Inheritance Tax for US citizens - 10 year domicile law

[zagzig 2]

Dear TTers,

 

I've had a look through other threads and haven't found the relevant information.  My apologies if I missed it.

 

Unfortunately, my mother (US citizen and resident) was recently diagnosed with a terminal illness and wants to update her will.  I am a US citizen who has been a resident in Germany since 2010 and a permanent resident (Niederlassung) since last year.  I read on this website that "a U.S. citizen is deemed to be domiciled in the U.S. if he has not been domiciled in Germany for more than 10 years" and that inheritance tax liability for US citizens with German residency only applies after 10 years residency here.

 

I contacted one of the attorneys from this website and had a brief chat on the phone about this issue.  He said that the law is written as described on the website.  However, the inheritance tax office (Erbsteuerstelle in Kaufbeuren) usually treats any US citizen with residency status in Germany as tax liable, i.e. as if the person has been a resident for 10 years.  He said that one could probably contest this in court, but that would involve a legal battle and ensuing costs.

 

Has anyone had experience with such a situation?  If so, what was the outcome? 

 

Also, could anyone recommend an attorney (or possibly tax adviser) in Munich with experience in such situations?  The attorney I spoke with from the website is in Berlin.

 

Thanks in advance for your Input!

[fraufruit 42,166]

I'm sorry I have no advice but am terribly sorry to hear about your mother's illness.

May she have a peaceful passing.

Hugs to you.

[Tim Hortons Man 542]

Found this and it jives with what I've read elsewhere it is taxable but there is a large 500,000€ deductible. What I'm not sure on is if you have to delcare it on your tax return (even though no tax would be owing) and will it bump up your tax rate on other income or not. There are several English speaking Steuerbreaters here who can answer the question I'd suggest dropping them an email or giving them a call. Of course being an American means filling US taxes . 

 

Edit: do update us when you get an answer.

[PandaMunich 16,704]

Inheritance tax and income tax are two separate taxes, that are declared in two different tax declarations --> no bumping up of the income tax rate.

And yes, even if it's below that tax free amount you have to file an inheritance tax return.

 

And the tax free amount for the parent/child relationship is 400,000€, see §16 Absatz 1 Nr. 2 ErbStG: https://dejure.org/gesetze/ErbStG/16.html

It's 500,000€ between spouses.

Any assets above that amount will be taxed at Steuerklasse I, see §19 ErbStG: https://dejure.org/gesetze/ErbStG/19.html

 

There is a double taxation treaty between Germany and the US, so the OP won't end up paying inheritance tax twice, any tax paid will be credited by the other country: http://www.pinkernell.de/estate2.htm

 

For more details, please see these lawyers' web site with examples (that's the web site of the lawyer that the OP already consulted): https://www.wf-frank.com/detail/article/die-besteuerung-deutsch-amerikanischer-erbfaelle-nach-dem-deutsch-amerikanischen-doppelbesteuerungsa.html

[Straightpoop 688]

@zagzig

 

The source of confusion - especially for Americans who are usually familiar with estate taxes but not inheritance taxes - is that although German death taxes are primarily an INHERITANCE tax imposed upon the value of a gift or inheritance received by a person domiciled in Germany at the time the gift/inheritance is received, they can also be enforced as an ESTATE tax against the property of a decedent domiciled in Germany at death regardless of the tax residence of his or her beneficiaries.

 

In the international context it might be helpful to regard the German INHERITANCE tax as a tax on "incoming" value and the ESTATE tax as a tax on "outgoing" values.

 

The 10-year domicile rule (increased from 5 to 10 years by treaty modification in 1998) in the US-Germany Estate and Inheritance tax treaty applies only to Germany's right to impose death taxes on the ESTATE of a German domiciled decedent. Thus, its application is limited to individuals who MAKE otherwise taxable gifts at THEIR death but it has no application to individuals who are tax residents of Germany (for any length of time) when they RECEIVE gifts from someone who dies - regardless of the domicile of their decedent donor.

 

This means that if you are a domiciliary of Germany at the time you RECEIVE an inheritance, the treaty's 10-year rule on domicile will not be applicable to you and you will have to pay German INHERITANCE tax on the value of the amount inherited less the applicable exemption amount.

 

On the other hand, if you - and/or through you, the members of your family household - have not been domiciled in Germany for at least 10 years at the time of YOUR death, Germany will have no right to impose its death taxes (inheritance/estate) on any of the beneficiaries of your estate - except those who reside in Germany at the time of your death. 

 

(It is not clear to me whether the German resident members of the household of a US citizen decedent who has not been domiciled in Germany for the requisite 10 years would be exempt from the INHERITANCE tax otherwise imposable on German tax residents. As a policy matter, if the German resident members of the US decedent's household are US citizens, they should be so exempt but, strictly speaking, the language of the treaty does not say so.)

 

Here is the treaty language (Article 4 Fiscal Domicile) spelling this out (emphasis added):

 

3. Where an individual, at his death or at the making of a gift, was

 

a) a citizen of one Contracting State, and not also a citizen of the other Contracting State, and

 

b ) by reason of the provisions of paragraph 1 domiciled in both Contracting States, and

 

c) by reason of the provisions of paragraph 1 domiciled in the other Contracting State for not more than ten years, 

 

then the domicile of that individual and of the members of his family forming part of his household and fulfilling the same requirements shall be deemed, notwithstanding the provisions of paragraph 2, to be in the Contracting State of which they were citizens.

 

 

Death tax planning for US citizens who are tax residents of Germany - for any length of time - needs to include the possibility of receiving an inheritance from persons outside of Germany.  There are measures that can be taken to mitigate or even avoid German taxes in such circumstances but such methods necessitate coordination with the potential foreign benefactor and his or her advisors the vast majority of whom are totally unaware that their intended beneficiary living in Germany could be nailed with inheritance taxes.

 

Alas, this is not always possible or practical.

 

 

 

 

[Straightpoop 688]

@zagzig

 

Please disregard the above.  I am not certain that it is accurate with respect to Germany's right to tax US citizen residents on the value of gifts received from any source before they have been domiciled in Germany for 10 years.

 

Let me get back to you on this.

