin. He can neither sell it nor use it as loan collateral. Donors should therefore secure a so-called usufructuary right. This not only allows them to continue to use the property given away, but also to continue to rent it out – the income belongs to the holder of the usufructuary right.
When giving away real estate, a sophisticated transfer agreement should be concluded if possible, recommends Hardenberg. Not only the right of usufruct may be agreed, but also a right of reclaim, for example. If, for example, the son becomes insolvent, the house reverts to the parents. "This prevents foreclosure of the property by the son’s creditors," Hardenberg said. She advises: "When drawing up the transfer contract, property owners should definitely seek legal advice.
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