What does the 1.5 percent figure mean?

How to inherit, what to do? It’s not for nothing that inheritance tax is also known as the“stupid tax“. In other words, anyone who doesn’t deal with it is stupid. Why? You can see that very quickly here: €30 million becomes a tax burden of just €1.5 million.

The 1.5 percent is not a statutory tax rate, but an effective average that can result from very large company inheritances. It arises when exemption rules for business assets, deferrals and, in some cases, waivers come together. As a result, only a small part of the estate value is taxed at all.

Here is a concrete example calculation that shows how the effective tax rate falls from 30% to just 1.5% for a 100 million euro company inheritance. Extra short, so it’s easy to understand.

1st starting point – without benefits

Statutory rate: 30 %

Calculation:
€ 100 million × 30 % = € 30 million tax
→ Effective tax burden: 30 %

2. relief discount (85 % standard relief)

The Inheritance Tax and Gift Tax Act (ErbStG) allows 85% tax exemption for business assets if the business is continued for at least 5 years.

Calculation:
100 million × 15% = € 15 million taxable
15 million × 30 % = € 4.5 million tax
→ Effective tax burden: 4.5 %

3. option exemption (100% exemption possible)

Anyone who undertakes to continue the company for 7 years and not to reduce the payroll significantly can even apply for 100% tax exemption.

Calculation:
€ 100 million × 0 % = € 0 tax
→ Effective tax burden: 0 %

4. combination of structuring & deferral

In practice, there is often a mixture:

• Parts of the assets are outsourced to holding structures.
• Tax payments are deferred without interest for 7 years.
• The tax can be partially waived in the case of a “needs test“.

That means:

Real effect:
Instead of € 4.5 million, the tax office often only receives € 1.5 million.
→ Effective tax burden: 1.5 %

5. overview of the calculation

Here is an overview:

In short: you only pay €1.5 million in taxes this way

Legally, the state could demand €30 million. In reality, the company heir often only pays € 1.5 million due to tax exemption regulations, holdings and deferrals.

End.

In case you’re wondering… no family foundation involved?

The 1.5 % from the SPIEGEL article comes about without a family foundation – solely due to the statutory exemption of business assets. A family foundation can have a supplementary effect, but is not the reason for this figure.

A family foundation, on the other hand, is an independent structuring instrument. It can also be used for tax optimization, but in a different way:

• With a family foundation, assets can be transferred before inheritance.
• This allows inheritance tax obligations to be avoided or deferred.
• However, different rules apply here: Inheritance tax is payable, but with a time lag (e.g. every 30 years).

In combination with business assets, a family foundation can be used to save additional tax, but this is a separate strategy.

Learn more about the:

• Family foundation

How does inheritance tax work in Germany?

Inheritance tax (together with gift tax) regulates what goes to the tax authorities when assets are transferred. The decisive factors are tax brackets, allowances and types of assets that benefit. Important: Gifts count – and you can utilize many allowances every ten years. This allows you to plan over time and distribute assets cleverly.

• Legal basis: ErbStG + valuation law
• Tax classes I-III depending on relationship
• Allowances: e.g. € 500,000 (spouse), € 400,000 (children)
• Ten-year rule for gifts
• Benefits: Business assets, family home
• Progressive tax rates depending on class & level

Helpful links & sources:

• Federal Ministry of Finance – Inheritance and gift tax
• §Section 16 ErbStG Allowances
• Wikipedia: Inheritance tax in Germany

Tax brackets & allowances: The basic buffer

The tax class depends on the proximity to the testator. In class I (spouses, children, grandchildren), the tax-free amounts are significantly higher than in class II (e.g. siblings) and III (unrelated third parties). In addition, there are special pension allowances (e.g. for spouses). Result: A large proportion of normal inheritances already remain tax-free due to allowances. Only the surplus is taxable.

Family home & deferrals: Protection for your home

The owner-occupied family home can remain tax-free if acquired by a spouse or children under certain conditions (e.g. continued use, holding periods). In the case of real estate or companies, a deferral is also possible if the tax payment would otherwise jeopardize the assets. This provides time for financing or restructuring without having to sell immediately.

• §13 ErbStG Family home
• Family home information sheet (NRW)

Business assets: tax exemption of 85% or 100%

In the case of an inherited business, the standard exemption (85%) or the option exemption (100%) applies if the requirements are met (payroll, holding periods, administrative asset ratios). This is politically desirable: company successions should secure jobs and not fail due to the tax burden. For large estates, this is THE lever for tax reduction.

• IHK Munich: Business assets and tax exemptions

Erbe & Nachlass

Why do you save when you inherit a lot? … and how?

