How and when should real estate be transferred within the family?

Owning a home often plays a central role in the lives of many families. Whether for their own use or as an investment, their own four walls should also offer their descendants stability and security.

To ensure that this also works in reality, the issue of transferring a property should be addressed at an early stage. In this way, the tax planning potential can be exploited and high inheritance tax can often be avoided or at least significantly reduced.

Real estate can be transferred because of an inheritance (acquisition upon death) or during your lifetime. To ensure a legally secure and tax-efficient transfer of assets, the best way is often a combination of transfer during one’s lifetime (“anticipated succession”) and testamentary provisions.

Acquisition upon death

The ownership structure of the property changes at the latest upon death. If the deceased has not regulated the succession by will / inheritance contract, the law regulates the succession. This also determines who acquires ownership of the property. This can lead to unexpected problems:

• Community of heirs as owners of the property
  The statutory succession is based on the specific family relationships and the matrimonial property regime of the deceased at the time of death. Several legal heirs – such as the spouse and children – form a so-called community of heirs. As it is only known at the time of the deceased’s death which relatives are present at that exact time, the community of heirs is a community of chance.
  The deceased’s assets are transferred to the community of heirs as a whole. Decisions relating to the management or sale of the property must always be made jointly by all co-heirs. This also means that a single co-heir can block the entire community of heirs. Disagreement can even lead to an unwanted auction of the property.
• Underage heirs
  Major difficulties can arise if minors are involved in a community of heirs. This can be the case, for example, if a parent dies while the children are still under the age of majority. The involvement of the family court or supplementary guardians is then necessary in order to protect the interests of the children.

The will as a solution to the problem

These problems can be solved with a will. For example, the property can be designated to just one family member so that this member can live there permanently without risk.

• Drawing up a will with the help of a lawyer
  The prerequisite for optimal estate planning is a professionally and legally compliant will. A poorly drafted will entails the risk that legal consequences other than those intended by the testator are derived from the will. This applies all the more to joint spouses’ wills. It is therefore strongly advisable to seek advice from a lawyer experienced in wills and inheritance tax law when drafting a will. Advice can also be given by a notary, but tax aspects are usually excluded from the advice.

• Tax advantages by drawing up a will
  As the regular inheritance tax allowances (spouse €500,000, child €400,000) are often insufficient due to the high property values, particularly in Munich, it is important to make the best possible use of existing allowances and existing tax exemptions. The so-called “family home exemption” is particularly relevant in the case of inheritance. However, this exemption can only be claimed by those who (permanently) meet its requirements.

Tax exemption of the family home in the event of death

Certain conditions must be met for this:

• The family home exemption can only be claimed by spouses/children and
• only to the extent that they themselves become owners through the inheritance.
• The deceased must have owned the property at the time of death and have lived there until the end.
• The property was already being used as a shared home at the time of the deceased’s death or the property was occupied for personal residential purposes immediately after the death (after six months at the latest).

Please note: The property must be occupied continuously for ten years from the date of inheritance. If you move out within these ten years or move the center of your life to another location, the full amount of tax will be due retroactively. Ownership of the property may also not be transferred within the ten-year period.

Transfer of property during lifetime

In contrast to an acquisition upon death, the allowances for inheritance/gift tax are available again every ten years in the case of a transfer during one’s lifetime. If there are more than ten years between two gifts or between a gift and inheritance, the allowance can be claimed again each time.

The following aspects should be taken into account when making a lifetime transfer:

• Legal planning before transferring the property
  Can the donor afford to hand over assets? It must be ensured that the donor and any spouse remain adequately and permanently provided for and protected. Otherwise, a gift is not advisable. However, the property transfer can also be structured in such a way that the donor can continue to live in the property themselves or rent it out. It is crucial that this is correctly agreed in the transfer agreement.
• Tax planning before the property transfer
  The aim of tax planning is to ensure that no or as little gift tax as possible is incurred. A partial gift of a property is possible, but the fraction to be gifted must be specified in the transfer agreement. For this purpose, the tax value of the property must be determined in advance by a (tax) advisor specializing in valuation law / gift tax law.
  In the course of planning, a decision must be made as to whether a usufruct for the property or consideration (e.g. an annuity, a right of residence, a reduced purchase price) should be agreed, which may reduce the value of the gift.
• Exemption from gift tax for the spouse
  The lifetime gift of a jointly occupied property to a spouse is exempt from gift tax. The spouse receiving the gift does not have to continue to live in the property for ten years following the gift. It only has to be the jointly occupied property (center of life) at the time of the gift.
  In the case of lifetime transfers, this tax exemption only applies to spouses, but not to children.
• Risk of possible capital gains taxation
  If consideration such as a pension, loan assumption or purchase price is agreed when transferring the property, it is essential to ensure that this does not trigger income tax for the donor. This tax can be very high.

Establishment of a family company

If several or expensive properties are to be transferred, it may also be possible to transfer them as part of a family company (also known as a family pool). A civil law partnership (GbR) or a limited partnership is usually formed for this purpose. The transferring generation contributes its real estate assets to this company.

Shares in the company can then be transferred to the children. This is best done in ten-year increments so that the gift tax allowances can be claimed several times over time.

The formation of a family company can make sense for larger (real estate) assets, but it is associated with not inconsiderable (formation) costs. One major advantage is that it can prevent the assets from becoming fragmented.

Conclusion

Depending on the individual starting position, there are various approaches to transferring real estate within the family circle. If the tax-free amounts are not likely to be sufficient in the event of inheritance, the possibility of a (partial) transfer during your lifetime should be considered as early as possible.

In order to avoid future disputes within the family circle, gifts during one’s lifetime and future succession must be coordinated.

It is therefore advisable to consult a specialist in the field of inheritance law / tax law at an early stage in order to develop the best strategy for the transfer of real estate and to ensure that all tax and legal aspects are optimally taken into account.