Inheritance Tax for US citizens - 10 year domicile law

[PandaMunich 16,704]

14 hours ago, zagzig said:

My mother did not specify who was to inherit what. Instead, her trust states a dollar amount for each inheritor.  The amount our child is to inherit roughly corresponds to the one-third share of the sale price of the farm.  If the farm/proceeds from the farm sale are distributed to our child, would there still be issues for Progressionseinkommen?  In other words, would this be treated as income for our child?

 

If your mother didn't explicitly say in her will that "my grandchild ABC child should inherit ???€ worth of the farm", i.e. assign that asset, then I'm afraid the profit from the sale of the farm (and therefore the Progressionseinkommen) will simply be allocated by percentages, i.e. they will simply assume your mother's inheritance as one large melting pot of money (= all assets that make up the inheritance that weren't explicitly left separately to either you or your daughter have become one large melted mass, i.e. all non-assigned assets), from which you and your daughter each get a part.

 

For example, if you inherited 80% of the total non-assigned assets, and your child 20%, then 80% of the farm sale profit will be allocated to you, i.e. you have to declare 80% of the farm sale profit as Progressionseinkommen in your German income tax return, and your child 20% as Progressionseinkommen in her tax return.

 

14 hours ago, zagzig said:

I was named by my mother as the direct beneficiary of a traditional and a Roth IRA.  Apparently, I have to take out a certain amount from the IRA each year. Will this also be considered Progressionseinkommen?   

 

No, it's worse, it will not be considered Progressionseinkommen (= lesser evil), but income that is taxable by Germany.

 

The Roth IRA contributions were made from already taxed (= post-tax) money according to this Wiki classification, so that part is straightforward: it's treated just like an investment fund.

The capital in the Roth IRA will not be taxed again by Germany (after all, that money was already taxed by the US when you mother earned that money), but just the income generated by that capital (= its yearly rise in worth = its profit) will be taxed.

You will just have to declare the entire profit that retirement plan generated that calendar year (regardless of how much you took out of it!) in your yearly income tax return, in Anlage KAP (this also explains the way the profit will taxed differently starting with 2018):

The traditional IRA contributions were made from untaxed (= pre-tax) money according to this Wiki classification, so we have a case of "nachgelagerte Besteuerung", i.e. the your mother paid in untaxed money, but in return, she later (or you/your child, as the inheritors) has/have to tax all the capital of the traditional IRA, i.e. everything in it.

 

I see the fact that you are able to take out as much as you like out of that traditional IRA as a problem, since in Germany, nachgelagerte Besteuerung is only used for pensions, i.e. once you reach pension age, you get a fixed amount every month and cannot get more than that amount out of it, so in Germany you don't really "have" that entire amount, you just "have" a real monthly income from a "German IRA" plan (Riester or Rürup Vertrag).

 

Taxation alternative 1:

With your constellation, that you can take as much as you like out of it, they may treat it like you got that entire amount the moment you inherited it, i.e. the German income tax would be due on it just as if you had taken all of it out at the moment of your mother's death.

Just to be clear: in that case, this entire IRA lump sum (well, the part that belongs to you, your daughter's part would be taxed in her own tax return) would have to be declared in Anlage R (which is the form for pension income. I admit it sounds strange, since neither you nor your daughter are of pension age, but well, international tax cases have strange consequences).

The taxation would be normal, i.e. just as if you (your daughter) had had employee (= salary) or self-employed income (= profit) in the amount of that lump sum in 2017.

It will not count as capital income, i.e. its taxation will not be capped at 25% income tax rate like for capital income. 

 

Taxation alternative 2:

They treat it just like a Riester/Rurüp plan and only tax the payouts you (your daughter) actually get that year (this would be the best alternative for you).

These payouts would again have to be declared in your and your daughter's Anlage R.

The taxation would be normal, i.e. just as if you (your daughter) had had employee (= salary) or self-employed income (= profit) in the amount of that pay-out in 2017.

It will not count as capital income, i.e. its taxation will not be capped at 25% income tax rate like for capital income. 

 

If they really treat it like alternative 1, this means that my earlier suggestion, to file separately from your husband, may no longer be the optimum solution.

Since the part of the IRA which "belongs" to you (the other part "belongs" to your daughter) would be a lump income which may be higher than your husband's salary income in 2017, filing jointly would be more advantageous, i.e you would benefit by filing jointly but hurt him by doing it, but as a family as a whole, you would benefit from filing jointly.

