In Germany, freedom of testamentary disposition is accompanied by a tightly knit inheritance law that provides for specific legal forms for testamentary dispositions. Furthermore, there are some regulations, such as the right to a compulsory portion, which are strongly influenced by a conservative valuation. Certain family members are therefore entitled to a share of the deceased’s estate. It should also be noted that inheritance law is as old as the Civil Code (Bürgerliches Gesetzbuch – BGB) – ie, more than 100 years old.

Inheritance tax law is based on the principle that generous enrichment achieved without personal effort is taxed accordingly. At the same time, inheritance tax law offers a number of benefits for transfers, particularly for companies, so that they are not burdened with inheritance tax but can be continued for the benefit of the employees and not sold. Different tax classes in inheritance tax law reflect the idea that high allowances and lower tax rates are available for close family members, while only a small allowance and high tax rates apply to third parties.

Strong Family Protection and Limited Freedom of Testamentary Disposition

German inheritance law is codified primarily in the BGB and provides a high degree of protection for the family. Although there is freedom of testamentary disposition in Germany, this freedom is significantly restricted by the right to a compulsory portion. Children, spouses and, in some cases, parents are entitled to a cash claim amounting to half of their legal inheritance, regardless of the contents of the will. The right to a compulsory portion cannot be easily excluded.

Succession planning therefore often involves minimising the compulsory portion, structuring transfers during the lifetime of the deceased or securing assets.

Continuity of Family Businesses

Germany’s economic structure is strongly influenced by SMEs – ie, family-run small and medium-sized enterprises, often spanning several generations.

Inheritance and gift tax law provides for considerable relief (exemption rules) for qualified business assets if the level of employment and the holding period are maintained. This reflects a political consensus that the continuity of companies and employees justifies preferential treatment. The Federal Constitutional Court has ruled in several decisions that the exemption of business assets is permissible under certain conditions if this secures jobs and ensures the continuity of the company.

Transfers Between Living Persons and Anticipated Succession

Anticipated succession (through gifts during one’s lifetime) also plays an important role. In this case, a transfer subject to usufruct may be particularly useful. The donors retain the income from an asset, but in the event of inheritance, there is no longer any taxation.

Anticipated succession fulfils the following functions:

• reduces inheritance tax liability through repeated use of allowances;
• provides planning security.
• mitigates risks associated with compulsory portions – gifts can reduce the compulsory portion; and
• ensures generational change during the founder’s lifetime (“better to give with a warm hand”).

Limited History of Long-Term Trusts

Unlike common law countries, there are no trusts in Germany. The legal form does not exist, and Germany has not ratified the Hague Convention. Instead, there are foundations – in particular family foundations and charitable foundations. These are subject to foundation supervision, and many testators do not want such official supervision of their assets, especially since transferring them to a foundation also means that they must permanently part with their assets.

Instead of a trust, the following options are available:

• establishment of a private foundation;
• use of holding companies to centralise control;
• introduction of family governance instruments (eg, family constitutions);
• permanent execution of wills for minors; and
• preliminary and reversionary inheritance if control is to be maintained.

Charity in Succession

Although charitable foundations – especially in the academic, cultural and social sectors – are highly regarded, there is no strong culture of generous testamentary donations in Germany.

Demographic Pressure and Changing Family Structures

Low birth rates, patchwork families and an increasing concentration of wealth among the older generation are changing the dynamics of succession. In patchwork families, certain mechanisms must be used in a will to ensure that the divorced spouse does not inherit. In many entrepreneurial families, it must be taken into account that the children do not always want to continue the business. 

Summary

The German succession culture can be characterised as follows:

• family-centred;
• focused on asset protection;
• strongly oriented towards business continuity, where possible; and
• restricted by the principles of compulsory inheritance rights.

There are four groups of companies, which require different planning approaches:

• firstly, entrepreneurial business assets of SMEs, where corporate governance, tax relief and continuity are key;
• secondly, real estate assets, especially in conurbations with high-priced assets – consideration must be given to how illiquid assets can be transferred, and valuation issues also need to be addressed;
• thirdly, new tech assets, which require exit-oriented, internationally focused structures (private equity, but also crypto-assets); and
• fourthly, works of art or art collections – here, too, the lack of liquidity must be taken into account, as well as the need to prevent the fragmentation of assets.

