Berlin will and inheritance tax
It is perfectly legitimate for spouses to want to save inheritance tax and make use of the possibilities offered by the Inheritance Tax Act in a Berlin will. However, as the following example shows only too clearly, to the chagrin of the longer-living wife, it is essential to avoid the goal of saving inheritance tax becoming an end in itself. Otherwise you overshoot the mark and create problems that are disproportionate to the tax savings achieved:
Mr. Karl Fischer and Mrs. Maria Fischer are married. As they have no children, Mr. Fischer quite rightly fears, due to their joint assets, that considerable inheritance tax will be due at the latest after the death of the longer-living spouse - Mr. Fischer assumes that this will be his wife. This is because they own a house in Hamburg worth around EUR 1,000,000 and around EUR 650,000 in savings. However, the idea that up to 30% of their joint assets will go to the tax authorities is so troubling for Mr. Fischer that he is intensively occupied with the question of how he can optimize (his) spouse's will for tax purposes as far as possible. Mr. Fischer begins to search the relevant forums and discovers that the tax-free amounts for his sister and her husband, for his wife's sister, for the respective nephews, their wives and finally their children are EUR 20,000 per person. Mr. Fischer would like to take advantage of this fact. Secondly, he would like to implement the idea, which is entirely correct in terms of its approach, that the overall tax burden can also be reduced by avoiding the tax progression laid down in the Inheritance Tax Act, and that this goal can best be achieved if as many heirs as possible are involved. As a result, he and his wife draw up the following will:
Our will
We name each other as our sole heirs.
The following nine people each receive a legacy of EUR 20,000: Petra Maier (sister of the husband) and Andreas Maier (husband of Petra), Kai Maier (nephew of the husband), Simone Maier (wife of Kai Maier) and Lion Maier (son of Kai and Simone Maier), Susanne Hain (sister of the wife) and Ludwig Hain (husband of Susanne Hain), Frauke Müller (sister of the wife) and Frank Müller (son of Frauke Müller).
These nine persons shall also be the heirs of the longer living of us.
Hamburg, 10.03.2015 (Signature Karl Fischer)
Hamburg, 10.03.2015 (Signature Maria Fischer)
One year after the will was drawn up, Mr. Fischer died. He is inherited by his wife, who accepts the inheritance and who is now alarmed to hear from her circle of acquaintances that she will not be able to make a completely new will and will no longer be able to dispose of her assets completely freely and will have to live in her house for at least 10 years for tax reasons.
Unfortunately, all her fears are true.
Consequence not considered: Binding effect
In general, every spouse's will raises the question of whether and, if so, to what extent the longer living person should be able to make a new will or whether they should be bound by the old Berlin will. This is known as the binding effect. If - as in the case of Mr. and Mrs. Fischer - a Berlin will does not contain any express provisions and the question cannot be clarified by means of the so-called interpretation of the will, Section 2270 (2) BGB applies as a statutory rule of interpretation. Without going into the details here, the provision means that Mrs. Fischer is legally bound to a total of 3/9 in relation to her husband's sister Petra Maier, her son Andreas Maier and her grandson Lion Maier. Depending on the individual case, the binding effect may also apply to Mrs. Petra Maier's husband and her daughter-in-law Simone. This is rather unlikely. Either way, however, Mrs. Fischer can no longer appoint her nephew, for example, as her sole heir. Such a will would be invalid with regard to the persons in whose favor the spouse's will from 2015 is binding.
Consequence not considered: prohibition of gifts
The fact that Mrs. Fischer is bound by the 2015 Berlin will also restricts her right to dispose of her own assets and those inherited from her husband as freely as she is used to. For example, she can no longer simply support her nephew financially or give him the house as a gift. The law does provide for such freedom in principle. However, there is a limit to the right to freely dispose of one's assets in the case of gifts: a testator who is bound by inheritance law is only permitted to make gifts if he or she has a so-called vested interest in this, for example if the recipient takes care of the donor in return and looks after him or her in old age. Without such a vested interest, the persons in whose favor the 2015 Berlin will is binding can demand that the gift be reversed after Mrs. Fischer's death. The nephew would then have to reimburse at least 3/9ths as the donee.
Consequence not considered: 10-year period, § 13 para. 1 no. 4b ErbStG
Even if the Berlin will is "optimal" from the point of view of allowances and the avoidance of tax progression, Mr. Fischer has overlooked the fact that there would have been a much better solution with regard to the house in Hamburg. The Inheritance Tax Act provides that the house in which Mr. and Mrs. Fischer live is not included in the assessment of inheritance tax. However, the heir must then live in it for 10 years. If he moves out before then without compelling reasons, the house must be taxed subsequently. It would have been better if Mr. Fischer had given his share of the house to his wife during his lifetime. Such a gift is tax-free in the same way. Compared to the inheritance solution, however, the 10-year period does not apply in this case, which makes the longer-living spouse obviously freer.
Consequence not considered: community of heirs
As a further consequence, the Berlin will will lead to a community of heirs, which in this specific case will consist of 9 people aged between 2 and 79. This will no longer be a burden for Mrs. Fischer. Nevertheless, you don't have to be an inheritance law specialist to predict that such a "solution" - apart from the need for family court approval for the sale of the house or the conclusion of an inheritance settlement agreement - is highly explosive.
Summary
The main mistake made by Mr. Fischer in particular is that the spouse's will does not contain a so-called amendment clause. This would have been possible without further ado and could have freed Mrs. Fischer to a tailor-made extent. Furthermore, it would have been better if the Berlin will had provided for either one (main) heir and eight legatees or at least the appointment of an executor. All that remains is the bitter realization that "well-intentioned" does not equal "well-made" when you look through the Fischer couple's will to see how it could and should have been properly drafted.
Status: 23.10.2016