I suggest you ask your Steuerberaterin to get a verbindliche Auskunft (= advance ruling) according to §89 Absatz 2 AO (in English) from the Finanzamt on how they would tax the IRA (though I fear it will be the first alternative, i.e. a lump sum, like I wrote above), and then let her calculate the income tax due in both alternatives: filing jointly and filing separately.

 

This taxable income of yours (and of your daughters) :

1. capital income from Roth IRA, and
2. normal income from the traditional IRA

may create problems with your public health insurance.

If it is too high, you will breach the limit for remaining for free under your husband's public health insurance cover, which is (see §10 Absatz 1 Nr. 5 SGB V):

• 1/7 * Bezugsgröße = 1/7 * 2,975€ = 425€ (in 2017), or
• a 450€ mini job (= geringfügige Beschäftigung)

and you and your daughter will have to get and pay your own public health insurance policies as voluntary members, which will cost 18.x% (15.x% in the case of your daughter, since children don't pay 2.55% Pflegeversicherung) of your monthly income.

However, they assume a minimum income of at least (1/3 * Bezugsgröße = 1/3*2,975€ =) 991.67€ (in 2017), which means that the minimum public health contribution is around 180€ a month, you never pay less than that.

In your case, since you also have a 450€ mini job, you are already at the limit, so you will for sure have to get (and pay for) you own public health insurance policy. In the case of your daughter only if her monthly "income" is above 425€.

 

For a similar case regarding "nachgelagerte Besteuerung", which also describes the problem regarding the public health insurance contribution, please read (in there, the best alternative was if the Finanzamt erroneously classified it as capital income, which they will not do in your case once they understand that this was untaxed money) :

 

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

 

German income tax reduction because of German double inheritance/income taxation on same asset:

Yours will be a case where you (your daughter) will pay both German inheritance tax and German income tax on the same asset, on the traditional IRA.

In such cases, the law allows you to apply for (you don't get it automatically, you explicitly have to apply for it!) a reduction of your income tax, according to §35b EStG.

For example, if that traditional IRA was 30% of your inheritance, and you paid, say, 10,000€ German inheritance tax in total, then your later German income tax on that same traditional IRA will be reduced by 30%*10,000€ = 3,000€.

 

US taxation

To further complicate matters, both you and your daughter also have US citizenship, which means that the US also gets to tax your income: http://mtg-group.de/unsere-kompetenzen/internationale-beratung-service/us-steuer/

 

So the order in which you do the tax returns will become important:

• inheritance tax: first do the US inheritance tax return, and any US inheritance tax you paid will reduce your German inheritance tax (though that would also be the case for non-US persons, not just for US citizens like yourself, since most countries have first dibs on inheritances of local assets/assets left by their citizens, no matter what the citizenship of the inheritor)
• income tax: probably the "standard" way of doing it, i.e. first do the German income tax return, and then declare the German tax already paid on that income in your US tax return

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

 

Here's an article on this topic which sums up all the above and will therefore be of interest to your Steuerberaterin: https://www.wf-frank.com/detail/article/us-rentensparplan-ira-rechtsfolgen-des-todes-und-steuern-1535.html

 

 

[StephenGermany 23]

Hi @PandaMunich

 

She will become the owner of the Roth IRA. In the US, she will take annual distributions tax free (post-tax contributions + gains). Germany -does- recognize that Roth IRA accounts are retirement accounts however. They allow for you to trade (cap gains) and receive dividends within the account tax free. Distributions are taxed when money is withdrawn, but only on the gains. The DBA says that Roth contributions are not tax free, which makes sense since they aren't in the US either. But it does recognize them as pension plans.

 

I don't know anything about the inheritance side of this (need to learn about that myself).

 

Just trying to help... hopefully I'm not wrong. =)

[Straightpoop 688]

18 hours ago, StephenGermany said:

Germany -does- recognize that Roth IRA accounts are retirement accounts however.

 

@StephenGermany

 

Sorry.  That is not entirely correct.

 

In the protocol of signature to the 2006 treaty amendment introducing Art. 18A, Germany specifically excepted Roth IRAs from the list of individual US pension plans that it would recognize as "qualified plans" entitled to favorable German tax treatment as provided under under Art. 18A(3):

 

16. WITH REFERENCE TO PARAGRAPH 4 OF ARTICLE 18A (PENSION PLANS)

a) For purposes of paragraph 4 of Article 18A, the term "pension plan" shall include the following and any identical or substantially similar plans established pursuant to legislation enacted after the date of signature of this Protocol:

aa) In the case of the United States, qualified plans under section 401(a) of the Internal Revenue Code, individual retirement plans (including individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k), individual retirement accounts, individual retirement annuities, and section 408(p) accounts, and Roth IRAs under Section 408A), section 403(a) qualified annuity plans, section 403(b) plans, and section 457(b) governmental plans.

bb) In the case of the Federal Republic of Germany, arrangements under section 1 of the German law on employment-related pensions (Betriebsrentengesetz).

