Design tips for prenuptial agreements, settlement of gain and alimony

According to the Federal Fiscal Court, waiver of alimony before marriage is taxable as a gift

The Federal Fiscal Court (Bundesfinanzhof, BFH) decided in its ruling of 17 October 2007 (Ref.: II R 53/05) that in the case of a waiver of maintenance prior to marriage, the “consideration” or the settlement amount is taxable as a gift. In the specific case, the wife had received DM 1.5 million from her future husband in exchange for a partial waiver of alimony prior to the marriage.

The reason for this was essentially that the future wife did not yet have a claim for payment of maintenance against her future husband, i.e. she had only waived an “uncertain chance”. For neither was the subsequent marriage and subsequent divorce certain, nor had the amount of the maintenance claim been determinable. On the face of it, all that had been foisted on a gift was a waiver of future alimony. However, the Federal Fiscal Court (Bundesfinanzhof, BFH) did not accept this.

Alternative designs

The “easiest” solution would have been for the future spouses to move abroad – because in some places such gifts remain completely tax-free:

However, to do this, you need to seriously move abroad and may have to observe shame periods. Another alternative would have been to agree on a loan instead of a “gift”, which could have been offset later. A prudent notary will include a tax clause in cases of anticipated succession or donation in cases of tax uncertainty: This can, for example, reserve the right of withdrawal if the tax result does not turn out as desired.

Good advice is good advice

The spouses can rarely take recourse against the notary, because (Federal Court of Justice, judgement of 20 September 2007, ref.: III ZR 33/07) the notary is “regularly not required under section 17, paragraph 1, sentence 1 of the Notarisation Act (BeurkG) on the basis of his duty to provide legal instruction or his general duty of care under section 14, paragraph 1, sentence 2 of the Federal Notarial Code (BnotO) to point out the tax consequences of the notarised transaction”. Notaries repeatedly point out that, with regard to the economic and tax consequences of a transaction, it is “an obligation of the contracting parties to inform themselves” about “tax and economic risks and side effects”. This knows in the meantime probably also over one million Federal citizens, who fell into so-called tax savings models – despite certifying.

Tax optimisation through prenuptial agreements

A common misconception is that spouses are liable for each other’s debts – this often results in property division, which also leads to higher inheritance tax in the event of one spouse’s death. From the point of view of inheritance tax, it makes more sense if the separation of property is not agreed for the case of death (modified community of gains).

Advice from notarial practice

It is very sensible to think of the option of a separation of property for the time after the marriage: Notary Nikolaus Klöcker (Starnberg) points out that according to a recent ruling of the BFH of 12 July 2005, an accrued gain after a few years of marriage can be settled completely legally and free of gift tax: “It is then possible to agree on the separation of property and settlement of the accrued gain, and to return to the community of accrued gain a legal second later” (Güterstandsschaukel). However, this swing in the matrimonial property regime is only harmless in terms of gift tax: income tax or corporation tax may sometimes also be payable on withdrawal profits: This applies in particular if the transfer of assets from one spouse’s business assets to the other spouse’s private assets. In contrast, the retroactive agreement of the community of gains is not recognised for tax purposes. According to notary Klöcker, the BFH ruling on maintenance compensation does not apply if maintenance claims of spouses are compensated within the scope of divorce agreements.

Further design options

Presumably, the BFH ruling also does not apply if the divorce agreement already provides for a maintenance settlement in the run-up to a divorce. It is also conceivable that the spouses agree on a life annuity instead of maintenance – after a few years this can also be settled tax-free. In case of doubt, a written tax opinion should always be available for the respective current design.

Prenuptial agreement as a restructuring instrument

Entrepreneurs who are in financial distress can also take a step towards restructuring and securing their marital pension provision by switching from the community of gains to the separation of property. Many a family home, which was previously owned by the entrepreneur alone, can thus be protected from the access of creditors if it is transferred in good time – because it is not a gift.

by RA Dr. Johannes Fiala

by courtesy of

www.dzw-online.de (published in Die Zahnarztwoche, issue 14/2008, page 23)

and

www.halstenbeker-magazin.de (published in Halstenbeker Magazin, issue 4/2008, page 16)

and

in FuR 06/2008, pp. 273-274

Under the heading: BFH: Waiver of alimony before marriage is taxable as a gift)

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About the author

Dr. Johannes Fiala
PhD, MBA, MM

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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