Anticipated inheritance

The “anticipated inheritance” as “inheritance during one’s lifetime” is a way of reducing inheritance tax for heirs by systematically using the tax allowances provided by law, e.g. for children and grandchildren.

If you therefore want to transfer all or part of your assets to the next generation(s) during your lifetime, you should approach this issue in a timely and systematic manner. In this case, “in a timely manner” means above all: not waiting until you are very old, so that you can use tax allowances several times if necessary.

What does “anticipated succession” mean?

Anticipated inheritance means that you partially anticipate the future inheritance by transferring or giving away individual assets to people during your lifetime.

As a rule, assets such as real estate, company shares, etc. are transferred to people who would otherwise inherit the assets. In such a constellation, the assets are usually transferred to children and/or grandchildren as a gift.

In addition to tax considerations, anticipated inheritance has the advantage that it can make later inheritance easier. This applies, for example, if a family business is only to be passed on to one of several children.

How can you avoid or reduce inheritance tax by anticipating inheritance?

If people inherit something, close relatives are entitled to inheritance tax allowances. The same applies if people give their assets to relatives, where gift tax allowances apply. The law generally provides a uniform tax allowance for inheritances and gifts, depending on the degree of relationship.

This is where the system of anticipated inheritance comes into play: with gift tax, recipients benefit from these allowances again every ten years. If more than 10 years pass between the gift(s) and the inheritance, the allowance can be used several times. With anticipated inheritance, it is possible to transfer assets in whole or in part free of gift tax or inheritance tax to the people who would possibly inherit the assets later anyway.

Depending on the size of the assets, the tax allowance can also be used more often if the anticipated inheritance is tackled in good time – i.e. not only in old age.

Example of anticipated inheritance:

In 2015, a mother gives her daughter (tax-free allowance: EUR 400,000) half of a property worth EUR 400,000. After the mother’s death in 2021, the daughter inherits the other half of the property. The daughter has to pay inheritance tax on the amount of EUR 400,000, as the two acquisitions are added together within the 10-year period.

With a tax rate of 15% (of EUR 400,000), EUR 60,000 inheritance tax is payable upon inheritance. If, however, at least ten years pass between the gift and the inheritance, the acquisition would be tax-free, as the tax-free allowance would then be available again upon inheritance.

The example makes it clear: thinking about transferring assets to the next generation during one’s lifetime is worth real money for heirs and can help to ensure that family assets, e.g. in the form of real estate, are not “eaten up” by inheritance tax.

Both parents have allowances!

Furthermore, it is important to avoid a parent’s allowances going unused, as every child has a separate allowance in relation to each parent.

If assets are distributed one-sidedly between the parents, it may be worthwhile, for example, for the “richer” parent to give something to the “poorer” parent (within the scope of the spouse’s allowance of EUR 500,000), which the parent then gives away/bequeaths to the children.

In this way, the children’s allowances in relation to each parent can be used.

Anticipated inheritance & minor children: is that possible?

In principle, you can also give gifts to underage children. However, it should be noted that the children have unrestricted access to the gifted assets when they turn 18. This can also have a negative impact on the child’s further development.

In such a case, it is possible to restrict the child’s access. However, if the main focus is on protecting the underage child in the event of your own death (the donor’s), it is better to include the child in a will. This is because it is much easier to exclude access for a longer period of time in a will (e.g. until the child reaches the age of 27).

How should the donor protect himself?

Even if parents often only have the well-being of their own children in mind when it comes to anticipated inheritance, donors who pass their assets on to the next generation(s) should definitely protect themselves. This applies in particular to properties that are lived in by the donor.

With the appropriate contract design, it is possible to obtain a right of residence and rental rights in the family home despite a gift with a lifetime usufruct. It is also strongly recommended that the right to reclaim the money in certain cases (e.g. an attempt to sell the property or the death of the recipient) be reserved when making a gift.

This makes it clear that the legally secure design of the gift contract is, in addition to tax planning, the be-all and end-all of a successful anticipated inheritance. This is extremely important, as it is not possible to subsequently change a gift contract on your own.