 

b) For purposes of subparagraph b) of paragraph 3 and subparagraph d) of paragraph 5 of Article 18A, it is understood that:

aa) The Federal Republic of Germany recognizes qualified plans specifically listed in clause aa) of subparagraph a), other than Roth IRAs, as arrangements that correspond to pension plans referred to under section 1 of the German law on employment-related pensions (Betriebsrentengesetz). The Federal Republic of Germany shall provide the corresponding relief under section 3 No. 63 of the Income Tax Act; and

bb) The United States recognizes arrangements under section 1 of the German law on employment-related pensions (Betriebsrentengesetz) as arrangements that correspond to pension plans referred to in clause aa) of subparagraph a) above.

 

 

[StephenGermany 23]

Hi @Straightpoop, when I saw you had replied, I knew I was in trouble. =)

 

If it's "not entirely correct", is it at all correct? =)

 

Any idea why they bothered to list the Roth IRA in the list of pension plans in the first place, just to explicitly carve it out later? When I read this long ago,

I had the apparently incorrect opinion that this carve out applied for contributions, but not for growth within the account itself.

 

I just checked, and luckily I haven't sold any stocks in my Roth account since moving here, nor do I own dividend bearing stocks in that account. So I'm OK

so far. But this is a total bummer. Germany really does make it difficult to just follow the rules sometimes.

 

One interesting note on this... seems like if the Roth is a normal brokerage account in Germany, if you have loser stocks in that account, you should be able

to then take a loss on those sales, which you can't do in the US... do you agree? So while living in Germany, seems like a good time to clear out the Roth

stocks in the red.

 

@zagzig, sorry for the incorrect information.

 

[StephenGermany 23]

@Straightpoop,

 

I'm still not 100% on the Roth topic. I read what you quoted a few times with Article 18A next to me. Please excuse me for debating

this further, as this has big tax consequences for me... @PandaMunich, what do you think? =)

 

16aa says that Roth accounts are pensions. That is clear. Paragraph 4 of 18A just talks about what pension plans are.

For 16b to then say "You know how we said a Roth is a pension plan a few lines above this line? Well, you get none of the pension plan

benefits" doesn't make sense to me. Why leave it in 16aa?

 

 

All it seems to be saying to me is that Roth plans do not...

 

correspond to pension plans referred to under section 1 of the German law on employment-related pensions (Betriebsrentengesetz). The Federal Republic of Germany shall (not) provide the corresponding relief under section 3 No. 63 of the Income Tax Act

 

section 3 No 63 talks about contributions to pension plans being tax free up to a certain level. So would it not be a reasonable interpretation

that it's just saying contributions to Roths are not tax free?

 

Thank you!

 

[Straightpoop 688]

14 hours ago, StephenGermany said:

section 3 No 63 talks about contributions to pension plans being tax free up to a certain level. So would it not be a reasonable interpretation

that it's just saying contributions to Roths are not tax free?

 

On 6/21/2017, 12:44:50, StephenGermany said:

I had the apparently incorrect opinion that this carve out applied for contributions, but not for growth within the account itself.

 

 

Your interpretation is entirely defensible.

 

But what I like and what the FA likes may be two different things.

 

Bear in mind:  All contributions to a Roth represent post-tax income. Hence, the application of Sec. 3 No. 63 would produce no benefit for Roth account holders (and no detriment to the German fiscus) anyway.  That being the case, what else, other than the tax-free internal growth (i.e. deferred taxation - possibly in PERPETUITY with a Roth) would there be to prompt the Germans to object to giving Roth accounts favorable treatment?

[StephenGermany 23]

@Straightpoop, yes those contributions are not tax free in the US... but maybe they added that text just to make it clear that this is the case in Germany as well. There's nothing in the treaty that says contributions to Roths are tax free in the US (even if you can google it everywhere)... so a German tax accountant reading this treaty would perhaps not know that, and think he can deduct ~4800 euros from his US expat client's taxable income. The same argument can be made, as to why they bother mentioning Roths as being pension plans in the text above it... could they not have simply written at the end of the list of plans that are pension plans, that Roth's are -not- considered pension plans in Germany, period?

 

The other point is the distributions... it seems clear that when money is taken from the account, since it's a pension plan, that the untaxed money will be taxed in Germany... so every penny distributed from a normal IRA, and just the gains in a Roth IRA (in Germany, not the US).

