Transferring real estate into trusts is a complex yet powerful instrument of international asset protection. Wealthy property owners in particular face a wide range of challenges today – from politically debated special levies (such as wealth levies akin to the Lastenausgleich, or burden-sharing levy) to rising inheritance-tax burdens and family disputes over succession. In this environment, trusts are gaining importance as part of a holistic asset structure. This article explains what a trust is and how it works, which types of trust are suitable for property owners, how real estate is transferred safely into trusts, the differences and obstacles that German and foreign properties bring with them, and the tax consequences. It also discusses how trusts can be combined with other structuring tools – for example family foundations or life insurance policies – and examines the strategic advantages of trusts (liability protection, succession planning, anonymity). With practical examples, common mistakes and concrete recommendations, this guide offers comprehensive orientation for international wealth planning involving real estate.
What is a trust and how does it work?
A trust is a civil-law construct of Anglo-American law, based on the principle of a “split ownership and benefit structure”. A trust typically involves three parties: the settlor (or grantor), who places the assets into the trust; the trustee, who formally administers the assets; and the beneficiaries, who benefit economically. The trustee holds the legal title to the assets (e.g. real estate or company shares), while the beneficiaries hold the economic title – they profit from income and increases in value.
- Core idea: The trust separates legal ownership from the economic right of use. This allows the settlor to remove assets from their own ownership, transfer them to a trustee and at the same time determine who will benefit from them later.
- Advantage of anonymity: Because the trust itself is not registered as a legal entity, the nature and scope of the trust assets often remain discreet. Neither the existence of the trust nor the names of the beneficiaries are published in public registers. This advantage of confidentiality is particularly attractive to wealthy individuals.
- Fiduciary responsibility: The trustee administers the assets on a fiduciary basis in accordance with the terms of the trust deed. Externally, the trustee holds the formal ownership rights, but must exercise them for the benefit of the beneficiaries. The trustee’s conduct is generally subject to fiduciary duties set out in the trust documentation.
Germany has no trust law of its own. The trust concept is “alien” to German property and asset law. Nonetheless, foreigners can establish a trust under foreign law over German assets as well – though this then requires legal reinterpretation. German courts generally consider whether, instead of a trust, a German legal institution such as the fiduciary relationship (Treuhand, under the BGB (German Civil Code)) or a promise of gift (under the ErbStG, German Inheritance and Gift Tax Act) should be applied. In practice, this means: trusts have no direct equivalent in German law. Anyone who nonetheless wishes to hold real estate in a trust must therefore often proceed creatively – for instance through foreign companies or other intermediary vehicles.
Summary: A trust is an asset structure governed by foreign law, with three actors and divided ownership. In many countries it is used flexibly to hold assets independently of the testator. Germany has no direct trust rules, yet the effects of a trust can often be achieved through alternative constructions.
Relevant types of trust for property owners
Trusts come in many forms. For property owners, the following types are particularly relevant:
- Living trust vs. testamentary trust: With a living trust (inter vivos trust), the settlor transfers assets into the trust during their lifetime. The settlor often remains trustee at the same time and can continue to use the assets. A living trust serves both succession planning and protection against later access. A testamentary trust, by contrast, only comes into being through a testamentary disposition; it therefore takes effect only on the death of the settlor. It is frequently used alongside an executor and governs which beneficiaries receive assets from the trust and when – for example for minor children.
- Revocable vs. irrevocable trust: In a revocable trust, the settlor retains the ability to dissolve or amend the trust at any time. They can reclaim the assets or appoint new beneficiaries. This flexibility, however, comes at the expense of asset protection and, in many countries – for example under US tax law – means that the settlor continues to be regarded as the owner for tax purposes. By contrast, an irrevocable trust is generally fixed and cannot be unilaterally amended by the settlor after it has been established. Irrevocable trusts offer greater protection against creditors and are often used for genuine transfers of assets. They are, however, more demanding in tax terms.
