Spousal wills
Spouses often draw up a so-called Berlin will. In many cases, this is a step in the right direction. However, this widespread model is not suitable for every situation. This can result in serious disadvantages, particularly in terms of inheritance tax.
I.
When spouses draw up a will, they often stipulate:
"1. the first of us to die appoints the survivor as his or her unrestricted sole heir. 2. the longer-lived of us appoints our children as his heirs in equal shares. Reutlingen, the . . . . . (Signature)"
This form of will, the so-called Berlin will, has been widely used for a long time. The advantages of such a will lie in the intended legal and economic protection and provision for the surviving spouse: he or she is to become the sole heir. As such, they receive everything that their deceased spouse leaves behind. The (not necessarily joint) children of the deceased, on the other hand, do not become heirs and therefore do not enter into a community of heirs with the longer-living spouse with their typical problems. Instead, they can claim their compulsory portion. They often waive this in accordance with their parents' wishes. However, this is not certain. The consequences may then be high monetary claims after the compulsory portion is due in cash immediately upon death, as well as considerable disputes within the family.
II.
Whether a Berlin will proves to be the ideal solution in an individual case only becomes apparent in retrospect, i.e. after the first inheritance. If it then turns out - as is all too often the case in practice - that it would have been better to make a will in a different way, it is naturally too late. For this reason, spouses should always check or seek advice as to whether the traditional Berlin will is the best solution for them or whether it should at least be adapted to their specific circumstances. This is because the traditional Berlin will can lead to both inheritance tax problems (see 1.) and substantive law problems (see 2.).
Inheritance tax problems
Each child has an inheritance tax allowance of €400,000 after each of their parents (i.e. a total of €800,000 per child). However, the Berlin will regularly results in the children's tax-free amounts being "given away" on the first inheritance, i.e. €400,000 per child. The following example illustrates the drastic consequences:
Mr. and Mrs. Baier are married in a community of accrued gains. They each have around €1,100,000 in bank assets which they have earned or inherited during their marriage and which they use to support their retirement (there are no pension entitlements). In a handwritten Berlin will, they appointed each other as sole heirs and their children Petra and Frank as heirs of the survivor. When Mr. Baier dies, he is inherited by his wife as his sole heir. In accordance with their parents' wishes, the children Petra and Frank waive their compulsory portion. A few years later, Mrs. Baier also passes away. According to the wording of the will, she is inherited equally by her two children. What inheritance tax is payable in total if the assets remain the same?
According to the Berlin will, Mrs. Baier inherits €1,100,000. After deducting the spouse's allowance (€ 500,000) and the pension allowance (€ 256,000) - if Mrs. Baier is entitled to the full amount - she will have to pay tax on € 344,000. At a tax rate of 15 %, her tax burden amounts to € 51,600.
On the death of their mother, Petra and Frank each receive half of the (total) estate, i.e. around €1,100,000 each. Their tax-free allowance is €400,000 each, so that they each have to pay tax on €700,000. At a tax rate of 19%, Petra and Frank will each have to pay €133,000 in inheritance tax. In total, i.e. for both inheritances, € 317,600 goes to the state.
From a purely inheritance tax perspective, it would have been better if Mr. and Mrs. Baier had not drawn up a will at all and had been subject to intestate succession. Mr. Baier would have inherited ½ (€ 550,000) from his wife and ¼ (€ 275,000) from each of their children. No inheritance tax would have been payable as the personal allowance limits would not have been reached. After the mother, Petra and Michael would each have inherited ½ x (€1,100,000 + €550,000), i.e. €825,000 each. After deducting their tax-free allowance of €400,000, their tax burden would have been 15% of €425,000 each, i.e. €63,750 each. Inheritance tax of €127,500 would have been payable on both inheritances, i.e. €190,100 less than above.
It would have been even better if Mr. and Mrs. Baier had, for example, modified their Berlin will slightly and added a third sentence. Apart from making the longer-living spouse the sole heir, they should have stipulated that the first to die should bequeath €400,000 to each of the children as part of a (specific-purpose) legacy.
After Mr. Baier's death, no inheritance tax would then have been due. Upon the death of Mrs. Baier, Petra and Frank would have inherited half of their parents' assets in the amount of ½ x (€1,100,000 + €300,000), i.e. €700,000 each. Their inheritance tax burden would then have been €33,000 each (11% of €300,000) or €66,000 together. They could therefore have saved €251,600 in inheritance tax.