 

[Straightpoop 688]

@zagzig

 

OK.  I'm back.  This portion of my original post was WRONG with respect to the scope of application of the 10-year domicile rule:

 

"This means that if you are a domiciliary of Germany at the time you RECEIVE an inheritance, the treaty's 10-year rule on domicile will not be applicable to you and you will have to pay German INHERITANCE tax on the value of the amount inherited less the applicable exemption amount."

 

 

According to the US Treasury technical explanation, the 10-year rule applies both with respect to imposing taxes on the ESTATE of a US citizen domiciled for less than 10 years in Germany and on the value of an INHERITANCE received by a US citizen domiciled less than 10 years in Germany at the time of receiving the inheritance.  In such cases, Germany's right to tax is limited to the value of property located within Germany that is the subject of the gift or inheritance (so-called "situs taxation").

 

In addition, I failed to point out that before you even get to the 10-year rule, there must first be a determination that Germany is the fiscal domicile after applying the so-called "tie breaker" rules.  Those rules might result in a determination that even a long-term resident of Germany still has a fiscal domicile in the US, i.e. that the 10-year period never began.  (I actually successfully argued this to the FA in the case of a US citizen who died in Germany after living here for more than 50 years.  That, however, was a special case:  He was an employee of the US military for most of those 50 years and under the NATO SOFA his presence here did not count towards time of residence for the purpose of imposing any tax.)

 

Please accept my apology for the error.

[PandaMunich 16,704]

@Straightpoop

Sorry, but I agree with your initial assessment, which was also what the specialised lawyer told the OP.

It's also my reading of article 4 of the DTA, when you get to "gewöhnlicher Aufenthalt" at the latest, Germany is the OP's fiscal residence: http://www.pinkernell.de/estate2.htm#Art04

 

"(2) Hatte nach Absatz 1 eine natürliche Person in beiden Vertragsstaaten einen Wohnsitz, so gilt vorbehaltlich des Absatzes 3 Folgendes:

...

b) kann nicht bestimmt werden, in welchem Vertragsstaat die natürliche Person den Mittelpunkt ihrer Lebensinteressen hatte, so gilt ihr Wohnsitz als in dem Vertragsstaat gelegen, in dem sie ihren gewöhnlichen Aufenthalt hatte;"

 

Absatz 3 deals with the "giving/leaving" cases, i.e. "outgoing" which doesn't fit the OP, so we remain at the decision reached by the above Absatz 2.

 

Gewöhnlicher Aufenthalt is anything over 6 months of having stayed here, see §9 AO: https://www.gesetze-im-internet.de/ao_1977/__9.html

[zagzig 2]

Thank you for all of the replies!

 

So, as I understand, the information about the ten-year domicile law on the webiste that I linked is incorrect and I will have some tax liability in Germany.  I am still a bit confused about why the attorney told me that the law is written to include inheritors in the ten-year domicile rule if the definition of 'gewöhnlicher Aufenthalt' is six months.

 

I also have a few more questions.  My mother's will is currently set up as a trust (I believe 'living' or 'testamentary' trust), with me as the successor trustee.  After reading about taxation of US trusts under German law from the same website as in the original post, it seems that there may be some issues for a trustee with domicile in Germany, for example:

"2. A trustee who has a fiscal domicile in Germany should not be named if the trust is deemed to be a legal entity under German tax law."

Does this mean that someone else should be named as the successor trustee?

 

My mother would like to consider bequeathing a portion of her estate directly to our child, who is a minor with both German and US citizenship.  Probably this would be done in the form of a trust unless there are reasons not to do so from the German side.  This is all new territory for me, so understanding all of the information about inheritance/estate laws, trusts, etc. has been challenging, especially while dealing with all of the other aspects of my mother's illness.

 

How long does one have to pay the inheritance taxes?  A fairly large share of the estate is a tract of inoperative farmland which my mother and her siblings inherited from their father.  Two of her deceased brothers' families are co-owners, which means there are six cousins involved in making decisions.  The consensus is to sell the land, but it could be some time before a buyer is found, a price agreed upon and the land sold.  What happens if I don't have the funds to pay the inheritance tax when it is due?

 

Again, I would be grateful for any recommendations for attorneys (or possibly tax advisors if they are familiar with all of this) in Munich to help with this situation.  I did contact one here, but he had never heard of the ten-year domicile issue, so I am a bit skeptical about whether he has the necessary expertise for this situation.

 

Thanks again in advance for your responses!

[PandaMunich 16,704]

If in a hurry, skip to the end.

 

**************************************

 

What's written in that yellow box in the English version article by the US lawyer JS (his name is at the bottom of the article) that you linked to in your first post is incorrect, yes.

 

The German version written by the German lawyer J-H F that I linked to in my first post is however correct. He's a Fachanwalt für Erbrecht, so that's a plus.

 

In a nutshell: read the German articles on that web site, the English ones are imprecise.

 

I don't know which lawyer you talked to, but you have to take his statement that he could challenge the current double taxation agreement in a court of law with a big pinch of salt.

I understand that he's a lawyer and that lawyers like to go to court, but it would mean fees down the drain for you since there's no chance of winning.

 

What you need isn't a lawyer but a Steuerberater, to ensure that you adhere to the double taxation agreement between Germany and the US and to German tax law.

 

Inheritance law only foresees a deferment for paying the inheritance tax due on companies and real estate let for living purposes, see §28 ErbStG: https://www.steuertipps.de/gesetze/erbschaftsteuer-schenkungsteuer-erbstg/28-stundung

However, if you can prove that you don't have any liquid assets, you can get a 6 month deferment quite easily (but they will charge you 0.5% per month Stundungszins for the privilege, see §238 AO).

Beyond that, the Finanzamt usually tells you to take out a loan against the inheritance and pay them their inheritance tax.

 

Trusts are not a good idea, best case it's taxed as if she had left the money to you/the grandchild directly (400,000€/200,000€ inheritance tax free amount see §16 Absatz 1 ErbStG, and favourable Steuerklasse I) while worst case you might actually manage to have the trust recognised as a separate entitity and only get the ridiculous tax free amount of 2,000€ for entities that only have limited tax liability in Germany according to §16 Absatz 2 ErbStG and the infavourable Steuerklasse III.