There is basically no concept of domicile in Germany. Tax law is more concerned with the concepts of residence and habitual abode.

Inheritance Tax Liability

Inheritance tax liability in Germany is based on the personal domestic connection of the parties involved and the location of the assets. A distinction is made between unlimited and limited tax liability.

Unlimited tax liability exists if the testator or the acquirer is a resident at the time of inheritance – in particular if they have a domicile or habitual residence in Germany or are a domestic legal entity. In this case, the entire estate, including foreign assets, is subject to German inheritance tax.

A residence is where someone has a home in circumstances that suggest that they will retain and use that home. A certain minimum length of stay is not necessary; it is sufficient to have a key that allows access and use at any time. The habitual residence is the place where someone stays under circumstances that indicate that they are not only staying there temporarily. This is the case if someone stays in one place for more than six months, whereby short-term interruptions (eg, holidays) are irrelevant.

Both terms are based on the actual circumstances; registration or civil law regulations are irrelevant for tax assessment purposes.

Jurisdiction for Inheritance

In private international law, on the other hand, the question of which inheritance law is applicable depends on the habitual residence of the deceased at the time of their death (see the EU Succession Regulation). Here, a different term applies than in tax law, referring to the place where the deceased had the centre of their life at the time of their death – ie, where the actual centre of their life was in family, social and professional terms. The duration and permanence of the stay, personal integration into the social and family environment, and personal ties are all relevant factors. A mere temporary stay is not sufficient. However, the deceased may choose the law of the country of his or her nationality.

The question of the right to a compulsory portion is also determined by the last habitual residence of the deceased, unless he or she has made a choice of law.

Jurisdiction for Divorce Law

In most cases, the applicable law in a divorce with international implications is governed by Regulation (EU) No 1259/2010 (the “Rome III Regulation”) . The spouses may primarily determine the law applicable to the divorce. However, they may only choose the nationality of one spouse (the place of the court seised).

Otherwise, the following applies:

• the law of the country in which the spouses have their habitual residence at the time the court is seised;
• the law of the country in which the spouses last had their habitual residence, provided that this did not end more than one year ago and one of the spouses still has their habitual residence there;
• the law of the country of which both spouses are nationals; or
• the law of the country of the court seised.

Income tax liability for natural persons is also linked to their place of residence or habitual abode in Germany. The terms “place of residence” and “habitual abode” as used in inheritance tax law apply. These criteria are relevant for both types of tax. If someone is liable for income tax, they are also liable for inheritance tax.

Legal succession in Germany is governed by the BGB. This applies if the deceased has not left a valid last will and testament. The order in which legal heirs are considered is determined by a specific order provided for in law.

The spouse has a special status. They are entitled to inherit alongside relatives and receive a certain share of the estate depending on the matrimonial property regime and the number of other heirs.

First-order heirs are the descendants of the deceased – ie, children, grandchildren, etc. A living descendant excludes descendants related to them through the deceased from the succession. If children have died, their descendants take their place and enter into the line of succession. Children generally inherit equal shares.

Only if there are no descendants – ie, no first-order heirs, do the parents of the deceased and their descendants (siblings, nieces, nephews; second-order heirs) inherit. If there are also no second-order heirs, the grandparents and their descendants (aunts, uncles; third-order heirs) inherit. From the fourth order onwards, the next relatives inherit.

In the legal succession, there may be numerous heirs who together form a community of heirs. In such a case, the individual heir cannot dispose of individual items of the estate. It should also be noted that illegitimate children are treated equally to legitimate descendants; adopted children may also be entitled to inherit, whereby a distinction must be made between the adoption of minors and adults.

Although German inheritance law is based on the principle of freedom of testamentary disposition, the right to a compulsory portion must always be taken into account in succession planning. Descendants (children, grandchildren), the spouse and the parents of the deceased are entitled to a compulsory portion if they have been excluded from succession by a disposition of property upon death (eg, will). The compulsory portion consists of half the value of the legal inheritance that the beneficiary would have received without disinheritance.