The example with its variations shows that Berlin wills should be modified for assets above a certain size in order not to give away the inheritance tax allowances. The question as to what level of assets this makes sense depends on various factors, e.g. the number of children and the distribution of assets between the spouses. For a family with one child, the tax side should be taken into account from a total wealth of the spouses of more than EUR 400,000, for a family with two children from a total wealth of the spouses of more than EUR 500,000. The greater the assets of the spouses, the more serious the tax implications, as the tax burden increases disproportionately with increasing assets (so-called tax progression). In the case of assets in the millions, the grandchildren's generation should also be considered. If, for example, you allocate the tax-free amount of currently EUR 200,000 to each of your five grandchildren and the total amount (EUR 1,000,000) would otherwise be taxed at 19%, the tax saving would be EUR 190,000. However, you should then also consider arranging for the execution of the will, e.g. until the grandchildren have each reached the age of 25.
In addition, it should be noted that a change in the matrimonial property regime, the reallocation of cash assets into owner-occupied or rented real estate assets and from private to business assets should also be considered when advising on inheritance law.
Substantive legal problems
The second problem area relates to substantive law, namely the question of whether the surviving spouse can still change the will concluded with their deceased spouse after their death. Following on from the example above, the issue is as follows:
A few years after the death of Mr. Baier, Mrs. Baier becomes in need of care. The children Petra and Frank live in the same town. Nevertheless, only the daughter takes care of her mother, visits her three times a day, keeps her company and, with the help of an outpatient care service, ensures that she can remain in her familiar surroundings for several years until her death. Mrs. Petra Baier never asked her mother for money for her help, nor did she accept it when her mother wanted to give her something. Shortly before her death, Mrs. Baier Sr. therefore drew up a handwritten will in which she named her daughter Petra as her sole heir. Nevertheless, after his mother's death, Frank takes the view that he and his sister Petra have each become ½ heirs and demands half of the inheritance. Rightly so?
Who inherits Mrs. Baier's estate depends on whether she was still able to change the designation of heirs in the old Berlin will or whether she was bound by it. This depends on whether the so-called appointment of the last heir in the Berlin will, i.e. the appointment of Petra and Frank as heirs of the longer living person, is "subject to change" or not. In the former case, the so-called binding effect occurred and Mrs. Baier would no longer have been allowed to draw up the newer handwritten will: Petra and Frank would each be half heirs. In the latter case, Petra would be the sole heir and her brother would be entitled to the compulsory portion.
Whether and to what extent joint wills are binding has considerable practical implications. This also determines, for example, whether a larger gift from the longer-living parent to only one of the children is to be accepted by the other children or whether the gift can in fact be reversed after the death of the longer-living parent. As a result, it can be assumed that Mrs. Baier was bound by the will of Mr. and Mrs. Baier under inheritance law. As a result, Mrs. Baier's handwritten will will be invalid and Mrs. Baier will inherit half from each of her children, contrary to her wishes.
How could this result have been prevented? If Mr. and Mrs. Baier had sought advice when drawing up their will, they would very probably have made provision for the extremely common case in practice, namely that the longer-living spouse is cared for exclusively by one of the children and the other child does not care for his or her parent, or only to a very limited extent. Mr. and Mrs. Baier could then have stipulated in their will, for example, that the surviving spouse could make a new will under certain conditions.
Alternatively, a care contract between Mrs. Baier and her daughter Petra could have been considered. This could and should have stipulated exactly what she does for her mother, how long she has been working for her mother and how extensive the care and support is. Furthermore, a specific remuneration should have been agreed, whereby case law has repeatedly ruled that care provided by a close relative can certainly be more expensive than care provided by an outpatient care service, for example. Finally, Mrs. Baier and her daughter Petra could have agreed that the remuneration would be deferred until Mrs. Baier's death. This is usually in line with the wishes of the parties involved: Mrs. Baier senior would not have to pass on any of her monthly income to her daughter Petra. Nevertheless, Petra would be protected and would be paid for her care services after her mother's death.
III.
Summary: The Berlin will, which is extremely common in practice, can still lead to inheritance tax and actual difficulties for assets above a certain size, which you should be aware of and which can also be avoided in the course of advice in case of doubt. Whether the advice is provided by a notary or a lawyer is ultimately the same, as wills can also be drawn up by hand. The decisive factor should be the respective expertise. But even if you come to the conclusion that the classic Berlin will does not need to be modified and adapted to individual circumstances in individual cases, it is always better to have made this decision consciously and with knowledge of the consequences of a Berlin will and not "out of the blue".
Status: 23.10.2016