by Johannes Fiala, lawyer
1. reduce the tax on cash gifts: A partner wishes to make a gift of EUR 75,000 to his partner. If this is done directly, only the tax-free amount of EUR 5,200 is deducted. On EUR 69,800, 23% gift tax is then due (i.e. EUR 16,054). The situation is different when using a life insurance policy. If 75,000 EUR have already been paid in as premiums, only 2/3 of this amount, i.e. 50,000 EUR, is taxed as the “assessment basis”. Again, the tax-free allowance of 5,200 EUR is not taken into account. There remains 44,800 EUR, for which 17% gift tax accrue (thus 7,616 EUR). As a result, EUR 8,438 in tax is saved in this way. Practical tip: A further tax saving can be arranged, if the donor takes over the tax payment, because then the partial amount, which actually the donee must lead off to the tax, is not subjected before likewise to the tax. So to speak, the basis of assessment is reduced by a clever design. In terms of income tax law, it should be noted that the maturity benefit of the policy can also be tax-free if at least 5 years have been paid in, the contract is to run for at least 12 years and the death protection of 60% of the premiums paid in is the minimum amount.
2. reduce the tax on inheritances through debts: Just as only 2/3 of the premiums paid are used as the basis of assessment for life insurance, inheritance tax can be saved on the transfer of real estate, because real estate is taxed (rule of thumb) at only about 60% of the actual market value. The transfer of companies is more complicated to calculate, but also favoured. If debts are then also transferred at the same time, the tax can be massively reduced, because liabilities count 100% in the inheritance. But be careful: In the case of gifts inter vivos (anticipated succession), this tax trick does not usually work (keyword: mixed gift). However, the deduction of debts can also be taken advantage of in the case of gifts if the real estate is held as business assets.
3. strategies, especially for spouses: a) Avoiding gift tax through business structuring: In case of participation in a business, not only the allowances in the business tax can be used several times, but also sources of income can be shifted between spouses. In individual cases, however, it must be examined whether income tax is due on the transfer of shares in the company. b) customary gifts (the amount is disputed, can range from EUR 1,500 to EUR 40,000 according to the commentaries) are tax-free. Alimony can also be paid tax-free. c) If the spouses decide (temporarily) to change the matrimonial property regime, tax-free inter vivos equalisation is possible. d) Spouses may make tax-free gifts to each other of ownership or co-ownership of real estate that is a single-family house or condominium, provided that the real estate is only used by the spouse: Holiday and weekend homes are not eligible. In principle, such property can be transferred between spouses as often as desired. e) Non-marital partners can avoid or at least postpone gift tax if a loan agreement is concluded at the same time. But here, too, caution is advisable: The agreements should be checked by the tax advisor so that the tax authorities cannot later regard them as a circumvention transaction that is invalid for tax purposes.
4. avoid tax on death cover: Some insurance customers want to insure their partner, for example because the family home has not yet been paid off. In the event of death, the insurance benefit should then be used to pay off the remaining debt on the house. a) Even in the case of pure risk insurance, the partner would generally have to pay tax on the benefit if he or she receives the benefits as a beneficiary or heir. This can be avoided completely if the partner who is to receive the money in the event of death acts as the policyholder himself: then it is, as it were, a tax-free ‘lottery win’ according to the motto ‘I bet the insurance company that my partner whose life I am insuring will survive’. Who receives as a policyholder an insurance benefit on the basis of a contract, with which the premiums were paid, which may keep the insurance benefit tax-free. b) Who does not consider this organization is again with the assessment basis ?repurchase value? or, if lower ?two thirds of the one paid premiums? Implementing the tax-saving model can mean double commission for the intermediary, namely if both partners conclude an insurance policy “crosswise” and thus each partner could receive his insurance benefit tax-free. c) If the insurance “crosswise” has not yet been realized, the policyholder could be replaced by a simple letter to the insurance company. In this case, however, it must be checked beforehand whether gift tax is payable on this transaction. It can be more problem-free if the insurer agrees to an exchange of the insured person (i.e. the risk): Then, however, the premium will often be calculated differently. d) If the “wealthier partner” pays the premium for the other partner, this may also constitute a gift: If the spouses are married (tax class I) in the legal matrimonial property regime of the community of gains, the tax-free amount is up to EUR 563,000 (EUR 307,000 spousal tax-free amount every 10 years, plus EUR 256,000 pension tax-free amount in the event of death). For unmarried persons (tax class III), on the other hand, there is only the EUR 5,200 tax-free allowance. The greatest caution is required with regard to income tax: As a rule, a ‘third-party expense’, i.e. payment by the partner cannot be deducted as a special expense. Here, too, it is clear that separate accounts (and thus separate payment of the premiums) can be advantageous.