Beneficiaries

The following are entitled to a compulsory portion:

• descendants of the testator (children, grandchildren if the children have predeceased the testator, etc);
• the spouse or registered civil partner; and
• the parents of the testator, if there are no descendants.

Amount

The compulsory portion amounts to half the value of the statutory inheritance. The starting point is the value of the estate at the time of inheritance. This can regularly lead to disputes because the beneficiary of the compulsory portion must know the value of the estate, and it is often a question of valuation as to how valuable the estate actually is. The claim is only monetary. A compulsory portion claim regularly encumbers illiquid assets, such as company assets, real estate or art estates. This forces the heirs who have to fulfil the claim to sell estate assets against their will, which can lead to fragmentation of the estate.

Withdrawal of the Compulsory Portion

There are only a few cases regulated by law in which the compulsory portion claim does not apply.

The testator can only withdraw the compulsory portion from a beneficiary if they have committed particularly serious offences. In such a case, the withdrawal of the compulsory portion should be made by means of a last will and testament, and the reason must be stated therein. The testator bears the burden of proof for the circumstances. The following may justify the withdrawal of a compulsory portion:

• attempting to take the life of the testator or a close relative of the testator;
• being guilty of a crime or serious intentional offence against the testator or a person close to him or her;
• malicious violation of the legal maintenance obligation towards the testator; or
• final conviction for an intentional criminal offence with a prison sentence of at least one year without parole, such that participation in the estate is unreasonable for the testator;

Family breakdown or severance of contact are not sufficient; the misconduct must go significantly beyond normal conflicts and seriously violate the family’s solidarity. It is even possible that the compulsory portion may be revived through the testator’s forgiveness.

Possibilities for Reduction

A reduction of the compulsory portion is only possible within narrow limits. One possibility is lifetime gifts to other persons or donations to the beneficiaries of the compulsory portion, which are credited against the compulsory portion.

Significance of the Compulsory Portion

Inheritance law assumes that the right to a compulsory portion is strictly linked to the statutory minimum share of close relatives and provides only limited possibilities for reduction. Case law also reflects the high requirements for deprivation of the compulsory portion.

Waiver of the Compulsory Portion

It is permissible to waive the compulsory portion, even in exchange for compensation. This is done by means of a notarial deed and must be desired by the beneficiary of the compulsory portion. Without their co-operation, this is not possible.

Limitation Period

The claim to a compulsory portion is subject to the standard three-year limitation period. The period begins at the end of the year in which the claim arose and the beneficiary became aware of the circumstances giving rise to the claim and the identity of the debtor, or should have become aware of them without gross negligence (opening of the will). The claim arises upon the opening of the succession.

Assertion

The claim to a compulsory portion is a monetary claim against the heir, which is asserted out of court by requesting payment; typically, information about the estate is first requested in order to calculate the compulsory portion. The claim is regularly asserted through a step-by-step lawsuit:

• first stage – information about the estate (if necessary, with supporting documents and valuation);
• second stage – quantification of the compulsory portion; and
• third stage – action for payment.

Community of Accrued Gains

If the spouses do not enter into a marriage contract under German law, the statutory matrimonial property regime of community of accrued gains applies. This is characterised by the fact that the spouses’ assets remain separate. Each spouse remains the owner of their assets and may dispose of them alone. Household items, on the other hand, belong to both spouses jointly. Restrictions only apply if one spouse wishes to dispose of their entire assets or household items. In such a case, the consent of the other spouse is required.

Only when this community of accrued gains is terminated does the spouse receive compensation for the accrued gains. A calculation is made to determine who has acquired more accrued gains during the marriage. The spouse who has acquired more must transfer half of the accrued gains to the other spouse. However, the claim only arises if the community of accrued gains ends due to a change to another matrimonial property regime, in the event of the death of the spouse or in the event of divorce.