Large inheritances systematically take advantage of preferential treatment. Assets are structured in such a way that as much as possible falls into favored “drawers”: business assets, residential property (family home), usufruct concepts and deferred gifts. This lowers the assessment basis – and therefore the effective tax rate. Studies and government responses show: On average, major heirs often only pay low single-digit percentages.

• Effective load often only a few percent
• Reason: Exemption + allowances + design
• Gift instead of inheritance (time plays for you)
• Usufruct: transfer values, retain use
• Foundation solutions & family divisions
• Protect substance: Deferral/partial payments

Helpful links & sources:

• Süddeutsche Zeitung – Inequality through inheritance tax
• ZEIT – Large heirs pay less
• Wikipedia: Tax statistics on inheritances

Real estate GmbH: strategically shifting the tax burden

Many families rely on a so-called Immobilien-GmbH, especially for large real estate assets. Real estate is transferred to the business assets. The advantage: company shares often benefit from exemption rules of up to 85% or even 100%. In addition, shares can be transferred in stages over generations – often combined with gifts and usufruct rights.

Family foundation: Permanent tax optimization

A family foundation pools assets and ensures continuity over generations. As the foundation does not die, there is no traditional inheritance tax. Instead, lower current taxes apply. This model is often used for assets in the double-digit million range in order to secure long-term substance and avoid high one-off charges.

Designing with time: utilizing the ten-year cycle

If you start early, you can distribute assets via gifts at ten-year intervals. This allows you to increase your tax-free allowance several times. Example: A parent can transfer €400,000 tax-free per child every ten years – with two children, that’s €800,000 per round. Over 20 or 30 years, this results in a very high tax-free transfer without inheritance risk at the end.

Usufruct & residential rights: Give away value, keep control

With a reserved usufruct , you transfer a property, for example, but secure rental income or the right of use. This reduces the tax value of the gift because the capital value of the usufruct is deducted. You remain financially secure – and at the same time make more efficient use of tax-free allowances.

Why “stupidity tax”? Planning mistakes cost real money

If you don’t plan at all, you give away allowances, lose exemptions (e.g. due to failure to meet deadlines) or slip into higher rates due to an unfavorable structure. Advice helps to close gaps: from the structuring of matrimonial property regimes to wills, division arrangements and pre- and post-inheritance through to foundations. The difference between “doing nothing” and “smart planning”: often tens of thousands to millions.

50 million € inheritance Example calculation + tax optimization

Der Spiegel reports: “Rich company heirs often only pay 1.5% tax”. Is that possible? Yes. Clever planning reduces the tax burden. Without planning, you quickly pay almost €15 million in tax on a €50 million inheritance. With clever planning, the tax burden falls to 1-5%. Studies, laws and examples clearly show that those who optimize early on save millions. This is precisely why inheritance tax is often referred to as the “stupid tax”.

• 50 million € inheritance Example calculation

Avoid inheritance tax? My conclusion

You can rarely avoid tax completely – but you can manage it. The key: start early, stagger gifts, qualify beneficiary asset types, comply with holding and payroll rules and use the family home correctly. The greater the assets, the greater the leverage – and the more expensive mistakes become. Get tax and legal advice in good time, document everything properly and plan in variants (inheritance, gift, foundation). This will turn the “stupid tax” into an avoidable cost trap – and you will get more out of your inheritance.

1. find out about investment options that suit you (goals, risk)

Tip 1 is to thoroughly research the different investment options and choose the ones that best fit your goals and risk tolerance.

This means that you should inform yourself about the various options in which you can invest your inherited money. These include, for example, stocks, bonds, funds, ETFs, real estate as an investment or alternative forms of investment. You should consider which investment options best fit your financial goals and risk tolerance. A financial advisor or expert can help you choose the investment options that are right for you.

Here is a bullet point list with a short summary of the content of tip 1:

• Find out about the different investment options
• Choose the ones that best fit your goals and risk tolerance
• Consider your financial goals and your risk tolerance
• Seek advice from a financial advisor or expert if you are unsure

2. talk to a financial advisor or an expert

Tip 2 is to talk to a financial advisor or an expert who can help you decide.

This means that it can be helpful to seek advice from a financial advisor or an expert if you are unsure how to invest your inherited money wisely. A financial advisor is knowledgeable about different investment options and can help you develop an investment strategy that fits your goals and risk tolerance. An expert in a particular investment area, such as real estate or art, can also give you valuable advice.