Examples in the German guy's article (this is the German version of the article you already found, it's generally better to read stuff in the author's native language to get the exact meaning): https://www.wf-frank.com/detail/article/us-trust-und-steuern-1498.html

 

As a reminder: you can look up the tax rates associated with these inheritance Steuerklassen (don't mix them up with income tax classes, there III is better than I) in §19 ErbStG: https://www.gesetze-im-internet.de/erbstg_1974/__19.html

 

**************************************

 

Summary:

 

You will only end up paying inheritance tax once, since any inheritance tax you already paid to the US will lower the inheritance tax due in Germany.

 

Ideally, your mum should leave 400,000€ directly (no trust!) to you and 200,000€ directly (no trust!) to her grandchild, no German inheritance tax will be due up to these amounts, since those are the Freibeträge set down in §16 Absatz 1 ErbStG.

 

The ten year domicile regulation doesn't apply to your case, it would only apply if you were the one gifting/leaving an inheritance.

 

What you have is a plain vanilla cross-border inheritance case, with the double taxation agreement making things easier, since it explicitly sets down the rules.

For example, article 12 section 1 of the DTA allows Germany to apply its own taxation rules to trusts (not that they need that permission, they would do so anyway, but that way you get fair warning) which, since they were widely used for tax evasion in the past, means that the Finanzamt has an allergy to them and doesn't recognise them. 

 

Any Steuerberater can file that Erbschaftsteuererklärung, just get one who knows English well to avoid also having to pay for a translator for all the US source documents involved.

[Straightpoop 688]

@zagzig @PandaMunich

 

I am sorry, Panda, but I must disagree with your conclusion that Zagzig will be taxable in Germany on a gift received from his mother.

 

Here is my analysis of why my original assessment - and your current position - was/is wrong and why the original advice Zagzig received from the German StB (which, by the way, agrees with the interpretation of the US Treasury Department) was correct:

 

Article 4 of the treaty defines "fiscal domicile" and provides in Art. 4 (2) for "tie-breaker" rules in the event an individual has a "domicile" in both countries at the time of the event giving rise to the tax.

 

In the case of a US citizen who is tax resident in Germany the "tie breaker" rules of Art. 4 (2) will always apply because US citizenship alone is sufficient to confer upon the US the right to impose its death tax on his worldwide estate.  (The US federal government, however, has no inheritance tax.)

 

Assuming for the sake of argument that after applying these "tie breaker" rules Zagzig (and his US citizen family living in his household) is or has been a domiciliary of Germany within the meaning of Article 4 (2) but only as from 2010 and his mother dies before 2020.

 

Article 4 (3) adds one additional statutory requirement to the definition of Domicile under Article 4 that must now be met:  The individual's domicile "at his death or at the making of a gift" (and qualifying members of his household) "shall be deemed - notwithstanding the provisions of Art 4(2), to be in the contracting state of which they were citizens."

 

If we terminate our analysis here, as I did originally, then yes, the conclusion would be that the 10-year rule applies only to the power to tax the "outbound" estate of a German domiciled decedent but has no apparent application to the power to tax living recipients on the value of "Inbound" inheritances received.  (We could, of course, argue that language "at the making of a gift" might possibly apply to the gift of a 3rd party donor or decedent, but that would be a stretch in this context.)

 

In many cases, however, this interpretation of the limited application of the 10-year rule would largely frustrate the purpose of the rule.  According to the Treasury Department analysis of the 1998 Protocol changing the "waiting period" from 5 to 10 years states the public policy underlying the rule:

 

"By extending the time period from 5 to 10 years, the Protocol furthers the policy of preventing the interaction of the two Contracting States' transfer tax regimes from inhibiting the flow of personnel between the two states."

 

(After all, what US citizen executive would accept an assignment to Germany if he knew that Germany could impose an inheritance tax on the value of the - US death tax free - $5 million they expected to receive under their 85-year old Uncle Zeke's will if Uncle Zeke were to die at any time during their assignment?) 

 

Accordingly, according to the US Treasury Department's analysis:  During [the 10-year waiting period] Germany may only impose situs-based taxation otherwise allowed by the Convention."  To the extent based on the domicile of the decedent or the domicile of the beneficiary, neither "outbound" nor "inbound" inheritance/gift taxation in Germany are, respectively, "situs based".

 

So where in the Convention does the US Treasury (pace FA Kaufbeuren) find support for its conclusion that Germany may not tax Zagzig except on the value of property located in Germany?

 

I submit that the supporting language is found (mis-located, actually) in Article 11 "Credits". This reads in pertinent part:

 

1. The provisions of this Convention shall not preclude

...

the Federal Republic of Germany from taxing in accordance with its law an heir, a donee, or another beneficiary who was domiciled (within the meaning of Article 4) in the Federal Republic of Germany at the time of the death of the decedent or the making of the gift.

 

Although the language quoted above speaks in terms of "no prohibition" against Germany imposing its tax on donees or beneficiaries, the "no prohibition" extends only to such persons who "at the time of the death of the decedent" or "the making of the gift" were domiciled in Germany (within the meaning of Art. 4).

 

Article 4, of course, says that a US citizen must be domiciled in Germany for 10-years at the "making of the gift" before he is domiciled in Germany within the meaning of Art. 4.

 

Note also that the timing reference Article 11 is not to the time of the death of the individual heir but rather to the death of the heir's benefactor, i.e. the decedent or donor.  In addition, it repeats the timing formula at the "making of the gift" that was used in Article 4.  ("Gift" can be used interchangeably to mean either a gift from a living donor or from a decedent.) 

 

Thus, the logically compelling negative corollary of Article 11 is:

 

Germany may NOT impose its inheritance tax on a US citizen or US citizen members of his family who have been domiciled in Germany for less than 10 years at the time of the death of the decedent or the making of the gift by the donor.

 

This interpretation is not only firmly based on logic and dovetails neatly with Art. 4(3) it also serves to promote the stated public policy underlying the 10-year rule:  to keep Germany's and the USA's death transfer tax regimes out of play for those citizens of the other contracting state who are only "temporarily" on its soil.

 

So Zagzig, tell the FA Kaufbeuren to keep its sticky fingers off your inheritance - regardless of the amount.

 

[PandaMunich 16,704]

@Straightpoop

 

Sorry, but I think we will have to agree to disagree.

Yes, I think that US executive would be looking at an inheritance tax demand from the Finanzamt should his uncle Zeke die during that executive's residence in Germany.

