GERMANY Law and Practice Contributed by: Tanja Schienke-Ohletz, Flick Gocke Schaumburg
1. Contemporary Cultural Considerations in Succession Planning 1.1 Social and Cultural Attitudes In Germany, freedom of testamentary disposition is accompanied by a tightly knit inheritance law that provides for specific legal forms for testamentary dis- positions. Furthermore, there are some regulations, such as the right to a compulsory portion, which are strongly influenced by a conservative valuation. Cer- tain family members are therefore entitled to a share of the deceased’s estate. It should also be noted that inheritance law is as old as the Civil Code ( Bürgerlich- es Gesetzbuch – BGB) – ie, more than 100 years old. Inheritance tax law is based on the principle that gen- erous enrichment achieved without personal effort is taxed accordingly. At the same time, inheritance tax law offers a number of benefits for transfers, particu- larly for companies, so that they are not burdened with inheritance tax but can be continued for the benefit of the employees and not sold. Different tax classes in inheritance tax law reflect the idea that high allow- ances and lower tax rates are available for close family members, while only a small allowance and high tax rates apply to third parties. Strong Family Protection and Limited Freedom of Testamentary Disposition German inheritance law is codified primarily in the BGB and provides a high degree of protection for the family. Although there is freedom of testamentary disposition in Germany, this freedom is significantly restricted by the right to a compulsory portion. Chil- dren, spouses and, in some cases, parents are entitled to a cash claim amounting to half of their legal inherit- ance, regardless of the contents of the will. The right to a compulsory portion cannot be easily excluded. Succession planning therefore often involves minimis- ing the compulsory portion, structuring transfers dur- ing the lifetime of the deceased or securing assets. Continuity of Family Businesses Germany’s economic structure is strongly influenced by SMEs – ie, family-run small and medium-sized enterprises, often spanning several generations.
Inheritance and gift tax law provides for considerable relief (exemption rules) for qualified business assets if the level of employment and the holding period are maintained. This reflects a political consensus that the continuity of companies and employees justifies pref- erential treatment. The Federal Constitutional Court has ruled in several decisions that the exemption of business assets is permissible under certain condi- tions if this secures jobs and ensures the continuity of the company. Transfers Between Living Persons and Anticipated Succession Anticipated succession (through gifts during one’s lifetime) also plays an important role. In this case, a transfer subject to usufruct may be particularly useful. The donors retain the income from an asset, but in the event of inheritance, there is no longer any taxation. Anticipated succession fulfils the following functions: • reduces inheritance tax liability through repeated use of allowances; • provides planning security. • mitigates risks associated with compulsory por- tions – gifts can reduce the compulsory portion; and • ensures generational change during the founder’s lifetime (“better to give with a warm hand”). Limited History of Long-Term Trusts Unlike common law countries, there are no trusts in Germany. The legal form does not exist, and Germany has not ratified the Hague Convention. Instead, there are foundations – in particular family foundations and charitable foundations. These are subject to founda- tion supervision, and many testators do not want such official supervision of their assets, especially since transferring them to a foundation also means that they must permanently part with their assets. Instead of a trust, the following options are available: • establishment of a private foundation; • use of holding companies to centralise control; • introduction of family governance instruments (eg, family constitutions); • permanent execution of wills for minors; and
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