- Fixed-interest trust vs. discretionary trust: In a fixed trust, the beneficiaries are entitled to fixed claims from the outset – for instance, the trust income is distributed to specified persons in a fixed percentage or on a fixed schedule under the trust terms. A discretionary trust, by contrast, gives the trustee a margin of discretion: within prescribed classes of beneficiary (e.g. “children, grandchildren”) or according to the beneficiaries’ needs, the trustee decides who receives what and when. Discretionary trusts are highly flexible, but under German law they are harder to enforce as a binding legal relationship.
- Dynasty trust (multi-generational or family trust): A dynasty trust is possible in certain jurisdictions (such as particular US states) and is designed for the long term, often without any time limit. It serves to preserve family wealth across many generations. The assets remain in the trust more or less “in perpetuity”, which can mean that inheritance taxes on generation-skipping transfers (generation-skipping transfer tax) are avoided. For wealthy property owners, such a trust can ensure, for example, that real estate remains undivided within the family across several generations.
- Asset-protection trust: This trust, specifically geared towards liability protection, is frequently offered in international offshore jurisdictions (Cook Islands, Nevis, Cyprus, etc.). The settlor transfers their assets irrevocably to a trustee in a jurisdiction with strong protective provisions. Legally, these trusts are constructed so that, even in the event of foreign court judgments, access to the trust assets is made extremely difficult. They are particularly relevant for property-owning entrepreneurs or high-net-worth private individuals who might face creditors or former partners.
- Hybrid forms and special trusts: US law additionally provides special forms such as the QPRT (Qualified Personal Residence Trust) – an inheritance-tax-advantaged trust for residential property – or the Charitable Remainder Trust for charitable donations combined with financing purposes. For property owners, however, the combination of family trusts (family or dynasty trusts) and asset-protection trusts is likely to be of greatest interest.
Key points on trust types: The choice of trust depends on the objectives. Inter vivos and irrevocable trusts are often decisive for asset protection and succession planning. Discretionary trusts offer flexibility regarding beneficiaries. Dynasty trusts can provide protection lasting across generations. For liability purposes, offshore asset-protection trusts are available.
Transferring real estate into a trust
Transferring real estate assets to a trust takes place in several steps that must be carefully prepared:
- Establishing and documenting the trust: First, a trust deed is drawn up, usually by a specialist lawyer. In this document the settlor sets out the name of the trustee, the beneficiaries, the purpose of the trust and the distribution rules. For a trust in a common-law jurisdiction, notarial form is typically not required, although a publicly certified contract is often used to create binding effect. For German real estate, it may be advisable to conclude parallel fiduciary agreements (§ 708 BGB) or transfer agreements.
- Registration with the notary / land register: In many countries the transfer of real estate is carried out by notarial conveyance. The settlor transfers ownership of the property to the trustee by notarially certified deed. The trustee is then entered in the land register as the new owner or trustee. Example USA/UK: this is referred to as “deeding property into trust”. In Germany, however, a foreign trust cannot be entered directly in the land register, because German property law does not recognise trusts. Instead, the trustee may where appropriate be registered as a fiduciary (§ 1052 BGB), or intermediary structures are used (see the next section).
- Handling financing/debts: If the property is still encumbered by mortgages or other charges, their transfer into the trust must be clarified. Banks often reserve a right of consent (approval of a change of trustee), or the loans must first be redeemed or restructured.
- Official notifications: In some jurisdictions the creation of a trust or the transfer of property must be reported (e.g. to the tax office or the land registry authority). Where gifts are made, for instance, this is relevant for tax purposes (see the chapter “Taxes”). One obstacle not to be underestimated is the settlor’s power to give instructions in a revocable trust: although they control the investment of the assets, they should in fact have no implicit power of disposal, so as not to jeopardise the protective effect.
- Special case: life insurance: Sometimes a life insurance policy is used as an intermediate step. For example, a property owner can take out a capital-forming life insurance policy and assign its policy value to a trust. This can create liquidity and bring tax advantages.
In brief: Real estate is generally transferred to the trustee by notarial re-registration. For foreign properties this step is usually straightforward. For German properties, intermediate steps are often necessary (e.g. a foreign holding company, fiduciary registration). In any case, the financing should be clarified and the transfer documented in a legally sound manner.