 

So if I put $10000 in a Roth while living in the US... and it earned $1000 in dividends... then I move to Germany... and while I live there it earns $1000 more in dividends, and I go with your interpretation and pay the FA on those dividends, eventually when I retire, are you suggesting that I owe the FA taxes on the first $1000 in dividends, that I have so far never paid taxes on? I was always assuming, just like regular IRA's, that if I would take a distribution from a Roth, I would owe taxes on the untaxed earnings. But if Roth's are considered regular brokerage accounts, why would I pay taxes on the money earned, when I didn't live in Germany? The US just chose to tax me at 0% on those gains.

 

Thanks!

 

[Straightpoop 688]

On 6/29/2017, 11:42:33, StephenGermany said:

So if I put $10000 in a Roth while living in the US... and it earned $1000 in dividends... then I move to Germany... and while I live there it earns $1000 more in dividends, and I go with your interpretation and pay the FA on those dividends, eventually when I retire, are you suggesting that I owe the FA taxes on the first $1000 in dividends, that I have so far never paid taxes on? I was always assuming, just like regular IRA's, that if I would take a distribution from a Roth, I would owe taxes on the untaxed earnings. But if Roth's are considered regular brokerage accounts, why would I pay taxes on the money earned, when I didn't live in Germany?

 

Assuming my interpretation of the language of the treaty excepts Roth IRAs from ALL aspects of Treaty Article 18A - and I have no confidence whatsoever that that interpretation would be shared by the FA - then the short answer to your question would be: no.  The $1000 of income accumulated prior to acquiring German residence in your example would not be taxed in Germany when withdrawn from the Roth. Just like the $10,000 originally deposited prior to arrival in Germany and any Roth income earned - and income taxed in Germany after arrival in Germany:  NONE of it would be taxed again upon withdrawal/distribution because "withdrawal" would be a non-event for German tax purposes.  The tax law "veil" that safeguards traditional IRA income accruals from current taxation - both in Germany and the US - would not exist for a Roth (under my interpretation) so whether you took some cash out of your Roth to spend it would be no different in the eyes of the FA than spending some excess cash from a normal fully taxable brokerage account.

 

Given the strictness with which Germany appears to define the term "pension" and the financial straight jacket that definition imposes on individuals compared to the relatively lax rules regarding management and disposition of US IRA's (incl. 401K, SEP, etc.) it is remarkable to me that the Germans granted recognition to any of these US institutions.  They are really nothing more than thinly disguised tax-deferred savings plans that may or may not ever result in that semi-sacred and exalted thing the Germans regard as a "pension" (payable et in saeculum saeculorum, amen).  Hence, if my understanding of Germany's income taxation of distributions from such treaty-favored IRA's is correct, the only way to get German "pension" tax treatment for the distributions is to convert the entire contents of the IRA to a lifetime annuity.  Anything less than 100% conversion will cause the distributions to be taxed much like the US taxes distributions from traditional IRA's that have "basis", i.e. an allocable portion of each distribution will represent a non-taxable return of contributions (basis) from after tax income.

 

God knows what the German inheritance tax and income tax implications of all this are for IRAs that are inherited instead of acquired by the beneficiary's own payments.

 

 

 

 

 

 

 

[StephenGermany 23]

Thank you for everything @Straightpoop.

[Winger 0]

I learned a lot reading this thread and had a few questions as a US citizen who will be moving to Germany for 2-4 years in January '18.  We are a family of 4.  My concern is my parents estate is worth more than the exemption amounts currently on the German books.  From the thread it seems settled that there is no 10 year "grace period" for US citizens residing in Germany when it comes to estate tax.  If we stayed in the US there is no tax as their estate is under the roughly $11mm exemption for a married couple.  Not so in Germany given the low exemptions.  Obviously if my parents live through our stay in Germany no issue, but it seems crazy to take this risk given they are in their upper 70s.  

 

Are there strategies that people do in a situation like this to eliminate or minimize the chances of Germany taking a 19% cut of any inherited assets?  Could someone spend less than 6 months in Germany and claim that it was not their habitual abode?  We are going to meet with international tax lawyers soon but I'm trying to learn as much as I can.  Seemingly I could ask my parents to give us assets now ahead of the move, but they may not be so keen on that idea!  From what I read it seems US trusts don't really help and can make matters worse.  I have to imagine this scenario comes up fairly regularly but I haven't been able to find much info online as to what strategies can be employed to minimize the chances of paying taxes to Germany that you would not have to pay in the US.  Thanks for any ideas -

 

 

[StephenGermany 23]

@Straightpoop & @PandaMunich, 

 

This thread really covered many topics. But getting back to the original topic... did you two end the initial topic's discussion still in disagreement? Or did

I miss the resolution somewhere?