5) Ensure security in the event of inheritance: Without the agreement of a subscription right, the insurance benefit in the event of death falls to the estate: This may be desirable ? but may mean avoidable inheritance tax. With agreement of a subscription right the insurance benefit falls to the beneficiary. However, if the subscription right is not irrevocable in the event of death, the heirs (if they are quick enough and get hold of the papers in time) can revoke the subscription right. Then, usually to the annoyance of the beneficiary, the benefit of the insurance again falls into the estate. If you want the right to draw to be irrevocable, you should enter into a legally sound contractual agreement with the future decedent. Repayment obligations: But this is not enough: If the money has been paid to the beneficiary, it can still happen that it must be paid back to the estate or the heirs: a) The testator was not overindebted during his lifetime ? his debts were offset by the ?value? of the life insurance. If, however, in the event of death the heirs are left with the debts and the beneficiary has received all the assets, as it were, the heirs can claim back at least part of the money directly (via the law on avoidance) or indirectly (e.g. via probate insolvency proceedings). b) If a divorced spouse was entered as the beneficiary, case law assumes, in the case of a revocable subscription right or in the absence of an agreement with the testator, that the basis for this gift ceased to exist with the divorce: So again, the money does not stay where it was supposed to go under the insurance contract. c) But that is not all: If the testator has given away such a large amount of his total assets via the right of subscription, the heirs entitled to the compulsory portion will have it checked whether they can demand so much back from the donee that the heirs mathematically receive at least as much as an inheritance as they would be entitled to as a compulsory portion. In the case of life and accident insurance, however, the yardstick here is not the insurance benefit but the sum of the premiums already paid to the insurance company. For the testator and his succession planning, it will be necessary to examine during his lifetime whether other measures (e.g. waiver of the compulsory portion in return for a settlement, contract of inheritance, execution of a will) should be taken to ensure that his will is enforced beyond his death. d) Those who wish to secure their contracts completely against access by the tax authorities (and any reporting obligations to the tax authorities by the insurer) in the first instance can consider structuring them with the involvement of a foundation or a trustee abroad. In the case of arrangements abroad, however, it should be noted that these do not in principle alter any tax liability existing in Germany and, above all, that a safeguard must be put in place so that the assets do not disappear “never to be found” in the event of death. In accordance with German tax law, heirs and donees are liable for the payment of tax alongside the testator/donor.
6 The family pool as an instrument for reducing the tax burden In the case of income tax, church tax and also the solidarity surcharge, children and other dependents are treated as independent taxpayers. In the family pool, a great deal of tax can be saved by structuring measures within a family. Legal assistance should not be lacking in the structuring, so that ? if there is no agreement in the family ? the majority and voting ratios are distributed as desired. The basic approach of the considerations is the circumstance that with each taxpayer in the year 2002 the first 7,500 – 12,500 ? remain tax-free, and that the income portions going beyond it are loaded first only with less than 30% taxes. In the case of a pupil or student who receives only income from capital assets, for example, the first ? 10,000 of income will remain tax-free in 2002, as shown in the following table. income remains tax-free, as the following calculation shows: Basic allowance (§ 32a Abs.1 EStG) EURO 7.235,- Savers’ allowance (§ 20 Abs.4 EStG) EURO 1.550,- Lump sum for income from capital (§ 9a EStG) EURO 51,- Special expenses lump sum (§ 10c Abs.1 EStG) EURO 36,- Special expenses deduction for education costs (§ 10 Abs.1 Nr.7 EStG) EURO 920,- Other special expenses and extraordinary burdens EURO 208,- In total: EURO 10.000,- If income is shifted to children, it must be considered that the child benefit and many other tax benefits are cancelled if an adult child in education has more than 7.188 ? in 2002 (§ 32, para. 4 EStG). For adult children in training, the 7,188 ? income limit should therefore be observed at all costs. And as icing on the cake: There are within the range of the Unternehmesbeteiligung, shares, pension papers numerous arrangements (nearly) the entire yields tax-free to arrange. Parents who want to take advantage of the tax benefits of “family splitting” and still retain influence over assets can do so by forming a family partnership in which the children (and/or other dependents) participate as minority shareholders. A family partnership also has the advantage that this partnership can make loans to a closely held business, whereas gifting funds that are subsequently loaned back to such a business requires very careful tax planning. With regard to inheritance or gift tax, it is advantageous if the family company has commercial income. In this case, §§ 13a and 19a of the German Inheritance Tax Act (ErbStG) come into effect when a share in this company is donated, i.e. the tax-free allowance for the transfer of business assets in the amount of EUR 256,000 (§ 13a para. 1 ErbStG), the reduction of the valuation by 40% if this allowance is exceeded (§ 13a para. 2 ErbStG) and the favourable tax class I (§ 19a ErbStG). But that’s not all: If the correct form of company is involved (partnership), the balance sheet values, which are possibly about 10 times lower, are applied instead of the high valuation for the business assets in the case of corporations (keyword: valuation according to the Stuttgarter procedure). If parts of the assets are to be transferred to the life partner or to distantly related relatives, the tax rate for gift tax is at least 17% (§ 19 ErbStG). In such cases, the privileges in connection with the transfer of business assets associated with a commercial family partnership have a very advantageous effect, because the initial tax rate for tax class I is only 7%. The (temporary) conversion of an asset-managing family company into a commercially active company can be achieved by the company becoming partially commercially active (keyword: infection theory). In addition, the family partnership can participate in another commercially active partnership as a partner or atypical silent partner. However, the family partnership can also be founded from the outset as a GmbH or commercially active partnership, e.g. as a GmbH & Co KG. If minor children are to be involved in a family company, it must be borne in mind that the appointment of a supplementary guardian and the approval of the guardianship court may be required: Careful planning and preparation will avoid unpleasant surprises in the end. In addition, the speculation period must be observed if real estate from private assets is transferred to a family company or if shares in an asset-managing real estate company are transferred to children or other relatives. Since in such transfer transactions, as a rule, the debts encumbering the property are also transferred to the new owners on a pro rata basis, this is a private sale transaction for which income tax may be payable in accordance with § 23 EStG if the 10-year period has not yet expired. But: If it concerns unprofitable real estates and losses, the ?commercialization? can be downright desired. Pure asset management can also be arranged to offset losses.
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About the author
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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