German vs. foreign real estate in a trust
A key aspect of transferring property into a trust is the location of the real estate:
- Foreign real estate: If the property is located abroad (e.g. in the EU, Switzerland, the USA), the local legal system generally recognises foreign trusts. The transfer usually takes place by conveyance to the trustee under local law, often without significant delay. In common-law countries such as the United Kingdom or the USA, the trustee can be entered at the land registry. In many offshore jurisdictions the actual register of trust assets is not publicly accessible – unlike in Germany, there is no inspection of land registers of foreign states. Foreign tax laws and reporting obligations must be taken into account (e.g. reporting obligations for foreign pension funds, reports under FATCA/CRS), but in principle a simple transfer of ownership usually triggers only gift tax (see below), not immediate income taxes.
- German (domestic) real estate: Property ownership in Germany cannot be held directly in a trust, because German property law has no model for splitting title and right of use. Attempts to enter a trustee as a fiduciary in the German land register are legally questionable (BGH (Federal Court of Justice)/KG (Berlin Court of Appeal): trusts have no standing in Germany). The common solution: an intermediate company is created to hold the property. For example, a foreign corporation is founded or acquired, the shares of which are then contributed to the trust. The trustee becomes shareholder or partner of this holding company rather than direct owner of the real estate. In this way the property formally remains with the company, while the company shares are structured via the trust. Alternatively, German models such as the fiduciary foundation (§§ 80 et seq. BGB) can be used, where a fiduciary administers the assets – but these are not subject to the anonymous structure of genuine trusts.
- Tax implications: For domestic assets, German gift or inheritance tax is payable even on a merely intended transfer (for instance a transfer to a company for trust purposes) where there is a connecting factor – for example the residence of the transferor or the recipient, or simply the presence of domestic assets (real estate, bank balances, etc.). The mere existence of assets in Germany is sufficient to trigger a gift-tax liability. On the transfer of shares in a company holding domestic real estate, gift tax initially applies (the highest rate in tax class III, with an allowance of only EUR 20,000!). Lifelong usufruct rights or transfer agreements may likewise be assessed for tax purposes. An advantage of holding-company models, however, can be that certain inheritance-tax exemptions for business assets are used where the shares in the company qualify as business assets.
Overview of the differences: In principle the trust functions “more genuinely” abroad: ownership of the real estate passes to the trustee. In Germany, one must usually work through companies or fiduciary models. Foreign real estate is subject to the rules of the respective country, German real estate to the strict provisions of German land-registry and tax law.
Recognition of trusts under German law – risks and obstacles
German law does not recognise the trust. Neither the Civil Code nor any other statute directly governs what applies in the case of a foreign trust. The Hague Trust Convention regulates certain recognition questions internationally, but it is not in force for Germany. Several problem areas therefore arise for a German-resident trust settlor or beneficiary:
- Quasi-fiduciary relationships and reinterpretation: German courts tend to dissolve the trust and apply equivalent German constructions. For example, a transfer to a foreign trustee may be interpreted as a gift subject to a condition or as a fiduciary agreement. Where access to the trust occurs by will, the conflict-of-laws rule of succession (EU Succession Regulation, Art. 21 et seq.) is usually applied. The mechanisms thus “reinterpreted” are then governed by German law – for instance a gift subject to certain conditions (§ 1909 BGB by analogy) or a contract for the benefit of a third party (§ 328 BGB by analogy). This complicates legally secure planning: one often only learns in the individual case whether a German court will recognise a disposition in the trust deed or classify it, for example, as an impermissible attempt to reduce the compulsory share.
- Hague Trust Convention: Germany has not ratified this convention. This means German courts do not automatically follow the convention’s conflict rules. Rather, they must fall back on the general provisions of private international law. For testamentary trusts (trusts mortis causa), the law of succession at the testator’s last domicile often applies. For lifetime trusts, the choice of law under Art. 16 EGBGB (Introductory Act to the German Civil Code) is relevant – if no law is chosen, German law may apply, or the law of the state with which the closest connection exists. All of this leads to legal uncertainty: even the question “Which law applies?” is complex.