 

There is a reason that that lawyer (he's not a Steuerberater, he's not even a Fachanwalt für Steuerrecht) told zagzig (who may well be female by the way ) that the Finanzamt Kaufbeuren will see her/his fiscal residence in Germany, no matter what the underlying intentions of the negotiators of the agreement was.

You see, the Finanzamt will stick to the German version of the DTA, and that version leaves no leeway for interpretation.

 

Let's go through the German version article 4 of the DTA section by section (see here for the bilingual version), i.e. do a subsumption:

 

Quote

 

(1) Eine natürliche Person hat im Sinne dieses Abkommens einen Wohnsitz

a.) in den Vereinigten Staaten von Amerika, wenn sie dort ansässig ist oder Staatsangehöriger der Vereinigten Staaten von Amerika ist;

b.) in der Bundesrepublik Deutschland, wenn sie dort ihren Wohnsitz oder gewöhnlichen Aufenthalt hat oder aus anderen Gründen für die Zwecke der deutschen Erbschaftsteuer (Schenkungsteuer) als unbeschränkt steuerpflichtig gilt.

 

Quote

1. For the purposes of this Convention, an individual has a domicile

a.) in the United States of America, if he is a resident or citizen thereof;

b.) in the Federal Republic of Germany, if he has his domicile (Wohnsitz) or habitual abode (gewöhnlicher Aufenthalt) therein or if he is deemed for other reasons to be subject to unlimited tax liability for the purposes of the German inheritance and gift tax.

--> according to that, zagzig's fiscal residence is both the US (because of her/his citizenship) and Germany, since that where she/he has been living for at least 6 months (= gewöhnlicher Aufenthalt).

 

Quote

 

(2) Hatte nach Absatz 1 eine natürliche Person in beiden Vertragsstaaten einen Wohnsitz, so gilt vorbehaltlich des Absatzes 3 Folgendes:

a.) Der Wohnsitz der natürlichen Person gilt als in dem Vertragsstaat gelegen, in dem sie über eine ständige Wohnstätte verfügte. Verfügte sie in beiden Vertragsstaaten oder in keinem der Vertragsstaaten über eine ständige Wohnstätte, so gilt ihr Wohnsitz als in dem Vertragsstaat gelegen, zu dem sie die engeren persönlichen und wirtschaftlichen Beziehungen hatte (Mittelpunkt der Lebensinteressen);

b.) kann nicht bestimmt werden, in welchem Vertragsstaat die natürliche Person den Mittelpunkt ihrer Lebensinteressen hatte, so gilt ihr Wohnsitz als in dem Vertragsstaat gelegen, in dem sie ihren gewöhnlichen Aufenthalt hatte;

c.) hatte die natürliche Person ihren gewöhnlichen Aufenthalt in beiden Vertragsstaaten oder in keinem der Vertragsstaaten, so gilt ihr Wohnsitz als in dem Vertragsstaat gelegen, dessen Staatsangehöriger sie war;

d.) war die Person Staatsangehöriger beider Vertragsstaaten oder keines der Vertragsstaaten, so regeln die zuständigen Behörden der Vertragsstaaten die Frage in gegenseitigem Einvernehmen.

 

 

Quote

2. Where by reason of the provisions of paragraph 1 an individual was domiciled in both Contracting States, then, subject to the provisions of paragraph 3, this case shall be determined in accordance with the following rules:

a.) he shall be deemed to have been domiciled in the Contracting State in which he had a permanent home available to him. If he had a permanent home available to him in both Contracting States, or in neither Contracting State, the domicile shall be deemed to be in the Contracting State with which his personal and economic relations were closest (center of vital interests);

b.) if the Contracting State in which he had his center of vital interests cannot be determined, the domicile shall be deemed to be in the Contracting State in which he had an habitual abode;

c.) if he had an habitual abode in both Contracting States or in neither of them, the domicile shall be deemed to be in the Contracting State of which he was a citizen;

d.) if he was a citizen of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

 

--> the centre of her/his life will be Germany, because that's where her/his child lives --> Germany is the fiscal residence.

 

But for argument's sake let's assume it hasn't been decided yet.

She/he cannot have spent more than 6 months during the last 12 months before her/his mum's death in both the US and Germany. The only way she/he could influence this would be by upping stakes and immediately moving back to the US, which isn't a feasible option in real life.

So letter b says her/his fiscal residence is Germany.

You don't get to letter c, since the German definition of gewöhnlicher Aufenthalt in §9 AO doesn't allow for the gewöhnlicher Aufenthalt to be in two different countries.

 

Yes, it says in section 2 that its result only counts if section 3 doesn't come to a different conclusion.

 

Quote

(3) War eine natürliche Person im Zeitpunkt ihres Todes oder der Schenkung

a.) Staatsangehöriger eines Vertragsstaats, ohne gleichzeitig Staatsangehöriger des anderen Vertragsstaats zu sein, und

b.) hatte sie auf Grund des Absatzes 1 einen Wohnsitz in beiden Vertragsstaaten und

c.) hatte sie im anderen Vertragsstaat ihren Wohnsitz auf Grund des Absatzes 1 für die Dauer von nicht mehr als zehn Jahren gehabt,

so gilt der Wohnsitz dieser Person und der zu ihrem Haushalt gehörenden Familienmitglieder, bei denen die gleichen Voraussetzungen vorliegen, ungeachtet des Absatzes 2 als in dem Vertragsstaat gelegen, dessen Staatsangehörige sie waren.

 

Quote

3. Where an individual, at his death or at the making of a gift, was

a.) a citizen of one Contracting State, and not also a citizen of the other Contracting State, and

b.) by reason of the provisions of paragraph 1 domiciled in both Contracting States, and

c.) by reason of the provisions of paragraph 1 domiciled in the other Contracting State for not more than ten years, then the domicile of that individual and of the members of his family forming part of his household and fulfilling the same requirements shall be deemed, notwithstanding the provisions of paragraph 2, to be in the Contracting State of which they were citizens.

 

But section 3 tells you where the fiscal residence of a person who dies and leaves an inheritance, or who is alive and who gives a gift, is.

The reasoning behind this is so that rich people don't think they can just up and leave a country in their old age, and maybe move to a country that doesn't charge any inheritance tax at all, like, for example, Austria, and save all that inheritance/gift tax.