In the event of inheritance, the surviving spouse in a community of accrued gains receives a lump-sum increase of one-quarter of their inheritance as a legal heir, regardless of the actual accrued gains. Alternatively, they can renounce the inheritance and instead demand the mathematically exact equalisation of accrued gains. The equalisation of accrued gains then takes place as a monetary claim against the estate.

Separation of Property

In the case of separation of property, there are no property relations between the spouses; the assets of each spouse remain completely separate. No equalisation takes place.

Community of Property

In the case of community of property, the assets of both spouses merge into joint property, known as the total property. The total property belongs to both spouses jointly – ie, they are joint owners and can only dispose of it jointly, unless the administration has been transferred to one spouse alone by marriage contract. In addition to the joint property, there is the separate property, which belongs to each spouse alone (eg, non-transferable rights), and the reserved property, which can be assigned to one spouse alone by marriage contract or third-party disposition.

German law provides for marriage contracts both before and after marriage; they can be concluded by engaged couples or spouses who are already married.

A marriage contract only makes sense if the spouses wish to deviate from the statutory matrimonial property regime of community of accrued gains. They can also remain in the community of accrued gains and modify it – eg, by excluding certain economic assets from the accrued gains or by agreeing on a lump sum to be paid out instead of the calculated accrued gains.

The matrimonial property regime may also be effectively limited, insofar as the spouses have a certain degree of freedom of contract.

For a marriage contract to be valid, it must be concluded in the presence of both parties and recorded by a notary. In terms of content, marriage contracts may, in principle, make extensive use of the spouses’ freedom of contract, but they are subject to judicial review: agreements that lead to a unilateral and unreasonable disadvantage for one spouse may be unconscionable and therefore invalid. In such a case, the statutory rights apply again, so this must be avoided in the marriage contract.

Provisions that affect the core area of statutory divorce law are viewed particularly critically, such as the complete exclusion of post-marital maintenance or pension rights equalisation, or both if the claim for equalisation of accrued gains and the maintenance provisions are excluded. A possible invalidity must be asserted; it will only be determined by the court if one spouse sues for claims and invokes the invalidity.

In the case of lifetime transfers (eg, gifts or anticipated succession), German law may impose gift tax, income tax (capital gains tax) and, in some cases, land transfer tax.

Gift Tax

Transfers of assets between living persons without consideration are generally subject to gift tax. The tax is payable upon execution of the gift. The amount is based on the value of the transferred assets, the family relationship (tax classes) and personal allowances. Exemption rules apply to certain transfers, such as the gift of the family home between spouses. Inheritance of the family home, on the other hand, is only taxable if the surviving spouse continues to live in the family home for the following ten years or only moves out for compelling reasons. This also applies to children, but only up to 200 square metres, and if they also move in after the death and live there for ten years. This rule is particularly unrealistic in cases where there are several children.

Income Tax (Capital Gains Tax)

Capital gains tax (in particular under Section 23 of the Income Tax Act) is only payable on transfers for consideration – ie, when the transferee provides consideration. In the case of gifts, there is no capital gain and therefore no income tax liability for the donor. However, if a property or other asset is transferred for consideration within the speculation period (eg, ten years for real estate), the gain is taxable.

In the case of mixed gifts (partly for consideration, partly free of charge), the part for consideration may be subject to income tax, and the part free of charge may be subject to gift tax.

Land Transfer Tax

Land transfer tax is generally payable on the transfer of land. However, gifts between living persons are exempt from land transfer tax if they are subject to gift tax (Section 3, No 2 of the German Real Estate Transfer Tax Act; Grunderwerbsteuergesetz – GrEStG). In the case of mixed gifts, the part for which consideration is paid is subject to land transfer tax, while the part for which no consideration is paid is subject to gift tax. The sale of real estate between spouses or close relatives may also be exempt from land transfer tax.

For income tax purposes, the so-called footsteps theory applies to transfers upon death: the heir follows in the footsteps of the deceased with regard to tax conditions (in particular acquisition costs and date of acquisition) – ie, there is no fictitious new purchase at market value on the date of death, but the heir continues to use the tax values of the deceased. This means, in particular, that if the heir subsequently sells the asset, the acquisition costs and date of acquisition of the deceased remain decisive for the calculation of any capital gains, so that the capital gains may be higher.

