Which assets are excluded from inheritance tax?

What is inheritance tax subject to?

When you can be called upon by the tax office to pay inheritance tax is regulated in Section 1 (1) No. 1 ErbStG (Inheritance and Gift Tax Act). Thereafter, inheritance tax is subject to “acquisition due to death”.

What is hidden behind this rather unusual formulation in general usage is explained in more detail in Section 3 ErbStG.

According to this, as a taxpayer, one can confidently assume that any increase in wealth that occurs in connection with the death of a person is basically subject to inheritance tax.

Inheritance, legacy and compulsory portion trigger inheritance tax

It does not matter for what reason the taxpayer participates in an inheritance. The inheritance tax must therefore by no means only be paid by the classic heir.

Rather, for example, tax must also be paid by the person who has not just become an heir because he was excluded from inheritance by the testator in his will. However, if the disinherited person demands and receives his compulsory portion, then the increase in property associated with the compulsory portion is also subject to inheritance tax.

In the case of an inheritance, it does not matter with regard to tax liability whether the heir has inherited by virtue of legal succession or whether the testator has left a will and has determined his legal successor and heir in this way. Inheritance tax does not differentiate between testamentary and legal heirs.

And finally, inheritance tax also strikes if you only participate in the testator's assets through a legacy suspended by the testator in the event of inheritance. If you request the legacy from the heir after the inheritance has occurred and you subsequently receive the property promised by the testator, then this process is basically also of interest to the tax office.

As a result, every classic asset acquisition in connection with an inheritance is subject to inheritance tax, regardless of whether the enrichment is triggered by an inheritance, the realization of a compulsory portion or a legacy.

Acquisition by gift on death

After the death of a person, however, one can not only participate in the testator's assets as an heir, legatee or person entitled to a compulsory portion.

Rather, the law recognizes other forms of participation in the estate.

An important form of handing over the testator's property to a third party is the so-called gift on death, Section 2301 of the German Civil Code (Bürgerliches Gesetzbuch). In the case of such a gift in the event of death, the testator promises a certain benefit to a third person without asking for anything in return, provided that this third person survives the testator. If the inheritance then occurs, the recipient receives the promised pecuniary advantage.

It is not surprising that such a process is also subject to inheritance tax and is expressly classified as - taxable - “acquisition due to death” in Section 3 (1) No. 2 ErbStG.

Anyone who receives something through a gift from the testator after the inheritance has occurred must report the reason for this to the tax office and, if necessary, pay inheritance tax.

Acquisition through life insurance benefits

It is largely unknown that benefits that a third party receives on the basis of a life insurance policy taken out by the testator are also subject to inheritance tax.

Whenever the testator names a certain person as entitled to benefits in a life insurance contract, this person receives the agreed sum insured - bypassing the estate. The insurance benefit is not part of the inheritance and the heirs - unless they are entitled to receive it themselves - cannot access the sum insured under the life insurance.

Legally, however, the benefit from a life insurance represents a pecuniary advantage that is directly acquired by a third party on the basis of a contract concluded by the testator upon his death, Section 3 (1) No. 4 ErbStG. The insurance benefit is therefore part of the "acquisition due to death" subject to inheritance tax and must be reported to the tax office in the event of inheritance.

Compensation for waiver of inheritance, compulsory portion or legacy

Inheritance tax law links tax liability with positive acquisition from an inheritance. Every heir, legatee or person entitled to a compulsory portion should, above a certain amount, share his increased wealth with the general public and pay inheritance tax.

Resourceful taxpayers could now come up with the idea of ​​rejecting the inheritance or legacy or not even claiming the compulsory portion, but at the same time agreeing with the heir that compensation for the waiver of the inheritance, legacy or compulsory portion is made will be paid.

Such a construction is possible, but does not release the waiver from his obligation to also pay inheritance tax for the compensation received as compensation.

Inheritance tax is also subject to what is paid as compensation for a waiver of a compulsory portion that has arisen or for the rejection of an inheritance, an inheritance claim or a legacy, Section 3 (2) No. 4 ErbStG.

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