So it would only tell us where the fiscal residence of the OP's mum is: that most certainly is the US.

 

But that's not in question here, we want to know where zagzig's fiscal residence is --> that's Germany.

 

_________________

 

By the way, in German taxation, there is a very big difference between:

• Erwerb von Todes wegen (= getting an inheritance from someone who died), and 
• Schenkung unter Lebenden (= getting a gift from someone who's alive)

For example, the tax free amount for a gift from a child to his parent is only 20,000€, but if they inherit from the child it's 100,000€, see here. 

 

But I think article 11 in the DTA that you mentioned also makes a clear distinction between both terms, since it says (here's the link to the latest bilingual version of 2001):

"estate of a decedent or the gift of a donor who, at his death or at the making of the gift"

 

***********************************************

 

@zagzig

 

Just upfront: if you're a member of the US forces stationed in Germany, who is therefore exempted from all taxation in Germany because of the SOFA, then Straightpoop's case becomes very relevant, because then you're not resident in Germany at all and therefore not taxable by Germany, and we can stop right here.

 

However, if you're just a normal citizen, please read on.

 

As that lawyer probably explained to you, you would anyway first have to pay the German inheritance tax and then your only option would be to initiate a law suit against the Finanzamt in the hope of getting that money back.

There is no legal procedure for "telling the FA Kaufbeuren to keep its sticky fingers off your inheritance" as Straightpoop so charmingly put it (if only there were...).

They will read the German version of the DTA and simply issue you with an Erbschaftsteuerbescheid and you then have to pay the amount written on it within 30 days.

 

Before considering going the court-of-law-route, you should however first ask that lawyer what your chances would be and how much it would cost.

If he is honest he will tell you that your chances are slim to none and that he will - no matter whether he wins or loses - get a fee based on the value of your inheritance (this would be the Streitwert), not on the hours he actually worked on your case.

For an example of the way lawyers bill in Germany, you could read this first-hand account: https://www.toytowngermany.com/forum/topic/238143-berlin-lawyersnotaries-charging-%E2%82%AC800hour/

 

To find out what kind of fees you would be looking at if you sue, let's first assume that the inheritance is higher than 600,000€, because up to 600,000€ no German inheritance tax would be due anyway (if your mum leaves you 400,000€ and 200,000€ to your child). So for an inheritance of up to 600,000€ there would be no reason for you to sue.

 

So let's assume the inheritance is 675,000€, i.e. she leaves you 475,000€ and 200,000€ to your child.

You would challenge the German inheritance tax due on the taxable gain of:

(475,000€ - 400,000€) * tax_rate_Steuerklasse_I 

= 75,000€ * 7%

= 5,250€ in German inheritance tax

 

This German inheritance tax would be reduced by whatever US tax you had paid on that inheritance, so it would be less, and could even by 0€ if the US tax was higher than that.

 

Now let's have a look at the fees for a law suit in front of the Finanzgericht: http://www.finanzgericht.org/Kosten-Finanzgericht.htm

Input the Streitwert, which would be the value of your inheritance (not just the taxable part!), so input:

475000

and click on the button:

1. "Gerichts-/Gesamtkosten" to find out the court fees, and then on
2. "Eigene Anwaltskosten" to find out what your own lawyer will charge you(never mind that you lawyer will make you sign a Honorarvereinbarung allowing him to charge you more than this fee set down by law) and then on
3. "Fremde Anwaltskosten" to see what your opponent's lawyer will cost you if you lose the case.

 

In the first instance (= Finanzgericht München, to be exact its branch at Augsburg, since Kaufbeueren belongs to its district), you would be looking at 

4,607.44€ for court costs

+ 1,556.04€ for your lawyer (that's the legal minimum, but it will be more than that if you sign a Honorarvereinbarung)

+ 2,094.40€ for the other party's lawyer

_________________________________

8,257.88€ just for the first instance

 

You will lose in the first instance for sure, because no lowly Finanzgericht will dare challenge a treaty that was negotiated over years by scores of negotiators from both the US and Germany and which was signed by the Finanzminister of both countries, just because the letter of the law in it runs counter to the intended effect. 

 

If you inherit land, the initial taxation rights are anyway assigned to the US because of the Belegenheitsprinzip in article 5 of the DTA gives the US the right to tax it.

Germany will then set its own tax on the value of that land and reduce that German tax by the US tax you already paid on it.

So best case, if the value is under the German Freibeträge and/or the US tax is higher than the US tax, no German tax will be due in the end.

 

And you would be able to sleep soundly at night knowing that the Finanzamt can't come knocking, accusing you of having hidden your inheritance.

And it will come out, even if you keep the money outside Germany.

That money will create capital income (e.g. interest) and then at the very latest it will come out then, since there aren't very many countries left in the world who aren't automatically exchanging information on bank accounts with Germany, see:

1. here for what information will be shared,
2. here for a map of the member countries in the OECD's "exchange of tax information" initiative and
3. here the list of countries who are signatories to the MCAA (the US isn't a signatory, but they also share information).

[zagzig 2]

Thank you very much, PandaMunich and Straightpoop, for your thorough responses!  I must say that I would like to prefer Straightpoop's assessment of the treaty, but PandaMunich's analysis is compelling.  I also appreciate the information about the attorney billing according to the Streitwert.  We did not discuss fees, though he did mention that he thought I would have a good chance at winning.  The probability of losing would not be worth the cost and hassle.

 

A few more questions:

 

If my mother bequeaths 200,000€ to our child, when would our child receive this money?  Upon turning 18?  A trust allows all sorts of provisions, such as receiving money at a later age and only under certain conditions, exclusions in cases of substance abuse, etc.  Is there something allowable in German inheritance law which can make such stipulations?  It seems unwise to just hand over 200,000€ to an 18 year old.  When would the inheritance tax be due for this amount:  immediately or only when our child receives this sum?  Some of my mother's estate consists of stocks.  What happens if the value of the stocks or land decreases or increases over the next years from the 200,000€ which was bequeathed?

 

I recall reading somewhere that the benefactor's primary residence is not subject to inheritance taxes.  Is this the case?

 

I am planning to fly to the US soon and will probably be there until the end.  I was also there for three and a half weeks in the summer.  It seems that my mother probably won't live for six more months, but if she does and I am there for this time, does this change things?