The footprint theory is thus a central principle for avoiding double taxation of increases in value: increases in value that have already occurred for the deceased are not taxed again for the heir as a fictitious capital gain.

In Germany, lifetime succession planning (vorweggenommene Erbfolge) is commonly used to transfer assets before death in order to reduce inheritance tax exposure, maintain control over family assets and structure ownership transitions smoothly. The most frequently used mechanisms combine civil law instruments, tax allowances and contractual arrangements. The following structures are typical.

Lifetime Gifts

Key features

Inheritance and gift tax allowances under the Inheritance and Gift Tax Act can be used repeatedly every ten years.

The typical allowances are:

• EUR400,000 per child;
• EUR200,000 per grandchild; and
• EUR500,000 between spouses.

Gifts are a common tool in German succession planning. This is because the allowances for inheritance and gift tax are identical and are available every ten years. Within these ten years, gifts/inheritances from the same persons are added together and are then subject to a higher progressive tax rate.

The gift is usually made with a right of usufruct, often to provide for the donor, so that the donor still secures the income. Unlike in other jurisdictions, the right of usufruct does not mean that the gift is not completed. The advantage is that it expires in the event of inheritance without incurring tax. It should be noted, however, that the usufructuary/donor generates income, which is then also inherited if not spent.

A gift agreement may also include rights of recovery – eg, if the donee dies before the donor. The expectation of a certain level of taxation may also be subject to a right of recovery. Unrestricted rights of recovery are not recommended.

Transfer of Business Interests With Retained Control

There is also the option of establishing a corporation or partnership as a so-called family holding company or family pool and gifting shares in it. This allows the next generation to be involved, with the parents retaining control but the children participating financially. This is also possible for minors.

When they reach the age of majority and continue to be involved in the company, control remains in place – eg, only all shareholders can make withdrawals at the same time.

The partnership agreement contains provisions stipulating that no third parties may become shareholders, that exclusion is possible under certain conditions and that a marriage contract is required if a shareholder marries, so as not to encumber the company’s assets.

German tax law provides substantial relief for business transfers if conditions are satisfied (eg, employment retention requirements under ErbStG).

Two main regimes exist:

• 85% exemption (Regelverschonung); and
• 100% exemption (Optionsverschonung).

These are widely used in succession planning for Mittelstand businesses. However, the requirements are only fulfilled if the company is not only administrating assets like holding or renting real estate or capital investments.

Currently, the relief for business assets is subject to a decision of the German Constitutional Court as to whether the provisions conform to German constitutional law for private assets (eg, whether tax relief does not apply).

Limited Use of Trust Structures

Unlike common law jurisdictions, Germany does not have a domestic trust regime comparable to Anglo-American trusts. Germany has not signed the Hague Convention so trusts do not exist in Germany. Thus, they cannot be used as a vehicle for succession planning.

Family Foundation (Familienstiftung)

A family foundation is a foundation with legal capacity whose purpose is exclusively or predominantly to promote or secure the welfare of the members of one or more specific families. Family foundations serve the welfare of the members of one or more specific families; this can be achieved, for example, by providing for, promoting or managing assets.

It should be noted that family foundations cannot be dissolved without due process and are therefore very stable. Amendments to the statutes can only be made with the approval of the foundation supervisory authority.

However, a family foundation can be interesting if certain assets are to be preserved. The heirs then no longer become owners, but merely beneficiaries of the foundation (as with a trust). This can also offer protection from the fragmentation of family wealth.

Charitable Foundation

Charitable foundations, on the other hand, must exclusively promote charitable causes. There are numerous tax breaks for this. The foundation itself is tax-exempt, as are transfers to the foundations. Donations are also tax-deductible. However, the assets cannot be returned to private use without tax disadvantages.

In principle, the foregoing rules are not only aimed at tax optimisation: these are economically sensible arrangements that do not constitute tax avoidance.

