Wealth and business succession
We are not forever
Our assets are supposed to pass to our intended heirs: children, spouses, close relatives or a charitable organisation. Rarely is it the state that is supposed to inherit them, even if only in the form of inheritance or gift tax.
In the case of larger assets, company shareholdings and in contentious succession constellations, prudent succession planning quickly pays off. After all, one would like to spare the successors quarrelling heirs, undesirable claims to a legal portion and taxes of up to 50 percent.
Plan your succession with us. Your goals and ideas are the benchmark for our tax and legal advice.
We speak of wealth succession when private assets are passed on to the next generation. This can be cash assets or a securities account. Often and especially valuable are owner-occupied or rented properties, where the exemption amount for inheritance and gift tax (in Germany: € 400,000 for children, € 500,000 for spouses) is quickly exceeded.
Although it is not possible to fully optimise inheritance tax and gift tax when transferring private assets to the next generation, it certainly is possible to avoid expensive mistakes. Currently, the easiest tax-saving potential comes with one’s own residence. For other assets, creative solutions during one’s lifetime are often more effective than the worst-case scenario of an unregulated transfer on death.
Business succession is about an active company. To whom can I pass on my business one day? Who can run the business? Should it remain in family hands or be sold? Or is a family foundation the best solution for the company and my family? How do I deal with compensation claims? These questions come at the beginning of a succession strategy, where we are happy to advise you.
However, the legal and tax aspects are only one of many issues, because at the heart of the matter is the company itself. Seamless business continuity needs to be ensured; the financial strength and competitiveness of the company must likewise be maintained.
Lawmakers are aware of the fact that taxes can place a heavy financial burden on a company during the transfer of the business, in turn endangering its existence. For this reason, business succession often entails tax privileges and is in some cases completely tax-free, even in the case of very high values.
It is always sensible and advisable to think about company succession at an early stage. Succession can be a hurdle, but can also provide enormous potential to further develop your company. Your company can be made fit for the future – if necessary, accompanied by sensible restructuring measures.
Our consulting fields in family succession
Essentially, there are two main options for regulated succession to the next generation:
- Transfers/gifting during one’s lifetime = proactive succession
- Testamentary arrangement = standard succession
We provide comprehensive support in both instances. As lawyers and tax advisors, we take care of succession planning for you with regard to both civil law and taxation. If required, we will be happy to work together with your current tax advisor, notaries, specialist lawyers, etc.
Among other things, we offer you:
- Determining your current inheritance tax or gift tax situation
- Preparing an optimal succession strategy for you, taking into account your current situation
- Calculating the taxable value of your company or your real estate
- Filing applications for binding information with the tax authorities
- Drafting of gift contracts (possibly with reservation of usufruct, waiver of compulsory portion)
- Contractual implementation of succession regulations upon death (will, inheritance contract)
- Establishing a foundation
- Arrangements between spouses by means of matrimonial property regimes
Preparing gift tax and inheritance tax returns as well as declarations of assessment
Here are some of the questions that we are asked on a daily basis in our practice – they might also interest you.
Which is more favourable from a tax point of view: inheritance or gift?
In principle, the same tax laws and the same tax allowances apply to the taxation of an inheritance or a gift. However, a gift is almost always more favourable from a tax point of view.
For one thing, the tax-free allowances can be used anew after a period of ten years, which leads to a tax reduction in the case of an early “gift in instalments every ten years”.
Tax retention periods for the transferred assets and the attainment of the legally prescribed wage totals can also be made plannable if the business succession is prepared sensibly. For example, the assets can be appropriately restructured prior to gifting in order to create and effectively utilise favourable taxation opportunities. This also reduces your tax burden.
All in all, there is great potential for tax optimisation in the handover process, especially in the case of family businesses – particularly if the planning of the business succession does not begin shortly before inheritance, but is instead completed in advance by means of a gift.
What are the tax allowances for gifts and inheritances in a family?
For spouses or civil partners, for example, the tax-free amount is €500,000, for children €400,000 and for grandchildren €200,000. If you exceed the tax-free amount, (only) the excess is taxable.
It is important that these tax-free amounts apply per (grand)parent. For example, you can give or bequeath €800,000 to your child tax-free every 10 years if €400,000 comes from the mother and another €400,000 from the father.
What is the Berlin will and does it make sense for me in terms of taxation?
A Berlin will describes a spousal will in which spouses appoint each other as sole heirs and stipulate that on the death of the second parent to die, the estate will pass to a third party (often joint children).
This can make sense if your spouse is involved in the business and is to continue the business alone in the event of death. Often the Berlin will is desired for purely psychological reasons and to provide for the spouse.
However, the right of descendants to a compulsory portion cannot be excluded with a Berlin will. Children are entitled to an enforceable compulsory share even if one parent is appointed as sole heir. The mere drawing up of a standard Berlin will is therefore often not sufficient to make the succession crisis-proof.
The Berlin will can also have a negative impact on taxation because the children’s tax allowances are not used optimally. The children’s tax allowances do not apply to the death of the first parent, unless the typical model Berlin wills found online are modified. The tax allowances are not applicable retroactively when the second parent dies, and are instead altogether forfeited as regards the first parent’s death. The utilisation of the increasing tax rate regarding a Berlin will is also not ideal, particularly if an inheritance exceeds the tax-free amount.
For these reasons, an unmodified Berlin will is often not the best succession strategy. Whether it is nevertheless suitable for you or can be made suitable, we will be happy to answer your questions in a personal consultation.
Can I avoid a claim to a compulsory portion by making a gift?
This is only possible to a limited extent and only if you act in good time on account of something known as a claim to a supplement to the compulsory portion in accordance with Section 2325 of the BGB (German Civil Code). More specifically, the compulsory portion is not to be avoided in the case of an inheritance by making a gift beforehand. The assets that would normally belong to your estate but were gifted by you in advance are credited to the compulsory portion on a pro rata basis within the first ten years after the gift. In order to reduce unwanted compulsory portions, it is worth planning succession early on.
Please note that in the case of gifts between spouses, the claim to a supplementary compulsory portion remains undiminished as long as the spouses remain married. The reduction within ten years in the case of gifts between spouses therefore begins only if the marriage is terminated. In order to reduce undesired compulsory portion claims, other arrangements are used in these cases, on which we will be happy to advise you.