 

The original main questions I think were:

 

1) If an American living in Germany for less than 10 years dies, leaving everything to his German spouse, also living in Germany, do only American estate tax laws apply?

Meaning, German inheritance laws don't apply. So unless someone is super rich, no taxes are due. It sounded like @Straightpoop thought this was correct, but 

@PandaMunich didn't. (Sorry, if I misrepresented your views)

 

2) If an American living in Germany inherits US situs assets from a deceased American, is this also under US tax law? Only for 10 years? Not at all?

 

Thank you, as always!

[PandaMunich 16,704]

We agreed in the end, that:

• if the person who inherits (= heir, inheritor = Erbe) is resident in Germany, it doesn't matter when that person moved from the US to Germany, he/she is always subject to German inheritance tax, unless the inheritance tax double taxation agreement (DTA) between Germany and the US then assigns the taxation rights on certain types of assets to the US.
• if the person who dies (= decedent, testator = Erblasser) moved to Germany from the US less than 10 years ago, and the non-German heir is not resident in Germany, or not a German citizen who left Germany less than 5 years ago (if the German citizen heir moved from Germany to the US: 10 years, because of article 4 no. 3c the DTA), then no German inheritance tax is due - except on assets like German real estate, where the inheritance tax double taxation agreement (DTA) between Germany and the US always assigns the taxation rights to Germany (article 5 of the DTA).

 

German inheritance tax is only due if at least one of the following conditions is met:

• personal tax liability (= persönliche Steuerpflicht) in Germany by either the testator or heir.
  This personal tax liability is set down §2 ErbStG and in the DTA and applies to:
  - residents in Germany, §2 (1) Nr. 1 a ErbStG
  - German citizens (be they testator or heir) if they moved away from Germany less than 5 years ago, §2 (1) Nr. 1 b ErbStG
  - German citizen testators who moved to the US less than 10 years ago, article 4 no. 3c in the DTA
   
• objectual tax liability (= sachliche Steuerpflicht), i.e. the tax liability comes from on the inherited object itself, e.g. German real estate, see article 5 of the DTA

 

3 hours ago, StephenGermany said:

1) If an American living in Germany for less than 10 years dies, leaving everything to his German spouse, also living in Germany, do only American estate tax laws apply?

Meaning, German inheritance laws don't apply. So unless someone is super rich, no taxes are due. It sounded like @Straightpoop thought this was correct, but 

@PandaMunich didn't. (Sorry, if I misrepresented your views)

No, since the heir is a resident in Germany, German inheritance tax applies to the whole worldwide inheritance, i.e. inside and outside Germany, unless the DTA assigns the taxation rights to the US, e.g. on US real estate.

The DTA also contains regulations on how inheritance tax one country charges is credited towards the inheritance tax the other country charges.

 

So you really have to go through the DTA and see what kinds of assets you are leaving your heir, and then see what the DTA says for each type.

 

3 hours ago, StephenGermany said:

2) If an American living in Germany inherits US situs assets from a deceased American, is this also under US tax law? Only for 10 years? Not at all?

 

The 10 year period does not apply here, since the DTA only speaks of a testator when mentioning the 10 year rule in article 4 of the DTA:

 

"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."

 

So you have the same situation as above, the heir has personal tax liability in Germany since he is resident in Germany.

German inheritance tax applies to the whole worldwide inheritance, i.e. inside and outside Germany, unless the DTA assigns the taxation rights to the US, e.g. on US real estate.

The DTA also contains regulations on how inheritance tax one country charges is credited towards the inheritance tax the other country charges.

 

So you really have to go through the DTA and see what kinds of assets you are going to inherit, and then see what the DTA says for each type.

[StephenGermany 23]

Thank you!!

[StephenGermany 23]

Sorry, I tried reading the DTA, but Article 10, Paragraph 4 made me dizzy.

 

So if a parent leaves US real estate to a child living in Germany, is the real estate's portion of the estate not subject to German inheritance tax? If the child inherits real estate worth 400K€ and cash of 100K€, does the real estate being tax free use up the 400K€ Freibetrag? So tax is only due on the 100K€? I'm assuming this can't all be right, because the last surviving parent could just invest most of their money in real estate prior to their death (if possible) to avoid the tax.