- Practical consequences: Because trusts are formally not legal persons but fiduciary relationships, a trustee is often not recognised as owner in the land register of a German property. Some courts therefore require a German nominee or a “fiduciary company” to be entered as owner – though for the beneficiaries this remains invisible externally. The risk of compulsory-share claims is increased where, for example, the acquisition of trust assets is treated under German succession law as an impermissible disposition in the final year of life. Likewise, a protective legacy (a bequest to a trust) could be challenged by estate administrators.
- Civil-law and tax-law obstacles: From a tax perspective, every transfer of assets into a trust is potentially subject to gift or inheritance tax (§ 7(1) nos. 8 f. ErbStG). Income from trust assets can likewise be taxed in Germany (§ 20(1) no. 9 EStG (German Income Tax Act)) where an economic benefit accrues to German recipients. A further problem arises with revocable trusts: the German tax authorities often treat these as though the settlor still controls the assets and therefore attribute investment income to the settlor.
- Conclusion on recognition and risks: On the whole, German property owners wishing to use a trust face a legal grey area. There is no statutory safeguard, only case law and expert opinions. For example, the Federal Fiscal Court (BFH) has ruled in detail that the transfer to a foreign trust by a person with a German connection (gift/inheritance tax under the ErbStG) is usually assessed as a gift. At the same time, pure trust provisions – such as instructions by the trustee – are difficult to enforce domestically. German statutes must therefore be applied by analogy. It is all the more important to structure trust solutions with foresight in light of German rules (e.g. tax-optimised within tax class I/II, or through foundation reservations).
Important: Banks and authorities now often demand extensive evidence for fiduciary structures (Who is the beneficial owner? Does a trust deed exist?). A hasty attempt to place assets into a trust without considering the German legal consequences can lead to actions for invalidity and back taxes. Expert legal and tax support is therefore indispensable.
Tax treatment of real-estate trusts (income and earnings taxes)
The tax treatment depends heavily on the specific structure and the tax residence of those involved. In principle, the following applies in Germany:
- Income tax: A trust itself is not a taxable entity within the meaning of income tax law. Instead, the general rule is: the transparency principle for trusts. This means that all income and losses of the trust assets are attributed either to the settlor or to the beneficiaries, as though they held the assets themselves. In many cases this means that the settlor continues to pay income tax on the income earned (e.g. rents, investment income of the trust assets). Only where a German beneficiary actually has economic disposal over trust income and the settlor no longer has any power of disposal can attribution be made to the beneficiary.
- Example: A German property owner transfers their rental buildings into a non-transparent offshore trust. The trustee pays the ongoing rents to the settlor or other beneficiaries. Germany continues to tax these rental receipts at the level of the settlor, as though they earned them personally.
- Intermediaries and the way out: Frequently the trust is not regarded as transparent if the settlor externally has no regular rights to give instructions. In that case an intermediate company (e.g. a foreign holding company) may be required in order to avoid unwanted German tax effects.
- Earnings taxes (ongoing): Are ongoing taxes incurred in connection with the operation of the trust (e.g. trade tax for commercial property management, real-estate transfer tax on transfers of company shares, VAT on letting)? These are governed by commercial and tax-law criteria. In practice, for example, transferring a domestic property into a company can trigger real-estate transfer tax. Ongoing rental income from real estate remains subject to income tax. Syndicated structures (e.g. § 20(1) no. 7 EStG) could apply where the trust is regarded as transparent.
- Inheritance and gift tax: Establishing and funding a trust usually has inheritance- or gift-tax consequences. Under § 7(1) no. 8 ErbStG, a transfer of assets to a foreign trust is generally assessed as a gift by the settlor. Since trusts do not fall within the favourable tax class I (family privilege), the unfavourable tax class III (allowance of only EUR 20,000) is often applied. The result: transferring real-estate assets to a trust risks high gift tax (up to 50%).
- Relevance of exemption conditions: In some circumstances, however, § 7(1) no. 8 sentence 2 ErbStG may be invoked, for instance where a “non-genuine fiduciary relationship” exists and no third-party assets are tied up (almost like making a will). In that case tax class I or II might come into consideration. This must, however, be carefully structured so as not to walk into the tax trap.
