In order to reduce or completely exclude compulsory portion claims of unwelcome or distant relatives, testators regularly opt for lifetime gifts, compulsory portion waiver agreements and marriage contracts. This article briefly outlines what needs to be taken into account in this regard.
1. Gifts and the 10-year period
The compulsory portion claim is generally calculated only on the basis of the estate existing on the date of death. In order to reduce compulsory portion claims, assets are therefore often transferred to desired beneficiaries during the lifetime of the deceased. However, the legislator has counteracted this with the compulsory portion supplement claim under Section 2325 of the German Civil Code (BGB). A 10-year period applies:
Gifts made within the last ten years before the inheritance are fictitiously added to the estate, with their value decreasing each year. For each full year after the gift, the value to be assessed is reduced by 10% (‘meltdown model’). Only after more than 10 years are earlier gifts disregarded. It is therefore advisable to plan ahead or transfer assets in such cases.
But beware: if the testator transfers assets to their spouse, the period only begins when the marriage is dissolved by death or divorce.
2. Gifts subject to restrictions such as usufruct
If the donor reserves a comprehensive right of use (e.g. lifelong right of residence or usufruct) to the gifted property, the above reduction model only begins when the testator waives the essential use. The ten-year period does not begin to run at all because, from an economic point of view, the assets have not yet been separated from the donor’s assets. In the case of real estate transfers with reservation of usufruct, this means that compulsory portion claims are not reduced if the usufruct existed in favour of the testator until his or her death.
3. Waiver of compulsory portion in exchange for compensation
Waiving a compulsory portion is the safest way to prevent claims to a compulsory portion. The future testator enters into a contract with the relative entitled to a compulsory portion, whereby the latter waives their right to a compulsory portion (and usually also to supplementary claims). However, such a contract must be notarised (Section 2348 of the German Civil Code (BGB)) and concluded during the testator’s lifetime.
The person waiving their rights is often compensated for their waiver with a settlement, such as an immediate payment or transfer of assets. They then lose their statutory minimum entitlement but could still be named as an heir in the will, e.g. if the relationship with the testator subsequently improves.
A contract waiving the right to a compulsory portion is typically considered, for example, to secure a business.
Example: In a family of entrepreneurs, a son is to become the sole successor; the daughter receives certain assets during her lifetime and, in return, waives her statutory share in a notarised deed, thereby preventing her from claiming her share in cash from the business assets after her father’s death, which would jeopardise the existence of the company.
Important: Payments made on the basis of a waiver of a compulsory portion constitute taxable gifts. The amount of tax is determined on the basis of the relationship between the person waiving the compulsory portion and the deceased and the corresponding tax-free allowance. If, for example, the father pays his daughter €540,000 in compensation, approximately €15,400 in gift tax will be payable after deduction of her allowance of €400,000 as the compensation amount.
It is always important to draw up a legally watertight contract in order to rule out any challenges or unconscionability. No predicament may be exploited and the compensation should be proportionate.
4. Marriage contracts and matrimonial property regimes
The choice or change of matrimonial property regime between spouses can also influence the compulsory portion. The difference between separation of property and community of accrued gains is particularly important. Under the statutory matrimonial property regime of community of accrued gains, the surviving spouse generally receives a larger share of the estate than under separation of property, which reduces the share that goes to the children and thus also reduces the children’s compulsory portion in the event of inheritance.
If the spouses currently live under separate property, a retroactive agreement to joint ownership of property acquired during marriage from the date of marriage can sometimes achieve a significant reduction in compulsory portion claims. If the matrimonial property regime is subsequently changed again during the lifetime of the spouses (known as a matrimonial property regime swing) and the claim for equalisation of gains is satisfied to the other spouse, this transfer of assets is not a gift that must first be reduced in order to affect the compulsory portion claims. Rather, the reduction is achieved immediately.
A good strategy for taking advantage of tax benefits while reducing the statutory share claims of children from a first marriage is to exclude equalisation of accrued gains in the event of divorce, but retain the benefits of the community of accrued gains for inheritance purposes. In the event of divorce, the assets are protected, but in the event of death, the inheritance tax allowances and the increased compulsory portion for spouses are retained.
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Conclusion
By combining the measures presented above – timely gifts, contractual waiver agreements, prenuptial agreements and usufruct reservations – the testator can significantly expand the scope of who will actually receive their assets after their death.
No single instrument is a panacea, but taken together, these measures can ensure that unwanted beneficiaries receive only the minimum or even nothing at all.
As each case is different and has its own particularities, it is always very important to seek advice and implement measures tailored to the family circumstances in order to find legally secure and fair solutions. We would be happy to assist you in these matters.
