Anticipated succession: using strategy to reduce inheritance tax

Inheritance tax can place a heavy financial burden on heirs, especially where substantial assets are involved but there is not enough liquidity to pay a high inheritance tax bill. For this reason, particularly in the case of larger estates, it is important to structure succession planning at an early stage in a tax-efficient way. One option is to make lifetime gifts as part of anticipated succession planning in order to make best use of available tax allowances.

Contents

Inheritance tax: a potential financial burden

What is “anticipated succession”?

Which tax allowances apply to children, grandchildren, other relatives and friends?

Adult adoption: a way to save inheritance tax?

Exceptions and additional allowances

Timely succession planning relieves future generations

Inheritance tax: a potential financial burden

Inheritance tax can impose a significant burden on heirs. In the best case, the issue is “only” to reduce the financial impact where there is sufficient liquidity available to pay the tax.

However, if someone inherits a substantial asset but does not have the necessary funds to pay the inheritance tax, the tax burden can become a serious financial threat.

For this reason, especially in the case of larger or very large estates, it is important to structure assets and succession planning during one’s lifetime in such a way that future heirs are exposed to as little inheritance tax as possible.

What is “anticipated succession”? 

Anticipated succession is one way of reducing the inheritance tax burden for future heirs. It involves transferring assets, or shares in assets, to future heirs during the lifetime of the person making the transfer, for example to children or grandchildren.

This can create tax advantages for the future heirs. Lifetime gifts are largely subject to the same tax allowances as inheritances. The amount of the allowance depends on the family relationship between the donor and the recipient (see Section 16 of the German Inheritance Tax and Gift Tax Act).

These are uniform allowances for inheritances and lifetime gifts within the same personal relationship.

The allowances can be used again every ten years. However, gifts and inheritances received within a ten-year period are added together, so the allowance can only be used once in total during that period. If, however, more than ten years pass between two gifts, or between a gift and the inheritance, the allowance can be used at least twice within the same personal relationship.

This can reduce the future inheritance or gift tax payable by the recipient, or may even mean that no inheritance tax is payable at all when the estate passes on death.

To allow heirs to benefit from these tax advantages, it is important to start transferring assets during one’s lifetime in good time.

Note: To facilitate asset transfers as part of anticipated succession planning, it is often advisable, especially where family-owned real estate is involved, to set up a family company or family asset pool. You can find out more in our article “Family Companies for Real Estate: A Practical Guide to Tax-Optimised Succession Planning”.

Which tax allowances apply to children, grandchildren, other relatives and friends?

The tax allowances that can be used through gifts made as part of anticipated succession planning depend on the family or personal relationship between the donor and the recipient.

The following allowances apply:

Spouse	€ 500,000
Children and stepchildren, irrespective of adoption	€ 400,000
Grandchildren, if their parents are still alive	€ 200,000
Parents and grandparents, in the case of inheritance on death	€ 100,000
Parents and grandparents, in the case of lifetime gifts	€ 20,000
Siblings, nieces, nephews, stepparents, parents-in-law, children-in-law and divorced spouses	€ 20,000
Other heirs, legatees etc., such as cousins, unmarried partners or friends receiving assets by legacy	€ 20,000

Especially in the case of very large estates, it is therefore important and sensible to begin transferring assets during one’s lifetime to children and, where appropriate, to a spouse. This usually makes it possible to use allowances more than once.

Adult adoption: a way to save inheritance tax?

The table above shows that children in particular benefit from substantial statutory inheritance tax allowances. But does that mean adoption can be used as an inheritance tax-saving model?

The answer is: yes and no.

As a general rule, adoption should not be pursued purely for tax reasons. However, adoption can in fact have significant inheritance tax advantages for the adopted person.

The adoption of a minor, for example the adoption of a stepchild, creates a full legal parent-child relationship. Adopted minors therefore inherit by law in the same way as biological children and benefit from the higher tax allowances. Their previous family ties are extinguished, however, which also means that their statutory inheritance rights and tax allowances in relation to their biological parents cease to apply.

Note: Without adoption, stepchildren inherit only if, for example, they are appointed as heirs in a will. You can find out more in our article on inheritance law in patchwork families and how stepchildren inherit.

The full adoption of an adult, known as a “strong adoption” with the same effect as the adoption of a minor, is possible only under very strict statutory conditions. In most cases, adult adoption is therefore a so-called “weak adoption”. The legal ties to the biological parents and other biological relatives remain in place.

As a result, adopted persons may benefit from up to four allowances: both in relation to their biological parents and in relation to their adoptive parents. However, corresponding obligations also arise, for example maintenance obligations.

Note: A strong adoption of an adult is possible only in the cases exhaustively regulated by law. You can find out more in our article on adult adoption, opportunities, rights and tax advantages.

Exceptions and additional allowances

When considering tax allowances for inheritance tax and gift tax, there are several important special rules that should be known and, where necessary, taken into account.

Special case: allowance for grandchildren whose parent has already died

As a general rule, each grandchild has an allowance of € 200,000 in relation to each grandparent.

However, if grandchildren inherit directly from their grandparents because the grandparents’ child — that is, the parent of the grandchildren — has died before the grandparent, the allowance for those grandchildren increases to € 400,000 each.

Example: A man has children and dies. His mother, who is also the grandmother of his children, dies after him. His children inherit directly from their grandmother. In that inheritance, each child has an inheritance tax allowance of € 400,000 because their father predeceased the grandmother.