 

What if a spouse dies, and both spouses lived in Germany. They own US real estate (community property). Half the property was already owned by the surviving spouse, so that portion doesn't come into play I assume. Does the surviving spouse then not have to pay inheritance tax on the other half? But it eats up part/all of the 500K€ Freibetrag?

 

And I've already emailed a German estate attorney for a consultation... just like to go into such a meeting being informed. =)

 

THANK YOU SO MUCH!

 

[PandaMunich 16,704]

 

1 hour ago, StephenGermany said:

And I've already emailed a German estate attorney for a consultation... just like to go into such a meeting being informed. =)

 

First off, a German attorney isn't the right person to ask, ask a German Steuerberater.

 

Why do I say that?

First off, most attorneys do not really have in depth knowledge of tax law, it's just one of their many areas they have to pass their exam in.

So if you really want someone with the expertise you need, go to a specialised lawyer, a "Fachanwalt für Erbrecht", who is preferably also a "Fachanwalt für Steuerrecht".

 

However, and here we come to the second caveat: lawyers charge according to the their own system, a law called the RVG (in English), which means that by default they charge not according to an hourly rate, but according to the value of the estate. Which means that asking about an estate worth 100,000€ will mean a different billed amount than asking about an estate worth 10,000€, see here for such an example:

Which is why I suggested to zagzig back in this thread to use "normal" (= low) amounts when consulting a lawyer (see the middle of this post):

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

 

You would be better off asking a Steuerberater, because:

1. they have the expertise in tax law (which makes sense, they specialise in tax law) 
2. they bill based on another fee regulation than lawyers, their bills are governed by the StBGebV, with lower fees for the same answer than the fees charged by a lawyer

Just take care that Steuerberater isn't also a lawyer, since he/she will then charge according to the higher fees for lawyers!

 

1 hour ago, StephenGermany said:

So if a parent leaves US real estate to a child living in Germany, is the real estate's portion of the estate not subject to German inheritance tax? If the child inherits real estate worth 400K€ and cash of 100K€, does the real estate being tax free use up the 400K€ Freibetrag? So tax is only due on the 100K€? I'm assuming this can't all be right, because the last surviving parent could just invest most of their money in real estate prior to their death (if possible) to avoid the tax.

 

No, in my opinion, the US real estate isn't tax free, it would only be tax-free in Germany in a constellation where neither the testator nor the heir have any relationship to Germany, e.g. a US citizen testator who moved to Germany less than 10 years ago leaves US real estate to a German citizen heir who moved to the US more than 10 years ago.

 

The US taxes that US real estate, and the German state then allows that that paid US inheritance tax lowers the German inheritance tax that's due on it, i.e. the double taxation agreement fulfills its primary function: that you end up paying inheritance tax only once.

 

So in both your scenarios (scenario 1: 400k€ house + 100k€ cash. Scenario 2: 500k€ cash), the child would have to pay German inheritance tax on the 100k€, since the 400k Freibetrag would have already been used up.

And since the house is not located in the EU/EEA, the child cannot apply §13 (1) Nr. 4c ErbStG, which would have exempted a house of up to 200m² from German inheritance tax as long as the house was lived in by the parent prior to his/her death, and the child immediately moves in and lives in it after the death for at least 10 years.

 

1 hour ago, StephenGermany said:

What if a spouse dies, and both spouses lived in Germany. They own US real estate (community property). Half the property was already owned by the surviving spouse, so that portion doesn't come into play I assume. Does the surviving spouse then not have to pay inheritance tax on the other half? But it eats up part/all of the 500K€ Freibetrag?

 

I have no idea about the US inheritance tax side of this.

 

Yes, the spouse does not have to pay inheritance tax on the half they already own.

On the German side, yes, my opinion is that that US real estate would eat up the 500k€ Freibetrag. 

So as long as the spouse only inherits a 500k€ US house, and no other assets, no German inheritance tax would be due.

If the estate of the deceased spouse amounts to more than 500k€, the German spouse will have to pay German inheritance tax.

 

Since the house is not located in the EU/EEA, the spouse cannot apply §13 (1) Nr. 4b ErbStG, which would have exempted a house from German inheritance tax as long as the house was lived in by the spouse prior to his/her death, and the spouse immediately moves in and lives in it after the death for at least 10 years.