- Distributions and dissolution of the trust: Where a trust later grants income to German beneficiaries, this likewise counts as a gift for tax purposes (§ 7(1) no. 9 ErbStG). Where funds from the trust assets are paid out to the beneficiary on a regular basis, this is a gift subject to inheritance tax. The legal concept of the “interim beneficiary” is interpreted narrowly here, so that only beneficiaries with a fixed entitlement are liable to tax.
- Gift-tax example: A German national transfers to his daughter an owner-occupied flat and a share in a revocable trust. Gift tax falls due; the allowance of EUR 400,000 can be used. If the trust remains revocable after its establishment, it could be taxed as part of the estate.
- Double taxation: For foreign trusts, the rules of double-taxation agreements (DTAs) must be observed. For inheritance and gift tax, Germany has concluded agreements with only a few states (e.g. the USA). By a suitable choice of residence (e.g. bearing in mind exit tax) and contracting party, double taxation may possibly be reduced. Without a DTA, German law applies to all domestic assets (including real estate and domestic shares) of the contracting persons.
Important: The tax treatment of trusts is considerably stricter than that of domestic foundations. The German tax authorities often consider all stages of a trust’s life: the initial endowment (gift tax at the settlor level), ongoing income (income tax at the settlor level), distributions (gift tax at the beneficiary level) and dissolution (gift tax on the remaining assets). Anyone owning foreign real estate via a trust should therefore always plan this with a tax advisor.
Combining trusts with foundations or insurance structures
For protection and tax planning, trusts are frequently combined with other constructs:
- Family foundation (national or international): A family foundation (modelled on Liechtenstein, Switzerland or a foreign trust-like foundation) can exist alongside the trust. For example, a trust can administer assets (or company shares) that flow to the foundation as beneficiary. Alternatively, the property owner establishes a foreign foundation (e.g. in Liechtenstein or Switzerland), transfers real estate into its ownership (or shares therein) and provides for a surplus participation. In many countries foundations offer the advantage of a degree of domestic recognition and often enjoy special tax rules. In Germany, a domestic family foundation (§§ 80 et seq. BGB) enjoys certain tax concessions and is in tax terms more privileged than trusts. In an international context, Liechtenstein private foundations are popular, for instance, because they legally resemble trusts but are recognised over and above German law. – Example: A German property owner relocates her rental flats into a Luxembourg foundation, retains control through the foundation’s bodies, and combines this with a transfer agreement to a protective fiduciary under German law.
- Private-placement life insurance (capital-forming life insurance): With an insurance wrapper, the assets are bundled within a life insurance policy. Privately placed life insurance policies (PPLI) in Switzerland, Liechtenstein or Ireland in particular often permit individual securities portfolios within a policy. The trust can act as policyholder or be the beneficiary. Such solutions combine asset protection with long-term tax deferral: capital gains within the policy usually grow tax-free as long as they are not paid out. In Germany, however, foreign life insurance policies are tax-favoured only under strict conditions (the 12/5 rule for unit-linked life insurance). For international clients: such policies enhance privacy (insurance-law confidentiality) and enable return optimisation without ongoing tax remittance in Germany.
- Real-estate funds or GmbH & Co. KG: For large portfolios, a combination with a GmbH & Co. KG or a real-estate fund is often advisable. The trust then holds the capital shares of these companies, while the company itself manages the real-estate assets. This construct allows classic tax exemptions for business assets (the business-asset privilege) to be used, which might otherwise be lost on a direct gift of a property. In addition, shares can be split and transferred successively. Insurance and trust constructions can thus work together so that the advantages of each individual stage are optimally exploited.
- Relocation of residence: Last but not least, combination with a relocation of residence or domicile is a method of choice. If the trust is controlled by a person who moves their tax residence abroad, this can further reduce German access (no more unlimited tax liability, different DTA rules). The trust continues to exist as a vehicle, but benefits from a different tax environment.