In 2024, the German Federal Fiscal Court issued an important judgment on this issue. Under Section 1953 of the German Civil Code, the disclaimer of an inheritance generally means that the person disclaiming is deemed, as a legal fiction, to have predeceased the deceased.

However, the Federal Fiscal Court held that an actual prior death is not to be equated for tax purposes with the legally presumed prior death of a person who has disclaimed an inheritance. Grandchildren who inherit from their grandparents as a result of their parent disclaiming the inheritance can therefore still claim only the grandchild allowance of € 200,000 (Federal Fiscal Court, judgment of 31 July 2024, Case No. II R 13/22).

Maintenance allowance, family home and household effects

For certain persons, German tax law provides additional allowances in the event of inheritance. Whether and to what extent these tax exemptions can actually be claimed in the future is often uncertain and will only become clear at the time of death.

Maintenance allowance for spouses and children

If the family’s provider dies, the maintenance allowance gives surviving spouses and children additional financial relief for inheritance tax purposes.

• For a surviving spouse, the additional maintenance allowance is a flat amount of € 256,000.
• For children up to the age of 27, the maintenance allowance depends on the child’s age.

€ 52,000 for children aged 0 to 5,

€ 41,000 for children aged 6 to 10,

€ 30,700 for children aged 11 to 15,

€ 20,500 for children aged 16 to 20, and

€ 10,300 for children aged 21 to 27.

However, the relevant maintenance allowance is reduced to the extent that the heir receives a non-taxable pension or maintenance benefit as a result of the death, such as a survivor’s pension.

The family home between spouses during their lifetime

Probably the most significant tax exemption concerns the transfer of the family home between spouses during their lifetime.

The family home is the centre of family life. It may be a house or a flat, but not a holiday home or second residence. This exemption is provided for in Section 13 of the German Inheritance Tax and Gift Tax Act.

If, at the time of the gift, both spouses live together in the family home as their main residence, the gift to the spouse is fully exempt from inheritance and gift tax. If the spouse later moves out of the property, this does not affect the exemption in this case.

The full or partial lifetime transfer of the family home to a spouse is therefore an effective way of reducing the future inheritance tax burden of the surviving spouse. It can also help distribute assets more evenly between spouses, enabling children in the future to use their regular allowances of € 400,000 in relation to both parents.

The family home on death

If, however, the family home forms part of the estate, surviving spouses — and in this case also children — can acquire the family home tax-free only under certain conditions.

One requirement is that the deceased person must have lived in the family home until death. An exception applies where the deceased had to move into a care facility.

In addition, the family home must continue to be used as such.

The surviving spouse must then live in the family home for at least ten years in order to benefit from the exemption. A child must move into the family home within six months of the inheritance and then live there for at least ten years. In the case of children, the tax-free living space is also limited to 200 square metres. If the family home is larger, the excess area is subject to inheritance tax on a pro rata basis.

Note: If a spouse or child moves out of the family home before the end of the ten-year period following the death — except in cases where a move into a care facility is unavoidable — the entire family home will become retrospectively taxable in full.

With regard to the family home exemption on death, it is essential to note that the exemption can usually only be claimed by individual beneficiaries. This is because, in practice, only individual beneficiaries will move into the family home.

An exception may apply, for example, where a widow lives in the family home with minor children. Even then, however, if the children move out within ten years, the exemption may cease to apply to them.

It is therefore important that estate planning takes into account which beneficiary is likely to be able to claim the exemption, and that the will is drafted in a way that makes this possible.

“Allowances” for household effects, jewellery and other movable assets

Finally, heirs may also benefit from tax allowances for household effects, such as furniture and tableware, and other movable assets forming part of the estate.

Spouses, children, grandchildren, parents and grandparents may acquire household effects with a total value of up to € 41,000 tax-free in the event of death.

Other movable estate assets, such as cars, works of art or jewellery, may also be acquired tax-free by these persons up to a total value of € 12,000.

The same allowance of € 12,000 applies to all other persons who receive household effects or similar assets from the estate.

These allowances do not, however, apply to cash, securities, coins, precious metals or gemstones, unless the gemstones have been processed into jewellery.

Timely succession planning relieves future generations

Although the tax allowances and exemptions described above can provide relief, particularly for close family members such as spouses, children and grandchildren, they often do not eliminate inheritance tax entirely.

This is especially true where real estate forms part of the estate. In such cases, the allowances are often insufficient or, without a will, cannot be used consistently and effectively.

In the case of large and very large estates, it is essential to consider at an early stage how assets can be transferred to a spouse and to the next generation or generations, and to make appropriate testamentary arrangements.

An individual, legally secure and tax-optimised strategy is indispensable for this purpose. We would be pleased to advise you.

Answers to frequently asked questions

What is “anticipated succession”?

Anticipated succession refers to the early transfer of assets during one’s lifetime by way of gifts. This allows statutory tax allowances for inheritance tax and gift tax purposes to be used repeatedly and can often significantly reduce inheritance tax.

What is the advantage of gifts made as part of anticipated succession?

The main advantage of anticipated succession is that tax allowances can be used in an optimal way to significantly reduce the inheritance tax burden for future heirs. Through early lifetime transfers in the form of gifts, allowances can be used again every ten years, enabling substantial assets to be transferred in a tax-efficient manner.

Which tax allowances apply to grandchildren, children and spouses in anticipated succession planning?

Spouses have an allowance of € 500,000, while children have an allowance of € 400,000 per parent. Grandchildren have an allowance of € 200,000 per grandparent. However, gifts and inheritances within a ten-year period in the same personal relationship are added together for tax purposes.