[Straightpoop 688]

On 20.9.2017, 13:09:02, Winger said:

Are there strategies that people do in a situation like this to eliminate or minimize the chances of Germany taking a 19% cut of any inherited assets?  Could someone spend less than 6 months in Germany and claim that it was not their habitual abode?  We are going to meet with international tax lawyers soon but I'm trying to learn as much as I can.  Seemingly I could ask my parents to give us assets now ahead of the move, but they may not be so keen on that idea!  From what I read it seems US trusts don't really help and can make matters worse.  I have to imagine this scenario comes up fairly regularly but I haven't been able to find much info online as to what strategies can be employed to minimize the chances of paying taxes to Germany that you would not have to pay in the US.  Thanks for any ideas -

 

 

 

 

@Winger

 

The German inheritance and gift tax law offers your family several planning possibilities to avoid German inheritance taxes should you inherit from either of your parents during your tax residency in Germany.

 

Germany imposes its inheritance tax when the beneficiary receives the benefit of a bequest or inheritance.  Normally, that is at the time of death.  But §9 of the ErbStG provides that if the economic enjoyment of all or a part of a gift or inheritance is subject to the fulfillment of a condition, then the tax event will not occur until the condition is fulfilled.

 

In addition, US law - specifically the institution known as the trust - offers an ideal method for creating such conditions with maximum flexibility.  I can see from the lengthy and sometimes confusing discussion on this thread how you might have come to a contrary conclusion but trusts are indeed an ideal planning tool.

 

For example your parents could each have the following clause in their will (or living trust).

 

"If my spouse has predeceased me and my child Winger is a tax resident of Germany I give €400,000 of Winger's share to him outright. The balance (if any) I give to XYZ (a citizen and resident of the US only) in trust for the benefit of Winger until such time as he shall return to the US and cease to be a tax resident of Germany.  All income from any amount held in trust from the date of my death until Winger ceases to be a German tax resident shall be payable to ABC Charities/Winger's brother/sister. Winger shall have no right, title or interest or power to appoint any amounts held in trust or any income therefrom unless and until he fulfills the condition of returning to the US and ceasing to be a German tax resident."

 

This arrangement assumes that you have received no other taxable gifts from this parent in the 10-year preceding his/her death. It gives you €400K outright and the rest when you get home and have effectively abandoned your German tax residence.  No taxes German or US will be owed.

 

You can, of course, add bells and whistles depending on your circumstances and that of your parents.  For example, if your parents have named each other as 100% beneficiary of their respective estates, you could arrange for the first to die to provide you with a €400,000 gift so as to maximize the exemption amounts from BOTH parents. 

 

If you expect your stay in Germany to be lengthy or permanent, you can suggest language that gives you €400K outright and another €400K in 10 years if you're still tax resident in Germany.

 

Trusts offer lots of possibilities.

 

 

 

[PandaMunich 16,704]

2 hours ago, Straightpoop said:

another €400K in 10 years if you're still tax resident in Germany.

 

Sorry, but I doubt that alternative would work. 

In such a case, where the Bereicherung (= enrichment) will happen for sure (= zu einem bestimmten Zeitpunkt), just after 10 years, there is a difference between the civil law interpretation of the "aufschiebende Bedingungen" (= condition precedent), and its interpretation in inheritance tax law. 

In my opinion, the German inheritance tax would then be due immediately, i.e. as soon as the testator (= Erblasser) dies, see this section of an article by a Fachanwalt für Steuerrecht:

 

Nach der Rechtsprechung des BFH (27.8.03, II R 58/01, BStBl II 03, 921), betrifft die Regelung in § 9 Abs. 1 Nr. 1a ErbStG zu betagten Ansprüchen jedoch nicht alle Ansprüche, die zivilrechtlich als betagt anzusehen sind.

 

• Aus der bewertungsrechtlichen (§ 12 Abs. 1 ErbStG i.V. mit § 12 Abs. 3 BewG) Behandlung noch nicht fälliger Forderungen folgt, dass die ErbSt für solche Ansprüche, die zu einem bestimmten (feststehenden) Zeitpunkt fällig werden, dem Regelfall des § 9 Abs. 1 Nr. 1 ErbStG entsprechend bereits im Zeitpunkt des Todes des Erblassers entstehen und dass diese Ansprüche gegebenenfalls mit ihrem abgezinsten Wert anzusetzen sind.

 

2 hours ago, Straightpoop said:

If my spouse has predeceased me and my child Winger is a tax resident of Germany I give €400,000 of Winger's share to him outright. The balance (if any) I give to XYZ (a citizen and resident of the US only) in trust for the benefit of Winger until such time as he shall return to the US and cease to be a tax resident of Germany. 

 

That might work, since the date when that will happen is unsure (= unbestimmter Zeitpunkt), though it has the risk that Finanzamt might swing the "mißbräuchliche Gestaltung" Hammer from §42 AO (in English) and refuse to accept that clause, since it was clearly put into the will in order to avoid German inheritance tax.