A brief list of possible combinations:
- Family foundation (Switzerland, Liechtenstein, Luxembourg) & trust for core family wealth
- Life insurance (e.g. PPLI in CH/LI) with a trust as policyholder
- Real-estate company (e.g. a Luxembourg holding) owned by a trust
- Usufruct structure in favour of a trust (tax usufruct)
- Marriage contract / waiver of marital property regime combined with a trust transfer
Strategic advantages of trusts
Why do the ultra-wealthy use trusts for property management and succession? The strategic advantages are manifold:
- Liability protection: Within a trust’s assets, the personal ownership of the settlor formally no longer applies. The settlor’s creditors cannot simply enforce a title against the trust, since it may be located in a different legal system. Even in Germany, they would first have to sue abroad (e.g. in the USA or Europe) and obtain an enforcement title. In addition, well-constructed asset-protection trusts often permit protective clauses (discretionary clauses) that allow the trustee to refuse distributions at their own discretion. In this way real-estate values remain “parked” within the trust and beyond seizure. A trust structure also offers better protection against potential enforcement measures (such as a compulsory mortgage or hereditary building right), since the trust generally has no place of business in Germany.
- Succession planning and avoidance of probate: Trusts enable the orderly passing-on of real estate. Instead of a simple will, owners use testamentary trusts in order, for instance, to fund an in-house foundation via the trust or to arrange fixed retirement incomes for children. Dynasty trusts prevent recurring inheritance events: formally, no one dies as regards the trust interests, so that the assets can be passed on across generations without repeated inheritance tax. One example is old English earls, whose estates have been held in a trust for centuries and never bequeathed to specific descendants.
- Asset protection and anonymity: Trusts offer considerable privacy. Neither the state nor the public sees which properties lie within a trust, as long as these are not entered in a transparent register. Unlike a conventional corporate or foundation system, trusts are subject to hardly any reporting requirements in many jurisdictions. Foreign banks and institutions often treat trust assets discreetly. For the wealthy, this means that their real-estate holdings can be kept largely hidden. Even confidential email orders or notarial notes in transfer deeds do not automatically lead to international disclosures in a jurisdiction such as Belize or Jersey, as long as there is no element of suspicion.
- Flexibility: Trusts can be tailored as required. They can be set up or amended relatively quickly (unlike, for example, a foundation, which requires lengthy recognition procedures). The various trust types (revocable, irrevocable, discretionary, protective, etc.) make it possible to tailor the rules precisely to personal wishes and risks. For example, real-estate income can flow temporarily to a first class of beneficiaries and later to a second class (staggered testamentary trusts), which would be difficult to achieve with rigid bequests.
- Tax-optimisation potential: In some cases a trust can bring tax advantages. In certain US states there are trust forms in which income is partly tax-exempt for the beneficiaries, or in which the assets are not captured for tax purposes across generations. German property owners often use such arrangements in conjunction with a relocation of residence. A US trust, for instance, becomes subject to German income tax again only once a distribution is made to German beneficiaries (analogous to a gift). This enables a lawful deferral of earnings taxes. Important here is the combination with an investment in diversifying funds or insurance policies, in order to maximise ongoing returns until the assets actually pass on.
- Brake on compulsory and statutory shares: The strategic use of trusts can reduce the claims of family members entitled to a compulsory share. Since German law often cannot enforce a trust as such, assets effectively “disappear” from the estate. A testator can, for example, place real estate into a foreign trust and grant their children merely a lifelong right of residence (usufruct) in the house. The children then have a right of use, but no longer full ownership, and certainly no claim to a share or payout vis-à-vis those entitled to a compulsory share. This does not circumvent the legal system, but it does create practical obstacles for any claims by the disinherited.
- International diversification: Trusts make it possible to bundle or split real-estate assets across national borders. A wealth base in Germany can, for instance, be split among several foreign real-estate companies and trusts, while the overall value remains internally stable. In this way owners can benefit from differences in legislation: real estate in a mix of jurisdictions that is neither excessively taxed nor prone to conflict.
Key points on the advantages: Trusts offer strong creditor protection, legally robust succession planning and financial discretion. They enable generational wealth management and the circumvention or mitigation of compulsory-share claims. Despite all the advantages, however, one must be prepared to give up immediate control (see the following sections).