 

 

[PandaMunich 16,704]

Alternative 1:

Yes, if she simply leaves it to the grandchild, the child would own it immediately and would also, for example, have to submit tax returns for the capital income resulting from that money.

This is a good thing because then the first 8,652€ (Grundfreibetrag, rises every year) of that capital income would be income tax free, since every person (even children) has their own Grundfreibetrag. That's why well-off families start transferring assets to their children the minute they are born. 

You as the parents would administrate the money until age 18 and also sign the child's tax returns.

From age 18, the child could do what she/he wants with that money, but there are ways to get around this, e.g. if shortly before her/his 18th birthday you invest all the money in a 7-year Festgeld that can't be prematurely terminated --> goal achieved, the child can only access the money at age 25.

 

The inheritance tax is calculated on the value the assets had on the day your mother died, if stocks decrease in value after that it's tough luck. Nor does it matter whether the value increases afterwards.

The inheritance tax has to be paid immediately, but again: the first 200,000€ she bequeathes to her grandchild are inheritance tax free.

 

Alternative 2:

Your mother can however put a clause in her will that the child will only have access to the money at a later age, age 25 is quite popular. Additional conditions could be, for example, that the child has to have finished a university degree, and whatever else you want put in.

Your mum would have to specify who would administrate that money until then, you would be the person who springs to mind.

 

But in this case, you would be an Erbe, and your child only a Vermächtnisnehmer unter einer aufschiebenden Bedingung, you can read about it here and here.

 

What does that mean?

It means that things get complicated.

 

You will be taxed immediately on the whole estate according to the value all the assets had on the day your mother died, as if you were the only heir and all that money were all yours, and not also meant in part for your child.

 

If, and only if all the conditions set down in the clause of your mum's last will will be met (child reaches age 25, has a university degree, ...) the child would then get the Vermächtnis.

This could either be a Vermächtnis fixed in money, e.g. 200,000€ or some assets like the stocks in the depot at bank ABC or x hectares of land.

 

You would have to announce the Finanzamt when this happens.

The Finanzamt would then take the value of the Vermächtnis (either the fixed amount or whatever the assets are worth) on the day of your child's 25th birthday (if that was the date specified in the will) and do two things:

1. retroactively correct your Erbschaftsteuerbescheid by taking out that fixed € value from your inheritance or the historical value that these stocks/land had the day your mum died (not the value on the day that you hand them over to your child!) --> you will get some inheritance tax back
2. issue a new Erbschaftsteuerbescheid for your child, based on that new value of the assets --> your child would have to tax either that fixed € amount or the value then of those stocks/land and pay the inheritance tax on it

 

I suggest that you ask an English-speaking "Fachanwalt für Erbrecht" what these clauses in your mum's last will would have to look like.

But don't tell him those high amounts, use "normal" amounts like 20,000€ and 40,000€, because he too will charge for his advice based on the value of the inheritance!

You can find such a Fachanwalt here: https://anwaltauskunft.de/anwaltssuche/erweitert/

Choose from the drop-down menus:

Fachanwalt für: Erbrecht

Fremdsprache: Englisch

 

********************************

 

Staying with your mother won't help you at all unless your spouse and child completely move back to the US with you.

As long as they stay in Germany, you will fail the "centre of life" test in article 4 section 2 letter a of the DTA. Your centre of life will still be Germany, where your spouse and child are, so your fiscal residence will also be Germany.

 

What you read about the inheritance tax exemption for a house is set down in §13 Absatz 1 Nr. 4c ErbStG and doesn't apply to you.

It would only apply if all the following conditions were met:

1. house in the EU or Iceland or Norway or Liechtenstein, and
2. house only used for living purposes, and
3. house up to 200sqm area (if it's bigger you pay inheritance tax on the part over 200sqm), and
4. house that was lived in by your parent until her death, and
5. you (the child), or if you had already died your child (the grandchild) immediately moves into it after your parent's death and lives in it for at least 10 years.

[Straightpoop 688]

On 10/29/2016, 7:41:55, PandaMunich said:

Sorry, but I think we will have to agree to disagree.

 

@PandaMunich @zagzig

 

Not so fast!

 

Before we can agree to disagree you must first refute the argument I made in my last post that the reservation claimed by Germany under Art. 11 logically excludes its right to tax US citizens, domiciled in Germany on the value of any inheritance they may receive regardless from whom so long as they have been domiciled in Germany for less than 10 years.

 

 

Rather than trouble you with this weighty task I have instead forwarded this thread to my (evil) twin, Durchfall.  Durchfall, whose analytical ability is admittedly superior to my own, can be counted upon to expose errors in my legal exegesis and – with unseemly relish – hold them up to ridicule:

 

 

 

 

Dear Straightpoop,

 

After reading what passes for an analysis of the 10-year rule under the DBA-USA in this thread I am once again astonished that you managed to attain a C+ average in law school and avoid disbarment over the last 35 years much less find a malpractice insurer willing to accept your premiums.

 

 

Your analysis proceeds from the mistaken and wholly unjustified assumption that the “savings clause” found in Article 11 (1)(b) was intended somehow to extend the class of exempt persons defined in Art. 4 (3).

 

 

That your assumption was wrong should have been apparent from the subject matter of Article 11:  Credits.

 

 

If you had read past the first subparagraph of Article 11 you would see that the purpose of Article 11 is to set forth, as between Germany and the USA, which of the two countries under different sets of circumstances will have the prime right to tax a transfer (gift or inheritance).  The country with the prime right to tax under Article 11 will give a credit against its taxes for taxes paid to the subsidiary country.  It is, in essence, a “first bite” rule.

 

 

Under Article 11 the USA has primacy (first bite) with respect to taxing the worldwide estate of US citizens or US domiciliaries (as determined under Art. 4).  It will give a credit for any taxes legitimately imposed by Germany on situs assets located in Germany (2a ))   and/or German inheritance taxes imposed on beneficiaries of the US citizen or US domiciliary decedent/donor on the value received from the US decedent or donor (2b )).

 

 

Conversely, Article 11 gives Germany primacy with respect to taxing the worldwide estate of decedents (outbound) or heirs (inbound) domiciled within Germany.  It will credit the taxes paid by its German domiciled decedent or German domiciled heirs legitimately imposed by the USA on  situs assets located in the USA (3a )) and/or the estate taxes paid to the USA (or a US state or locality) by a decedent/donor who was domiciled in the USA at the time of his or her death (3b )).