Here is a bullet point list with a short summary of the content of tip 2:

• Talk to a financial advisor or expert
• Get advice if you are unsure how to invest your inherited money wisely
• A financial advisor is knowledgeable about the different investment options and can help you develop an investment strategy
• An expert in a particular investment area can give you valuable tips

3. realistic goals and financial plan

Tip 3 is to set realistic goals and create a financial plan to ensure you are investing your money wisely.

This means that it is important to set clear goals and create a financial plan to ensure that you invest your inherited money wisely. For example, your goals may be to save a certain amount of money to buy a property in the future (Tip 8), or to create financial security for your retirement. A financial plan helps you keep track of your goals, expenses and income.

Here is a bullet point list with a short summary of the content of tip 3:

• Set realistic goals
• Create a financial plan
• Helps you track your goals and keep track of your expenses and income

4. diversify your portfolio

Tip 4 is to diversify your portfolio to minimize risk.

This means it’s important to diversify your portfolio to minimize risk. Diversification means that you invest your money in different investment options and industries, rather than putting everything into a single option. By doing this, you can reduce the risk of suffering big losses if one investment performs poorly. It is important to have a balanced portfolio that consists of different investment options.

Here is a bullet point list with a short summary of the content of tip 4:

• Diversify your portfolio
• Invest in different investment options and industries
• Reduce the risk of losses
• Hold a balanced portfolio of different investment options

5. shares with long-term appreciation / less risk

Tip 5 is: Consider investing in stocks to benefit from long-term appreciation.

This means that it may be an option to invest in shares in order to benefit from long-term increases in value. Stocks are shares in companies that are traded on the stock exchange. They can give you an attractive return if the company is successful and increases its value. However, it is also important to note that stocks are speculative and there is a risk of loss. You should therefore carefully consider whether stocks fit your goals and risk tolerance.

Here is a bullet point list with a short summary of the content of tip 5:

• Consider investing in stocks
• Profit from long-term value increases
• Shares are interests in companies that are traded on the stock exchange
• Take into account that shares are speculative and there is a risk of losses

6. think about ETFs (funds and bonds)

Tip 6 is: Also consider investment options such as bonds, funds, ETFs and other securities.

This means it’s important to consider other investment options such as bonds, mutual funds, ETFs and other securities if you want to invest your inherited money wisely. Bonds are debt instruments issued by companies or governments to raise money.

They can be a good way to earn a fixed return. Funds are investment vehicles that pool the money of many investors and invest in a variety of securities. ETFs are exchange-traded funds that track a specific index. There are many different investment options you can consider, and you should think carefully about which ones best fit your goals and risk tolerance.

Here is a bullet point list with a short summary of the content of tip 6:

• Consider investment options such as bonds, funds, ETFs and other securities
• Bonds are debt instruments that are issued by companies or governments
• Funds pool the money of many investors and invest in a variety of securities
• ETFs are exchange-traded funds that track a specific index
• Choose the investment options that best fit your goals and risk tolerance

7. robo advisor instead of asset manager

Tip 7: Consider using a robo advisor as an automated financial tool.

A Robo Advisor is a digital tool that serves as an automated wealth management tool. It uses algorithmic models to develop investment strategies and invest your money automatically. All you have to do is specify your investment goals and risk tolerance, and the robo advisor will create a customized portfolio for you.

You can use the Robo Advisor online at any time and thus have access to your portfolio around the clock. Robo advisors are usually cheaper than traditional asset managers and are therefore particularly suitable for investors who opt for a long-term investment strategy. However, you should keep in mind that robo advisors also have risks and you should therefore carefully consider whether they fit your goals and risk tolerance.

Here is a bullet point list with a short summary of the content of tip 7:

• Consider using a robo advisor as an automated financial tool
• Use algorithmic models to develop investment strategies and invest your money automatically
• Specify your investment goals and risk tolerance and get a customized portfolio
• Use the Robo Advisor online around the clock
• Robo advisors are usually cheaper than traditional asset managers
• Consider that robo advisors also have risks

More about automated trading:

• Robo Advisor: Provider
• Robo Advisor: 20 tips

8. invest in real estate as a capital investment

Tip 8 is: Consider investing in real estate to benefit from appreciation and rental income.

This means that investing in real estate to benefit from appreciation and rental income can be an option. Real estate can be a good way to achieve a stable return.

For example, you can invest in a property and rent it out to tenants to generate regular income. However, it is also important to note that real estate investments require a lot of capital and there is a risk of losses. You should therefore carefully consider whether real estate investments fit your goals and risk tolerance.

Depending on the inherited assets, you could also think about a family foundation with tax benefits.