 

§9 Nr. 1 Buchstabe a ErbstG was written with a different kind of "aufschiebende Bedingungen" (= condition precedent) in mind, e.g. the heir only gets the inheritance "when he/she marries", or "when he/she successfully finishes university", i.e. it was not intended as an instrument to avoid German inheritance tax.

[Straightpoop 688]

@PandaMunich

 

I am pleased to report that the German courts settled this issue more than 50 years ago.  The BFH has ruled specifically with regard to American trusts:  "Die Erbeinsetzung mit Zwischenschaltung eines trustee nach amerikanischem Recht ist aufschiebend bedingt."

BFH Mai 1961 – II 284/58 U, BStBl III 1961, 312

 

https://www.jurion.de/urteile/bfh/1961-05-31/ii-284_58-u/

 

No concerns about § 42 AO either:  the German taxability of a gift is a valid consideration for the Trustee in determining whether and when to distribute.  From the decision:

 

"Es kommt aber im vorliegenden Fall entscheidend das Folgende hinzu: Nach dem Testament ist die Auszahlung von Teilen oder des Gesamtbetrags des Kapitals und der angesammelten Einkünfte dem alleinigen Urteil der Treuhänder überlassen, die insbesondere auch darüber zu entscheiden haben, ob die von den Bf. zu entrichtende (deutsche) Erbschaftsteuer übermäßig hoch ist. In diesem Fall sowie in allen sonstigen Fällen sind die Treuhänder zur Zurückbehaltung jedes Teilbetrags oder Gesamtbetrags von Kapital und Einkünften berechtigt, wenn nach ihrem alleinigen Urteil die Bf. nicht den vollen persönlichen Gebrauch und Nutzen aus etwaigen Zahlungen haben würden."

 

 

There is a caveat though: the BFH described the trust in the case before it as a "discretionary trust" even though it did not quote any language in the trust instrument that led it to that conclusion; only that the beneficiaries would inherit only "unter bestimmten Voraussetzungen und Bedingungen".  The BFH, however, did not rule that a discretionary trust was a prerequisite for its ruling only that a distribution from such a trust would be regarded as especially "bedingt".

 

In my view a trust provision that requires distribution in 10 years time but only "upon condition that the beneficiary survives to that date, is not drug addicted at the time, not adjudicated incompetent, not in jail or tax resident in Germany or not still married to that hussy . . . " would appear to be pretty conditional to me even though it might not be regarded as discretionary should all the conditions be met.

 

Note, however, this case doesn't apply to gifts made through executors/administrators as opposed to trustees for the same reason that German Dauervollstreckung is not a "betagte/befriste/aufschiebend bedingte" Erbe.  See:  Bundesfinanzhof
Urt. v. 08.06.1988, Az.: II R 243/82 in which a previous case saying that it did was overturned.

 

https://www.jurion.de/urteile/bfh/1988-06-08/ii-r-243_82/

 

[PandaMunich 16,704]

You did see that the BFH ruling that Fachanwalt für Steuerrecht cited in his article is from 2003, i.e. a bit more current than 1961? 

[Straightpoop 688]

@PandaMunich

 

Yes, indeed. But it is not on the same topic.

 

As my Kommentar to §9 ErbStG makes abundantly clear, the rules for determining when a German tax on a gift or inheritance is to be determined go out the window when the inheritance or gift is governed by foreign legal systems that provide for legal constructs (e.g. trusts) that are foreign to the German legal system.

 

Thus, while a gift through a trust (utterly foreign) can effectively postpone the date of tax, a gift delayed by the intermediation of an executor/administrator generally will not since the latter offices and positions have a more or less direct equivalent in German law.

 

The article you cite is totally consistent with the application of § 9 ErbStG to gifts governed by German law or to foreign law with German equivalents.  It is easily distinguishable on its facts from a conditional gift made through a trust. For that matter, I fully agree with the ruling. In my view the gift in that case was complete and unconditional as of the date of death.  If the legatee in that case had died before 5 years had passed, his heirs would inherit the right to the amount fixed at his parent's death plus the stated interest and he could make a gift or testamentary disposition of that asset. Moreover, he could have immediately sold or pledged his claim to that gift before the 5-year delayed distribution date. 

 

Not so in the case of a gift that is made conditional upon the donee/heir surviving to a certain point or meeting any number of other conditions and which expressly deprives the conditional donee of any present right, title, interest, expectancy, power or managerial authority in any amount whose future payment is made conditional by the governing instrument.

 

The case discussed is simply not relevant to gifts/inheritances governed by foreign law for which German law has no equivalent.