 

 

Article 11(1)(b ) contains merely a reference to Article 4.  If a class of excluded persons exists under Article 4 then, by its incorporation by reference into Art 11(1)(b ), Germany is precluded from imposing its inheritance tax on such persons. 

 

 

That much you got right.

 

 

What your argument failed to apprehend is that the class of persons who are exempt by virtue of failing to be domiciled for the requisite 10-year period within the state of which they are not citizens, is defined in Article 4(3) only.

 

 

The Art. 4(3) definition of the class of persons conditions the mere existence of this class of persons upon the occurrence of two possible events absent which the class never comes into existence at any time:  the “death” of a potential member of the class (the taxpayer or a member of his household), or the “making of a gift” by a potential member of the class (the taxpayer or a member of his household).

 

 

In practice, this means that before Zagzig or other US citizen member of his household domiciled in Germany can claim membership in the class of exempt persons defined in Article 4(3), one of THEM must die or make a gift. In the absence of such death or gift, Article 4(3) is simply inoperative (gegenstandslos). That being the case, Article 4 would grant no protection to Zagzig or his family and the incorporating language of Article 11 would impose no restriction on Germany’s right to tax its domiciliaries (including members of the Zagzig family in Germany) on the value of gifts causa mortis or gifts inter vivos received from anywhere other than from Zagzig or a member of his household in Germany.

 

 

Should a qualified death (i.e. Zagzig or a member of his household) occur, then Article 11, by adopting the Art. 4(3) exclusion by reference, precludes Germany from taxing the surviving members of Zagzig’s family on the value of any inheritance they might receive from a deceased Zagzig or deceased member of his immediate household in Germany (unless it is German situs property under the treaty), or on the value of any gift that any family member may make to any person in the world (unless it is German situs property under the treaty).

 

 

You are correct in one other regard:  Article 4 and Article 11 do dovetail neatly.

 

 

Article 11 read in conjunction with Article 4 prevents Germany from imposing inbound taxation on an exempt individual or a member of his household who is outbound exempt under Article 4(3).  That tax protection, however, is limited to the value of gifts causa mortis received from a deceased family member domiciled in Germany and residing in the same household but for less than 10 years.  It also grants exemption from German outbound gifts inter vivos regardless of the recipient for up to 10 years.

 

 

Nor does this analysis conflict with the statement you quoted from the Treasury’s explanation that Germany would be limited to situs taxation of a 10-year exempt person.  That statement is 100% accurate.  You simply failed to appreciate the strictness of the conditions upon which a 10-year exempt person could come into existence under the treaty in the first place and the limits on their sovereign right to tax that the signatory countries were willing to accept to promote the free exchange of people.

 

 

I hope this is helpful but I must confess that given our ages, I do despair of ever seeing you exhibit anything as elevated as a B+ legal mind.

 

 

Your brother,

 

 

Durchfall

 

[PandaMunich 16,704]

@Straightpoop

What an erudite and entertaining letter that is, it really made my day 

 

Though I have to admit I think your parents could have been more thoughtful in naming you twins. 

For example, TT1 and TT2 would have been suitably ambiguous names. That way, according to your parents' mood you could have been:

• terrific twin 1&2
• terrible twin 1&2 (when you were in your terrible twos)
• and fitting your later occupation: taxation twin 1&2
• and of course Toytown twin 1&2 to go with the forum name

You see the advantage of such naming?

 

Please also extend my best wishes to your twin, it was a pleasure to meet him, albeit only virtually. 

I look forward to reading more contributions, from both of you.

[Straightpoop 688]

13 hours ago, PandaMunich said:

Though I have to admit I think your parents could have been more thoughtful in naming you twins.

 

Well, Dad was a proctologist and Mom was a gastroenterologist.  I guess they just let their professional enthusiasm get the better of them.

[zagzig 2]

@PandaMunich   @Straightpoop

 

Thank you again for your discussion and the invaluable advice. 

 

I’m still concerned about our child receiving a fairly large sum of money at an early age.  Certainly 25 would be better than 18, but it still seems quite young.  I realize that money can be a double-edged sword and worry about the what-ifs:  What if our child has a creepy significant other with ill-intentions?  What if there are responsibility or substance abuse issues?  Besides, I would like our child to have a sense of the value of money and appreciate what it means to work for it. 

 

Is it possible with Alternative 1 to have a longer term for the Festgeld or is 7 years the standard?  If other terms are possible, is it also possible to split the money, i.e. 25% with a 7-year term, 50% with a 10-year term, 25% with 12-year—or some other combination?  And since I’m a worrier, I wonder if an 18 year old whose parents postpone their inheritance in this way may harbor resentment. 

 

With Alternative 2, if I am taxed on the entire estate (minus my exemption), would the Finanzamt in 25 years (or whatever is specified in the clause) recalculate the Erbschaftsteuerbescheid with a 200,000€ exemption for our child?  If recalculating with a 200,000€ exemption would put the remaining value of the estate at the time of my mother’s death into a different tax bracket (ie. 15% instead of 19%) would those calculations also be made?  Would there be any adjustments for Inflation?

 

Is there a way to know in advance how the Finanzamt would view a trust? Is it just an arbitrary decision made by the person reviewing the case?

 

I will contact a Fachanwalt für Steuerrecht as soon as possible.  Is there any reliable website with ratings for them?  I’ve read through the reviews for some attorneys on anwalt.de, but I sense shills or self-written reviews.  Is it possible to agree on an Honorarvereinbarung instead of having the fees based on the value of the inheritance?  If so, what would be a reasonable rate?

 

Another question:  which currency exchange rate is used to determine the value of the estate?

 

Thanks again!

 

[zagzig 2]

I've been in touch with the US attorney who has set up my mother's trust and told him about the worst case scenario for trusts in Germany.  He responded that a will (instead of trust) would require probate and:

 

"Probate is time consuming and expensive.  Probate  will take a year from start to finish.  Administering the estate through probate will be twice as costly as using a trust.  Accordingly, your mother will want to use the trust and not a Will. 

...

Again, we do not want to go through probate in any estate.  It is very important that all of your mother’s assets (excluding tax deferred retirement assets and annuities) be titled in the name of the trust.