Practical examples and typical mistakes
Practical example 1 – family business with real estate: The Schmidt family owns several office buildings in Germany. They establish a Family Holding GmbH abroad, which holds the entire real-estate assets. The father then sets up an irrevocable trust in Liechtenstein, into which he contributes his shares in the holding company. The trust is designed so that, after his death, the three children each receive a share of the trust income. Through this structure, the real estate is formally separated from the family: the GmbH’s creditors do have access to the company, but the shares and the proceeds from their sale lie within the trust and are thus beyond direct reach. The children also avoid expensive German succession law, since formally there is no inheritance event. For tax purposes, the family pays gift tax only once, for the transfer of the shares into the trust (using relief provisions), and the ongoing rents are taxed by the holding company in Germany.
Practical example 2 – passing to the second generation: A property entrepreneur (German residence) establishes a revocable living trust in the USA, into which he contributes his detached house and a holiday estate in Spain. He remains trustee and reserves the right of use. His daughter becomes contingent beneficiary. After a few years, by way of supplement, he also transfers the account holdership of a Portuguese offshore portfolio into the same trust. On his death, ownership of the real estate and the investments passes into the final ownership of the daughter under the trust deed, without a regular certificate of inheritance being issued in Germany. On presentation of the trust deed elsewhere in Europe, the daughter opens a new account and gains access to the assets. German tax offices view it as follows: the real estate was already charged with gift tax at the time of establishment (the settlor’s residence). The daughter therefore only has to declare that she receives funds from the trust on the sale of her share – gift tax falls due again on these gifts (§ 7(1) no. 9 ErbStG)juhn.com, but can make use of the allowance and tax class I.
Typical mistakes and pitfalls:
- Faulty registration: A property is “transferred into trust” abroad, but no holder is named. In Germany, often only the original owner is deleted from the land register without the trustee being entered. As a result, formally there is no owner, which can cause problems. One should therefore appoint the trustee or an intermediate holding company as the new owner already at the time of the transfer.
- Ignored stamp duty and real-estate transfer tax (GrESt): Where a property is contributed into a trust via a (domestic) company, the real-estate transfer tax is easily overlooked. A common pitfall: simply because shares in a real-estate GmbH are given, 3.5% falls due. This can be tax-wise unfortunate if one is restructuring solely for the purpose of transferring wealth to a trust.
- Tax traps: Some believe they can outwit the tax authorities via a trust. If the trust is run, for example, as an irrevocable asset-protection company in an offshore state, the German authorities pay close attention to whether the founder continues to make their living from it. In some cases a trust is treated as transparent – that is, attributed to income tax. Example: a settlor paid himself rental income from the trust account directly over a period of years. The tax office said: the trust had remained ineffective; the income still belongs to the settlor. A lack of documentation often leads to such findings.
- No notary, no lawyer: Trusts are common internationally, yet German authorities and courts are suspicious of unfamiliar constructs. If they are not accompanied by a specialist lawyer or notary (e.g. notarial certification of the trust deed), people initially assume the concealment of undeclared money. Every contract should be properly drafted and certified, otherwise it will be ignored or doubted for tax purposes.
- False expectations: Trusts do not solve all problems. Some see only the liability effects and overlook the side effects: no access to the assets also means no access for an heir who is later entitled, as long as the trust is running. Moreover, the desired flexibility can turn into its opposite if, for example, a disabled heir suddenly had to receive all the funds (a discretionary trust helps here, but only if properly structured).
- Underestimated costs: The set-up costs for offshore trusts can be high (administration, annual fees, trustee fees, accounting, etc.). Anyone who fails to budget for this may cut back on advice – a risk to the entire structure.
Summary of practice / common mistakes: Real-life examples show that successful trust structures require precise planning. Procedural errors (incorrect registration, neglect of taxes) or assumptions made without legal review can quickly cause a good idea to fail. Professional support is indispensable.