German tax law contains a general anti-abuse provision. This provision prohibits the abuse of legal structuring options in tax law. Tax law cannot be circumvented by abusing legal structuring options. This means that, in the event of abuse, the tax assessment will be based on the most economically appropriate structure rather than the chosen structure.

Abuse occurs when an inappropriate legal arrangement is chosen that, compared to an appropriate arrangement, leads to a tax advantage for the taxpayer or a third party that is not provided for by law.

Succession to digital assets is generally governed by the general rules of universal succession: upon the death of the testator, all property rights, including digital assets such as online accounts, email accounts, social media profiles, stored data and contractual relationships with internet providers, pass to the heirs.

The heir enters into a contractual relationship with the service provider and thus obtains material access to the data stored under the deceased’s account.

In practical terms, this means that heirs are granted access to and the right to view the digital assets, as the deceased had previously – without, however, assuming the deceased’s identity or actively continuing to use the account. The heirs can assert claims for information against service providers in order to gain access. A separation between highly personal and property-related content is neither practicable nor legally required.

Succession in crypto-assets is handled in the same way: upon the death of the testator, all property rights, including crypto-assets, are transferred to the heirs. The relevant object of reference in inheritance law is the private key, as this is the only way to access the crypto-assets. The heirs become the legal owners of the stored data (eg, private key on hardware, software or a paper wallet) and assume the legal position of the deceased.

The special feature of crypto-assets is that the tokens themselves are not stored on the storage medium, but are recorded as entries on the blockchain; the private key is the prerequisite for accessing and disposing of the crypto-assets. If this can no longer be found, the heirs are indeed no longer able to dispose of the assets. This must then be secured by means of a will.

Special Challenges and Recommendations

These include the following.

• Access data: For crypto-assets, access to the private key is essential; without it, the assets are effectively lost, even if they are legally transferred to the heirs. It is therefore advisable to securely document access data (private keys, passwords, seed phrases) and store it in such a way that the authorised persons can access it in the event of inheritance.
• Execution of wills and powers of attorney: Ordering the execution of a will (possibly limited to the digital estate) or granting a power of attorney (with transmortal/postmortal effect) can ensure the capacity of the heirs or an executor to act.
• Contractual arrangements: It should be checked as to whether the terms of use of platforms or wallet providers exclude or restrict inheritance.

To date, the legislator has not created any special regulations for succession in digital assets or crypto-assets.

Family Companies

A family business often has special provisions in its articles of association. These include, for example, special provisions for the transferability of shares, redemption of shares, withdrawal in the event of misconduct, marriage contract clauses, succession clauses and severance payment rules. This ensures that only family members are and remain shareholders, and that measures can be taken in the event of misconduct.

Valuation of Family Businesses

For inheritance and gift tax purposes, the valuation of company shares is based on the Valuation Act. The fair market value is generally decisive.

Initially, the stock market price or actual sale price is used as a basis. In the case of unlisted companies, the purchase prices within a year may also be decisive if there have been sales. If this is not the case, the simplified statutory income approach is often used. This involves capitalising the sustainable annual income of the company. Alternatively, other recognised valuation methods may also be used if they reflect the fair market value more realistically. In this respect, the taxpayer has a right of choice.

Restrictions in the articles of association, such as transfer restrictions or compensation provisions, have no particular influence in the regular valuation procedure, although they do limit the actual realisability of the shares. In practice, succession plans are therefore often designed in such a way that tax advantages are optimally utilised and valuation effects are taken into account at the same time, for example through the gradual transfer of company shares within the family.

Tax breaks and valuation rules play a particularly important role in succession planning for family businesses in Germany.

Tax Breaks for Business Assets

The transfer of business assets by inheritance or gift is subject to tax breaks under certain conditions in accordance with the Inheritance Tax and Gift Tax Act. The aim of these regulations is to ensure the continuation of businesses and jobs. There are two main exemption models for eligible business assets, such as shares in a limited liability company or interests in partnerships.

• Standard exemption: 85% of eligible business assets remain tax-free, provided that certain conditions are met – in particular a five-year retention period and requirements regarding the total wage bill.
• Optional exemption: Under stricter conditions (in particular a seven-year retention period and stricter payroll requirements), a 100% tax exemption can be achieved. The aim of the exemption rules is to preserve jobs and ensure that the company does not have to be sold to finance inheritance tax.

