Disclaiming an inheritance: What options does selective disclaimer offer?

Most people are only familiar with the concept of renouncing an inheritance in connection with an over-indebted estate. However, if structured and implemented correctly, renunciation can be an effective means of actively influencing the succession even after a person’s death, e.g. for tax reasons.

What happens when an inheritance is renounced?

Anyone who becomes an heir by law or by last will and testament is not obliged to accept the inheritance: it is also possible to renounce the inheritance.

In most cases, an over-indebted estate is disclaimed in order to avoid having to pay the debts of the deceased. This is possible because successful disclaimer means that the disclaiming person is deemed to have predeceased the deceased and is therefore no longer an heir.

However, the consequences of renouncing an inheritance are significant: you inherit neither assets nor debts, meaning you come away completely empty-handed. The legal or testamentary substitute heirs become the heirs instead. In the case of legal succession, for example, the child is replaced by their children (grandchildren).

Tip! If minor children are also not to inherit, the parents must also renounce their inheritance on behalf of the children. If the parents have already renounced their inheritance, this can sometimes be done without the approval of the family court (Section 1643 BGB). Children of full age must renounce their inheritance themselves.

Why should you act quickly?

The renunciation is subject to a time limit: it must be declared within six weeks of becoming aware of the inheritance at the probate court where the deceased person had their last place of residence. This time limit cannot be extended. If the time limit expires, the inheritance is deemed to have been (finally) accepted.

What is a conditional disclaimer?

However, contrary to popular belief, a disclaimer is not only possible in the case of an over-indebted estate.

As a binding declaration, it can be used after a person’s death to actively influence their succession and thus their rights and obligations – even if, for example, testamentary dispositions can no longer be changed.

When can a selective discharge be useful?

A guiding disclaimer may be useful in the following situations, among others:

• Berlin will: The surviving spouse is bound by the joint will. A controlling renunciation (especially in old age) can be useful for tax reasons in particular. For more information, see our article ‘Berlin will – avoiding tax disadvantages with controlling renunciation’.

• Legal succession / normal will in old age: If one spouse dies (in old age), legal/testamentary succession, as in the case of a Berlin will, can have considerable tax disadvantages for the surviving spouse or, later, for joint children. The reason: the surviving spouse pays inheritance tax on the inherited assets and, upon the death of the longer-living spouse, the inheriting children pay inheritance tax on the latter’s estate. Because the estate of the longer-living spouse also includes the share inherited after the first death, this sometimes results in double taxation. A waiver by the surviving parent can prevent double taxation because, as a result of the waiver, the children inherit directly from the parent who died first. The surviving parent receives nothing and does not have to pay inheritance tax.

• Children pass over their inheritance in favour of their grandchildren: If the children of a deceased person pass over their inheritance, their children (grandchildren) usually become the direct heirs of their grandparents. This can be useful if, for example, the children have already received assets by way of gifts and the tax allowances have been exhausted. If the grandchildren become heirs, they can each claim their own tax-free allowance of €200,000 from their grandparents.

Settlement agreement: Settle compensation before the expiry of the renunciation period

The directed disclaimer can result in significant tax savings for children, especially if the parents are already at an advanced age or if parents have transferred a large amount of assets during their lifetime by way of anticipated succession.

And yet this step must be carefully considered, even within the short time frame available. The consequences are serious.

In this situation, it is important to ensure financial security for the person who is disclaiming the inheritance, e.g. to provide financial security for the surviving parent in old age.

To do this, you need to agree on a settlement with the people who will benefit from the renunciation (settlement agreement) before you renounce your inheritance and, for example, provide compensation in the form of a pension payment or a usufruct (e.g. right of residence).

If structured correctly, the heir benefiting from the renunciation can reduce their taxable acquisition through the compensation paid, and the person renouncing their inheritance can use their allowance vis-à-vis the deceased for the compensation received.

If minors benefit from a renunciation, a supplementary guardian and family court approval are usually required for the settlement agreement. However, given the short renunciation period, it is usually difficult to reach a final agreement before the deadline expires. 

Avoid the pitfalls of controlled rejection!

In order to make a reliable and sound decision regarding a disclaimer, it is essential to seek immediate legal and tax advice as soon as you learn of a death in which you are an heir. This is because a disclaimer can also have unintended consequences, e.g. if you inherit from someone you had not considered by disclaiming the inheritance of another person. In this case, too, the renunciation is effective. It is therefore essential to check in advance who will become an heir as a result of the renunciation.

Key factors: time and experienced consultants

Due to the six-week disclaimer period, it is essential to consult an experienced advisor as early as possible.

The right person to contact for all questions relating to the renunciation of inheritance is a specialist lawyer for inheritance law, who can also act as a link between the relevant tax and legal issues. The following applies: the more time the advisor has available, the more accurate a (rough) tax assessment of the estate can be made, and the more tax-optimised the structure/strategy can be. When it comes to tax and legal advice from a single source, the advisor will already have an eye on the presentation to the tax office in the context of the inheritance tax return.

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