Wealth succession

Wealth Succession - Wealth succession refers to the strategic planning and execution of the transfer of assets-particularly real estate-to the next generation, both during one’s lifetime and upon death.

What does estate succession involve for real estate?

Estate succession goes far beyond simple bequests. It is a comprehensive planning process that combines legal, tax, and family considerations. Early and well-thought-out planning is essential, particularly for real estate assets, as real estate cannot simply be divided and is subject to complex tax valuation.

Among the most important tools for estate succession are the will and the inheritance contract as testamentary dispositions that govern the transfer of assets upon death. Compared to a handwritten will, a notarized will offers the advantage that no certificate of inheritance is required-the notary files it with the Central Register of Wills of the Federal Chamber of Notaries, and the local court automatically forwards it upon the opening of the estate. This significantly speeds up the settlement process and is particularly relevant for real estate generating ongoing rental income.

Advance succession through lifetime gifts makes it possible to utilize tax exemptions multiple times and minimize the tax burden over decades. The personal tax-free allowance between parents and children amounts to 400,000 euros each under Sections 13 and 16 of the Inheritance Tax Act (ErbStG) and is renewed every ten years. Those who start early enough can therefore utilize the same allowance twice or even three times-a significant tax advantage for real estate valued at 600,000 euros or more.

Usufruct is one of the most commonly used planning tools: The previous owner transfers the property but reserves the right to continue using it or to collect the rental income. This simultaneously lowers the taxable transfer value because the capitalized usufruct value is deducted from the taxable gift value. The younger the donor at the time of transfer, the higher the usufruct value and the lower the gift tax burden.

For larger real estate portfolios, family companies in the form of a GbR or KG are a suitable option. They allow for a gradual transfer of shares, centralize management, and prevent the fragmentation of assets among the community of heirs. Through discounts on the value of the company shares (for lack of marketability and limited power of disposal), the tax-relevant value can be further reduced. In special cases, a family foundation may also be advisable, which permanently holds the assets together and benefits the family across generations-however, the so-called substitute inheritance tax is due every 30 years.

Tax Optimization and Timing

Tax optimization plays a central role in all these instruments. Through a skillful combination of tax-exempt allowances, usufruct reservations, and staggered transfers, the inheritance tax burden can be significantly reduced-in some cases even completely avoided. However, this requires that planning begins in a timely manner, as many tax structures only take full effect over a period of ten or more years.

When assessing the tax value of real estate, the tax office uses the so-called income approach or asset value approach pursuant to Sections 183 et seq. of the German Property Tax Act (BewG). This valuation often differs from the actual market value-it is frequently lower in tight markets, which is advantageous from a tax perspective. However, it is advisable to prepare an independent market value assessment pursuant to § 198 of the Property Valuation Act (BewG) to demonstrate a lower value in case of doubt.

Important: The ten-year holding period also applies to gifts when it comes to offsetting against the tax-free allowance. A property gifted subject to a right of usufruct is not considered a transfer for tax purposes until the usufruct actually ends-in some arrangements, this can complicate the effective use of tax allowances. An experienced tax advisor or attorney specializing in estate law can clarify these nuances.

Intergenerational Planning and a Holistic Approach

Successful estate planning takes into account not only tax considerations but also the personal wishes and life circumstances of all parties involved. So-called intergenerational planning brings parents and children together to address questions such as: Who wants to use the property themselves? Who should take over its management? How will siblings who do not receive property be compensated?

Conflicts within communities of heirs often arise when these issues were not discussed during the parents’ lifetime. Clear provisions in a will, gift agreement, or partnership agreement create transparency and prevent costly disputes-including partition auctions. In such auctions, real estate is typically sold at a 20 to 30 percent discount to market value-a loss that can be completely avoided through early planning.

The protection of the donor themselves must not be overlooked either: right of residence, usufruct, or clauses for reclaiming the property protect the previous owner from unforeseen developments-such as the recipient’s divorce, insolvency, or the premature death of a child. Clauses for reclaiming the property should always be agreed upon by a notary and secured in the land register.

Practical Tip for the Nuremberg and Franconia Region

In the Nuremberg metropolitan region, a significant portion of private wealth consists of real estate-whether a single-family home in Erlenstegen, an apartment building in the Südstadt, or inherited property in the Knoblauchsland. The rise in real estate values over the past decade makes professional estate planning more important than ever: Anyone who purchased an apartment building for 400,000 euros in 2012, which is now worth 900,000 euros, can expect a significant inheritance tax burden without proper planning.

We recommend that owners use a current market valuation as a starting point and plan their estate succession in an interdisciplinary manner with a notary, tax advisor, and real estate experts. The relevant tax office in Nuremberg-South or Nuremberg-North assesses real estate ex officio in the event of inheritance or a gift-a current market value appraisal pursuant to Section 198 of the German Property Transfer Tax Act (BewG) can adjust this value downward and thus save on gift or inheritance tax.

We support owner families in the region as a competent partner for the real estate aspects of estate planning: from market value assessments to referring suitable notaries and tax advisors, all the way through to assisting with the sale of real estate no longer needed from an estate.

Frequently Asked Questions

When should you start planning for estate succession?

We recommend starting planning no later than age 50-ideally even earlier. Since gift tax exemptions can be used again every ten years, starting early allows for multiple tax-free transfers. Someone who starts at age 50 and lives until age 70 can thus fully utilize the same exemption amount twice. In addition, timely planning protects the family from unexpected inheritances, in which, without clear dispositions, statutory succession applies and a community of heirs is formed.

What role does usufruct play in estate planning?

Usufruct is one of the most important tools in real estate succession planning. It allows a property to be transferred to the next generation during the owner’s lifetime, while the previous owner retains the right to use the property or collect rental income. From a tax perspective, usufruct is particularly attractive because its capital value reduces the taxable transfer value, thereby lowering gift tax. The capital value of the usufruct is calculated by multiplying the annual value (net rent or notional rental benefit) by an age-dependent multiplier pursuant to Section 14 of the German Property Valuation Act (BewG) in conjunction with Annex 9a-the younger the usufructuary, the higher the capital value, and the greater the tax savings.

What happens without estate planning?

Without a testamentary provision, statutory succession applies. In the case of real estate, this often results in the formation of a community of heirs, in which all co-heirs can only dispose of the property jointly. Decisions regarding sale, rental, or renovation require unanimity or at least a qualified majority. If the heirs cannot agree, there is a risk of a partition sale-often resulting in significant financial losses compared to a private sale. In addition, the full inheritance tax is due, without the possibility of tax-optimizing arrangements.

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