So-called administrative assets (eg, surplus funds or certain rental properties) are not eligible for relief if they exceed certain limits. Special rules apply to very large corporate assets.

In practice, the following legal forms are particularly popular for succession planning: foundations with legal capacity (especially family foundations), traditional corporations and partnerships (especially GmbH & Co KG).

Family Foundations

Family foundations and private charitable foundations ensure that the company’s assets remain tied up in the long term and allow for flexible succession planning.

Companies

Corporations (GmbH, AG) and partnerships (especially GmbH & Co KG) are traditional instruments of succession planning. GmbH & Co KG offers a high degree of flexibility and allows family members to be involved. The structure of the company (eg, transfer restrictions, special rights) can control influence and succession.

Differences Between Residents and Non-Residents

These are as follows.

• Tax law: Personal tax liability is based on the place of residence or habitual abode, while non-residents (foreigners, foreign companies/foundations) are only subject to limited tax liability on domestic assets.
• Foundations with foreign connections: For foreign family foundations without a registered office or management in Germany, additional taxation applies under certain conditions, meaning that foreign family foundations and trusts are often not advantageous for residents of Germany from a tax perspective.
• Structuring with foreign foundations: In the case of foreign foundations (eg, Liechtenstein), the composition of the governing body must often include non-family members for tax reasons. The role of the foundation can be limited by special rights and provisions in the articles of association.

Residents of Germany are subject to additional taxation if they benefit from a foreign family foundation or trust. In recent years, this has been repeatedly upheld by the European Court of Justice, albeit in favour of the taxpayer. Exceptions to additional taxation have so far only been provided for EU/European Economic Area (EEA) foundations in the law, but the Federal Finance Court has now ruled that they should also apply to third-country foundations, such as Swiss foundations. This also opens up further applicability for trusts and facilitates the tax treatment of beneficiaries in Germany.

German family foundations are subject to inheritance tax every 30 years, which does not apply to foreign family foundations and trusts.

Germany does not have its own trust law, as trusts do not exist as a separate legal form. Therefore, there is no special licensing system for trustees. However, if a trustee makes asset management or investment decisions within the framework of a trust, this may be considered a regulated financial service and require authorisation from the Federal Financial Supervisory Authority in accordance with the Banking Act.

Liability is governed by the general rules of German civil law. Professional trustees are regularly subject to a higher standard of care, which is based on the standards of their profession.

Private trust companies cannot be established under German law, as there is no domestic trust regime. Instead, family foundations are often used as long-term asset structures, such as the family foundation.

Whether trusts are subject to corporation tax depends on their classification under German tax law. According to the Corporation Tax Act, only certain corporations, associations of persons and asset pools are subject to corporation tax. Trusts are not legal entities under German law and are therefore not automatically treated as subject to corporation tax.

However, depending on its structure, a foreign trust may be classified as an asset pool subject to corporation tax, or as another type of corporation if its structure and function are comparable to those of a foundation or special-purpose fund and it has its own legal personality within the meaning of German tax law. This applies even though a trust does not exist as a legal entity under German law. The type comparison serves this purpose: if the trust corresponds in its structure to a foundation or special-purpose fund, it can be treated as subject to corporation tax.

If the trust is revocable and the settlor has secured extensive rights, the trust is generally not considered to be subject to corporation tax.

German inheritance law and inheritance tax treat same-sex spouses, adopted children and children born out of wedlock in the same way as opposite-sex spouses and legitimate children. However, there are special provisions for unmarried partners, surrogate children and posthumously conceived children.

Same-Sex Spouses and Registered Civil Partners

Same-sex partners can now also marry. Therefore, there are no longer any differences. They inherit legally as spouses and fall into tax class I, with the highest allowance and the lowest tax rates. This also applies to registered civil partners, provided that the civil partnership has not been converted into a marriage.