Here is a bullet point list with a short summary of the content of tip 8:

• Consider investing in real estate
• Profit from appreciation and rental income
• Real estate investments can provide a stable return
• Take into account that real estate investments require a lot of capital and there is a risk of losses
• Choose the investment options that best fit your goals and risk tolerance

More on the topic:

• Real estate as an investment
• Buy first property

9. sustainable, green investments with a future – idea

Tip 9 is to consider investing your inherited money in sustainable investments to have a positive impact and benefit financially.

This means that investing your inherited money in sustainable investment vehicles can be an option to have a positive impact and benefit financially. Sustainable investment vehicles are investments that are guided by social, environmental and governance (ESG) criteria and help create a more sustainable future. For example, you can invest in companies that are committed to climate protection or in funds that invest in sustainable projects.

It is important to note that sustainable investments are not without risk and you should consider whether they fit your goals and risk tolerance. You should also make sure that the sustainable investments you invest in are actually sustainable and not just so-called “green washing” products that only pretend to be sustainable.

Here is a bullet point list with a short summary of the content of tip 9:

• Consider investing your inherited money in sustainable investments
• Invest in a more sustainable future and benefit financially
• Sustainable forms of investment are based on ESG criteria (social, environmental and governance criteria)
• Consider that sustainable forms of investment have risks
• Make sure the sustainable investment vehicles you invest in are actually sustainable

Read more about here:

• Green investments

Conclusion: Investing inheritance wisely

There are many ways in which you can invest your inherited money. It is important that you weigh up the different options and choose the most suitable form of investment for you. You should also consider your goals and how much risk you are willing to take. If you are unsure, you can also hire a financial advisor or a financial planner to help you decide.

Inheritance & Inheritance of Real Estate

Never before has so much been inherited in Germany as this year, reports NDR. It continues, “According to the German Institute for Economic Research (DIW), up to 400 billion euros are inherited or given away every year.”

You can find the report in the NDR media center:

• Dispute over inheritance: How does a good will go?

Dispute in the community of heirs and partition auction

We have already reported on the topic of disputes in the community of heirs in the blog. If a deceased person leaves several heirs and the division of the estate among the heirs is not consensual, the division is determined by law. Since the estate is a joint asset, the co-heirs can only dispose of the inheritance jointly.

If this joint disposition does not work, each co-heir can demand the dissolution of the community of heirs at any time and pursue this independently. In this case, the individual co-heir can dispose of his share in the estate as a whole, but not of his share in individual assets.

• Dispute in the community of heirs

If the heirs are in dispute, a partition auction, a specific form of forced sale, is sometimes held. The aim of the partition auction is to convert the assets into a divisible sum of money and divide them among the co-owners.

An excerpt from Monday, April 25, 2022, 22:00 to 22:45 with our TV expert Jan Rickel.

Image source: 45 Min Reportage / NDR

Read even more on the topic here:

Will, house and compulsory share

The distribution of a deceased person’s assets can be recorded in a written declaration before death, which is the will. Every person is capable of making a will from the age of 16 and does not need a notary in the case of a handwritten will, as the testator draws it up himself by hand.

However, if one wants a notarized will, this must be notarized by a notary public, where the costs for this depend on the value of the estate. For clarification, the document should be labeled “Will” or “Last Will” and at the end it should be signed by the testator and dated. If there are several wills, the will with the most recent date is authoritative.

• Will
• Mandatory share

Inherit without a will?

The law of succession comes into force if there is no will. This regulates who receives the assets of the deceased after a death and how this is done. Communities of heirs may be formed if there are several heirs and the estate passes into their possession.

Communities of heirs are formed automatically after the death of the testator if there are several heirs. These must then divide the estate among themselves and make joint decisions about inherited property, such as real estate. If you want to decide for yourself which relatives inherit which property, you should draw up a will and regulate everything in detail.

• Heirs without a will

Selling property for parents, grandparents and loved ones

As a child, you worry about mom and dad; as a grandchild, you worry about grandma and grandpa. Retirement savings don’t last forever, and neither do the savings. At some point, the property becomes too big, and at the same time the savings become less and less. At the latest now, a solution must be found for your loved ones!

What to do when you need to sell?

Prevention is better than aftercare: options

Before it is about expressions of grief, it is about good solutions. People grow old and at some point, life has to be organized appropriately. For many, this means selling the house and moving into an age-appropriate condominium. Accordingly, close people have to make decisions. This includes living wills, in case your loved ones are no longer able to make their own decisions at some point. But it is just as much a part of thinking about your own property.

One thing is also Important: First and foremost, do not think about your own inheritance, but about the family!