Recommendations for preparation and support
Anyone wishing to transfer real estate into a trust should proceed strategically and observe several steps:
- Define objectives: First clarify your specific objectives. Is it about pure liability protection? Do you wish to minimise the inheritance-tax burden? Is anonymisation the priority? The more precise the objective (e.g. “protection against divorce in the next generation” or “anonymising our holiday home abroad”), the more clearly the type of trust and jurisdiction can be chosen.
- Select a jurisdiction: Not every country permits every type of trust. Choose a state suited to your purpose: offshore jurisdictions (Cook Islands, Nevis) offer special protective trusts; US states (Delaware, South Dakota) offer tax-optimised dynasty trusts; Switzerland or Liechtenstein have foundation structures as an alternative. Close to Germany, Liechtenstein, Switzerland and Austria are of interest – here legal advice is often available in German and the systems are predictable. Consult specialists in asset protection in order to make the right choice of law (lex causae).
- Tax and legal analysis: Have the planned transfer of assets reviewed by a specialist lawyer and tax advisor. In particular, the following points need to be clarified:
- Clear documentation of the (future) trust and its German counterpart (fiduciary agreement, gift agreement).
- Gift-tax consequences (allowances, avoiding tax class III). Where appropriate, exhaust allowances in good time beforehand or establish a family company.
- Income-tax effects: Is a revocation avoided, so that income from the trust is not wrongly attributed to the settlor?
- Examine compulsory-share risks: Can the trust be accepted as a disposition within the meaning of succession law, or as an impermissible anticipated succession?
- Real-estate transfer tax and other levies: Which tax burdens arise from the chosen route?
- Building the structure: The establishment of offshore companies or accounts should proceed in parallel. If German real estate is involved: set up a suitable holding (e.g. a KG, GmbH & Co. KG, or foreign Ltd. with a right of use) before the shares are contributed to the trust. The property valuations must be correct (to avoid tax-fraud proceedings).
- Drafting the contracts: Draw up and review the trust deed (where appropriate, separate transfer agreements for German assets). Conclude fiduciary agreements under German law in case assets remain in Germany. For acts requiring notarisation in Germany (registrations, transfers of real-estate shares), involve a notary. In acquisition transactions, the notary can often help quite practically to achieve the desired result, for instance where only the corporate shareholder changes.
- Clarify financing: Before the property “passes into the trust”, existing financing should be reorganised. This may mean: refinancing onto the trust owner or paying off the debt. If the bank agrees, a loan agreement is concluded, for example, with the trust as borrower. Avoid hidden assumptions of debt that could have the character of a taxable endowment.
- Documentation and controlling: Record all steps in writing. Keep a complete record of valuations, advice, notarial acts and approvals. After the trust has been established, it should be checked regularly whether the construction is working as planned: for example, whether the trustee administers the funds and there are no domestic connecting factors (tax advisor, residence) on the part of the beneficiaries that work against it.
- Support by experts: Work with law firms specialising in trusts. They coordinate lawyers, notaries, notarial experts and tax advisors in the relevant countries. Fiduciaries (professional trustee firms) are also often part of such a team. A mistake: private individuals often try to “just fill in a few forms” without legal help – in complex cases this goes wrong.
Ongoing support: Once set up, trust structures must be maintained. Hold regular trustee meetings and keep reports ready. Respond to changes in the law (e.g. new inheritance-tax reforms, transparency-register obligations or AML provisions). Your team of advisors should keep you informed of relevant developments on an ongoing basis, so that the trust continues to provide its protection.
Checklist: preparing and implementing a real-estate trust:
- Define objectives (asset protection, estate planning)
- Choose a suitable trust jurisdiction (offshore / countries with modern trust laws)
- Have a German legal structure ready (holding company, fiduciary agreement)
- Calculate the tax consequences thoroughly (gift/inheritance tax, income tax)
- Prepare notarial transfer deeds and valuation evidence
- Appoint a trustee and have the documents drafted
- Align finances (mortgage, bank loans) with the transfer to the trust
- Execute and register contracts / deeds correctly
- Observe statutory deadlines (e.g. for tax returns, trust reports)
Careful preparation and expert support ensure that the trust fulfils its intended functions – from protection against unwelcome access to smooth succession of assets.