Unmarried Partners

Unmarried partners are not privileged in either inheritance law or inheritance tax law. They are not legal heirs and must be included in a will. For inheritance tax purposes, they are treated as strangers (tax class III, allowance of EUR20,000).

Children Born Out of Wedlock

Since 1998, children born out of wedlock have been treated equally to children born in wedlock, in terms of inheritance law, and have the same legal right to inherit.

Adopted Children

Adopted children are treated equally to biological children in terms of inheritance law and inheritance tax law; in inheritance tax law, this also applies to stepchildren (but not in inheritance law).

Surrogate Children (Children Born to Surrogate Mothers)

German law does not recognise surrogacy. Legal parenthood is determined by the law of descent. The woman who gave birth to the child is the mother; the intended parents can only be recognised as parents through adoption. Without adoption, there is no legal right to inheritance or tax privileges.

Posthumously Conceived Children

Children conceived by artificial insemination after the death of the father are entitled to inherit if paternity is recognised under German descent law.

Conflicts can arise in cross-border estate planning when family relationships are recognised differently in different legal systems. This occurs most frequently in relation to marriage contracts or inheritances. Germany primarily regulates such conflicts through European regulations on inheritance law and matrimonial property law.

The provisions of the European regulations specify which national law applies to family law issues such as the validity of a marriage and matrimonial property law.

According to this regulation, the following generally applies:

• choice of law – spouses may choose the matrimonial property law of a country of which one of the spouses is a national, or in which one of the spouses has their habitual residence; and
• without choice of law – as a rule, the law of the first common habitual residence after marriage applies – or alternatively the law of the common nationality or the law of the country with which the spouses are most closely connected.

In inheritance matters, cross-border conflicts within the EU are largely governed by the EU Succession Regulation. This regulation generally applies the law of the deceased’s last habitual residence to the entire estate. It also allows individuals to choose the law of their nationality for estate planning purposes. This framework helps to ensure that the definition of heirs and family relationships is determined uniformly in all participating EU member states.

In Germany, there are no significant conflicts between state and federal law in this area, as family and inheritance law is uniformly regulated at the federal level by the BGB.

From a German perspective, there is only one federal tax regime in the area of inheritance and estate planning, as is the case in federal systems such as the United States. The relevant regulations are predominantly uniform across Germany, while European regulations and double taxation agreements play an important role in cross-border matters.

The Inheritance Tax and Gift Tax Act, which applies nationwide, is central to the taxation of inheritances and gifts. It determines both tax liability and allowances and tax rates. In addition, the Valuation Act regulates the tax valuation of transferred assets, such as real estate or company shares.

Unlimited tax liability applies if either the testator or the acquirer has their domicile or habitual residence in Germany at the time of acquisition. In this case, worldwide assets are generally subject to German inheritance or gift tax. For German citizens, unlimited tax liability can even continue for up to five years after moving away.

Limited tax liability applies if neither the deceased nor the acquirer is resident in Germany. In this case, only certain domestic assets are taxed, such as real estate located in Germany or shares in German companies.

To avoid double taxation, Germany has concluded double taxation agreements for inheritance tax (and in some cases also for gift tax) with a few countries. In double taxation agreements, both countries often have the right to tax an estate or a gift, but there are credit provisions. Ultimately, the higher tax rate prevails. Exemption from inheritance or gifts by a country is rarely found in common double taxation agreements.

If there is no double taxation agreement, tax credits apply. However, it should be noted that the national systems are not harmonised, so double taxation may still occur.

In addition to tax regulations, conflict-of-law rules also play an important role. For cross-border inheritance cases within the EU, the EU Succession Regulation applies, which basically applies the law of the deceased’s habitual residence to the entire succession. Substantive German inheritance law is itself regulated in the BGB. The German federal states have no independent substantive regulatory powers in this area for inheritance tax law or inheritance law. Their role is essentially limited to tax administration (tax offices) and, in some cases, the supervision of certain asset structures such as foundations.

Overall, succession planning with international implications is therefore primarily shaped by the interplay of federal tax rules, international double taxation agreements and European conflict-of-law rules. These determine which state may tax the assets and which law applies to the transfer of assets.