...

The trust is a non-entity.  There are many types of trusts -  grantor trusts, defective grantor trusts, testamentary trusts, irrevocable trusts, revocable trusts.  A revocable living trust (also called an intervivos trust, is a see through entity for tax purposes.  The trust transferring assets is like your mother transferring money.  In addition, after your mother’s death  you will not be receiving the assets in trust.  The assets will be transferred  to you directly.  You will take them in your name.  The tax provisions you are pointing to are applicable when you receive the assets in a trust.  These provisions would potentially be applicable to [your child] receiving assets in trust. 

...

Again, I want to make it clear that you will not be receiving assets from your mother’s estate in trust.  You will be receiving them outright."

 

 

So, would this eliminate any potential complications from the German side?  Would the Finanzamt recognize the assets as being transfered directly?

 

If so, would a revocable living trust also be required for our child? Or are there other types of trusts which can include certain stipulations (transfer of assets later than 18, job or university degree, etc.) and would still be recognized by the Finanzamt as a direct transfer of assets?

 

 

 

 

[Straightpoop 688]

17 hours ago, zagzig said:

Is there a way to know in advance how the Finanzamt would view a trust? Is it just an arbitrary decision made by the person reviewing the case?

 

 

@zagzig

 

What was the "worst case scenario for trusts in Germany" that you communicated to the attorney?

 

From what I can deduce from the rest of your post, the information you gave him was not correct.  Indeed, you may have told him the opposite of what is correct.

 

Since a BGH decision in 2012 the German inheritance/gift tax treatment of amounts received from or through a US trust of the kind that your mother apparently has have been crystal clear and are no longer in dispute. 

 

The values distributed to you - regardless of their characterization as income or priniciple under US law - will be taxable to you as a gift when actually distributed.  The Freibetrag for a distribution FROM a US trust (as opposed to a taxable transfer TO a US trust) is determined by the relationship of the trust Settlor (your mother) and the beneficiary.  Consequently, the Freibetrag for amounts coming out of your mother's trust to you or your child will be exactly the same had she given them to you directly in her will or by a "non-probate transfer" (e.g. using a designation of beneficiary, TOD, POD, or jointly owned survivorship account.).

 

After the aforementioned BGH decision there was brief academic speculation that a non-liquidating trust distribution to a "zwischenberechtigte" might be subject to both gift tax and income taxes.  In a 2014 decision in a different context, the BGH made it clear that where a transfer could be both gift and income taxable, it would be the one that it most economically resembled - but not both.

 

The fact that your mother has a trust, however, offers you an opportunity to solve the two problems that you were concerned about in your penultimate post:

 

1.  minimizing German inheritance taxes, and

2.  controlling the amount and timing of wealth transfers to your child

 

Using a US Trust to save gift taxes

 

As you have learned you and your child will not be exempt from German gift taxes on the values received from your mother; whether directly or through her trust.  You have learned that the exemption amounts €400K and €200 respectively will be available to you both whether the gift goes to you directly by will or through trust.

 

Now let me introduce you to how the German gift tax will be computed:

 

When you receive a gift, its value will be added to all other (non-exempt) gifts received by you from that same person over the previous 10 years.  (Appropriate occasional gifts for birthdays, anniversaries, Christmas, etc. need not be counted in this total.)  The Freibetrag will then be deducted from that amount and you will pay tax on the difference, if any at the rate specified in the table.  If, during those preceding years, you had to pay gift tax, then the amount you paid will function as a credit.

 

What this means, in effect, is that the Freibetrag renews itself every 10 years.

 

To my knowledge there is no German statutory requirement that the person who creates a trust that ultimately distributes a gift must be alive for the Freibetrag to be effective.  Indeed, the treaty we have been discussing anticipates that there will be timing differences between the time that a US decedent triggers the US estate tax and the time Germany imposes its gift tax on delayed amounts received through a trust.

 

What if the trust language provided that instead of giving it all to you and your child in a wad, you were instead to receive, respectively, the trust's annual income plus an amount of principle the total of which does not exceed the US dollar value of €40K or €20 per year?  If in the 10-year period preceding that first annual distribution your mother had made no gifts and the future payments of income+principle never exceeds €40K annually, then so long as the Freibetrag is not changed legislatively or the law is amended to limit the number of 10-year periods the Freibetrag renews itself, you and your child can essentially enjoy tax-free distributions from the trust for life.

 

As for solving the 2nd problem, the trust instrument could also be modified to provide that the income portion of the annual distributions to your child could be used to fund a 529 Plan and the principle not be distributed at all but remain in a spendthrift trust with provisions protecting the principle from the claims of creditors and for staged distributions at, say, ages 25, 35, 50, etc.  That would solve US income tax problems while simultaneously keeping your child's gift from grandma out of his hands - and safe from the Finanzamt.

 

This idea of spreading out trust distributions over a 10-year period in perpetuity is one I have never seen any German or US lawyer mention much less disparage for any reason.  I see no reason given the clarity of German law on the subject why it would not work.

 

In any event we still have no clue as to the magnitude of your Mom's estate.  It might be so large that such a plan would not be worth the effort.  On the other hand, it might be only a bit above the combined Freibetrag in which case it would be too small to worry about

 

Remember:  German law was amended in 1999 to put the kibosh on what were then tax-free transfers out of Germany to foreign trusts.  They did this by making such transfers taxable AS IF they were a completed gift to a third party with no relationship to the donor (i.e. €20K Freibetrag and Steuerklasse III)  They did NOT, however, change the law that tied the Freibetrag from foreign trusts to the relationship between the trust settlor and the beneficiary.

 

One other thing to remember in your own family planning:

 

As my brother, Durchfall, and @PandaMunich convincingly argued you are not exempt from gifts received from outside your family in Germany.  But, we also agreed that the treaty is crystal clear that until you have been here 10 years you and your family can make gifts - including gifts to irrevocable trusts located in the US that will keep your assets out of your estate so that if you die in Germany after the 10-year period has run, those assets will escape the Finanzamt's clutches.

 

One last and very important point:  if you decide to modify your mother's trust to do some family financial and/or tax planning, it would be very wise to appoint someone other than yourself as the trustee.  If you are the trustee, there is a strong danger that the trust assets will be deemed located in Germany.