Let’s take a look at the 3 options for your understanding: Sale of the property, partial sale and real estate annuity! Tip, you will find further links to all three topics, with detailed explanations. What to do when someone gets old? Here are three alternatives!

Options in the sale of real estate:

1. Real estate annuity – selling with lifelong right to live
2. Partial sale – Proportionate, with option for total sale
3. Sale – Complete sale of the property

In addition, for owners: an extra tip on the subject of bequeathing correctly.

Real estate pension: sale with extra “pension” – Option 1

Your first option is the real estate pension. The real estate annuity is especially interesting for people who have already reached a higher age, usually from 70, 75 years. Should you prefer a solution in which your relatives can stay in their own property until the end of their life (!) without any complications, then the life annuity is an option you should consider.

Life annuity means that the property is sold in its entirety, but the owner retains a full right of residence and use until death. These privileges are secured by the usufructuary right. In addition, the seller receives a small, monthly extra “pension”. Another advantage, they no longer have to worry about maintenance costs in the future. This is the responsibility of the new owner. All in all, a comfortable solution, especially in old age.

Real estate pension simply explained:

• Direct, complete sale
• Lifetime right of residence and use
• Small, monthly “extra pension” for former owner
• No maintenance costs

Read more about topic here:

• Real estate pension

Unconcerned and reassured into old age.

Partial sale: Proportionate, with possibility of total sale – option 2

The second option for your loved one, if you want them to be able to continue living in their property, whether it’s a condo or a house, is to partially sell a property.

A partial sale works like this, you sell the part of a property, usually between 10% and 50% pro rata, to a finance company. For this sold part, the financial company charges a so-called “usage fee”. The user fee is paid in return for the fact that sole residential rights and rights of use are still granted. This means that the finance company merely becomes the partial owner. The advantage: you get the sale price relatively uncomplicated, without a major credit check, as with loans from the bank. The disadvantage: the user fee is relatively high, e.g. compared to a mortgage loan.

Partial sale summarized:

• You sell a part of your property (usually 10-50%)
• Partial purchase house: Yes
• Partial purchase apartment: Yes
• Partial purchase of land: Yes
• Financial company becomes part owner
• You remain the sole user of the property
• You pay monthly usage fee
• Total sales in X years (optional)

Read more about the advantages and disadvantages here:

• Partial sale property

Complete real estate sale – option 3

Your third option, if you need to find a solution, is the complete sale of condominium, house, apartment building. For the regular process, the question often arises, sell privately or sell with broker? Especially the emotional situations, such as deciding on the future of their own parents or grandparents, it is recommended to work with an experienced broker. After all, it is about all the advertisements, communication with interested parties, selection according to serious, unseriös, the subsequent credit checks, arrangement of viewing appointments and many more. Of course, also a big factor, the previous real estate valuation.

Read more here:

• Sell property

Selling real estate: Procedure and steps

To give you an initial overview of how such a sales process works, explained here in 18 simple steps, categorized into 3 phases.

1. Preparation: prepare property and sale
1. Financial planning and timing of sale
2. Hire real estate agent
3. Records and documents
4. Increase real estate value
5. Determine offer price
6. Create exposé
2. Sales phase: market property and find buyers
1. Market real estate
2. Contact with prospective buyers
3. Filter and select prospective buyers
4. Credit check
5. Viewing dates
6. Sales talk & purchase price negotiation
3. Sales processing: purchase contract until handover
1. Draw up purchase contract with notary
2. Notary appointment
3. Land register entry and payment processing
4. Handover of the property
5. Notary fees & broker commission
6. Pay taxes

These 3 options are primarily available to you.

These were the most important tips for selling with and for your loved ones!

Whether a condominium in a prime A-location or a…

… Condominium in 60/70 prefabricated building:

Extra tip: Bequeath / inherit correctly

Here are a few extra tips for you.

Sale with usufruct

If you are considering a direct, outright sale of your parent’s, grandparent’s or loved one’s property, be sure to take a look at usufructuary rights. Usufructuary right simply means “lifetime, sole right of occupancy.” So, it means that your loved ones hold the sole right to use the property, even after the sale. The same applies in other cases, such as an anticipated inheritance (link above: Inheritance).

Advantage: The usufruct right brings you the advantage that your relatives are not dependent at any time, on the goodwill or the consent of the seller.

Inheritance in advance: Taxes & Co.

Tip. Before it is too late, talk to your parents and grandparents about the inheritance early on. After all, an early inheritance can save you quite a bit, especially on taxes. Learn more about early inheritance here:

• Bequeath correctly

For heirs:

• Inherit correctly

Inheriting correctly also often means preventing disputes among children.

Take care!