Succession Planning and Inheritance Tax

Succession planning in Germany: why it matters

Succession planning in Germany has to reconcile three sets of rules: the law of succession in the Civil Code (BGB), which determines who inherits and protects close relatives through compulsory portions; company law and the articles of association, which determine whether and how shares in a family business can pass to heirs; and inheritance and gift tax under the Inheritance and Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz, ErbStG), which can be substantial but offers generous relief for business assets if its conditions are met. For entrepreneurs and family businesses, the aim is to transfer ownership and control to the next generation, or to a buyer or foundation, without endangering the company or triggering avoidable tax.

Without planning, statutory succession applies. Assets pass to the spouse and children in fixed shares, often creating communities of heirs who must manage the estate jointly. In a family business, this can lead to deadlock, disputes and forced sales. The articles of association may contain succession clauses that conflict with the will. Inheritance tax may be due without liquidity to pay it. Good succession planning addresses these risks early, typically through a combination of lifetime gifts, a will or inheritance contract, harmonised shareholder agreements and, where appropriate, a foundation or holding structure.

This page explains wills and inheritance contracts, compulsory portions, the alignment of corporate documents, inheritance and gift tax including business-asset relief, cross-border estates under the EU Succession Regulation, and practical steps. It is written for entrepreneurs, family shareholders and their advisers. Foundations and family offices are covered on our page on foundations, trusts and family offices.

Wills and inheritance contracts

German law offers two main forms of disposition on death. A will (Testament) can be made by the testator alone, either by hand, written and signed entirely in his or her own handwriting (§ 2247 BGB), or as a public will recorded by a notary. Spouses can make a joint will. An inheritance contract (Erbvertrag) binds the testator contractually and can only be concluded before a notary with both parties present (§ 2276(1) BGB). Inheritance contracts are useful where the plan depends on commitments by several family members, for example combining a succession arrangement with waivers of compulsory portions.

The content of a will can include the appointment of heirs, legacies, conditions, the division of the estate, the appointment of an executor (Testamentsvollstrecker) and, in family businesses, instructions on how shares are to be allocated. Executorship can secure continuity for a period after death, for example until heirs reach a certain age, and can be combined with instructions on voting the shares. Handwritten wills are valid but frequently ambiguous; notarial wills avoid formal defects and can replace the certificate of inheritance in many cases, which speeds up the transfer of shares and real estate.

Compulsory portions

Descendants, the spouse and, if there are no descendants, the parents are entitled to a compulsory portion (Pflichtteil) if excluded from succession: a cash claim against the heirs equal to half the value of their statutory share (§ 2303(1) BGB). Gifts made in the ten years before death are taken into account on a sliding scale. In a family business, compulsory portion claims by children who do not inherit the company can create a serious liquidity problem. Typical solutions, which should be agreed while all family members are on good terms, include waivers of compulsory portions in a notarial agreement against compensation, valuation clauses, lifetime gifts started early, and life insurance to fund claims.

Marriage contracts and matrimonial property

The statutory matrimonial property regime in Germany is the community of accrued gains (Zugewinngemeinschaft): each spouse keeps his or her own assets, but on divorce the spouse with the lower increase in assets during the marriage can claim half of the difference. For an entrepreneur whose company has grown in value, this claim can threaten the business. Marriage contracts, which must be notarised, often exclude the company from the equalisation or modify the regime, and family shareholder agreements frequently require shareholders to conclude such contracts. On death, the accrued gains regime increases the surviving spouse's statutory share, and the equalisation amount is exempt from inheritance tax, which can be used in planning.

Aligning articles and shareholder agreements

A will cannot override the articles of association of a company. GmbH articles often contain succession clauses: they may allow shares to pass only to certain persons, such as descendants or other shareholders, provide for compulsory redemption or transfer of shares inherited by others, and set compensation, sometimes below market value. In partnerships such as a GmbH & Co. KG, the partnership agreement determines whether the partnership continues with heirs, with only one successor or with the remaining partners. If the will and the articles are not aligned, the heir designated in the will may not be able to become a shareholder, or may receive only a compensation claim.

Succession planning in Germany should therefore review the articles, shareholder agreements and family constitution together with the will. Voting rights, management rights, transfer restrictions, drag-along and tag-along rights, and rules on the distribution of profits all affect how the next generation will run or own the company. Many families separate ownership from management, for example through non-voting shares, a holding structure or an advisory board, so that family members who are not active in the business can benefit economically without disturbing management. See our page on corporate governance.

Inheritance and gift tax and business-asset relief

Inheritance and gift tax is levied on each acquisition by reason of death or gift. Rates depend on the tax class, determined by the relationship to the deceased or donor, and the value of the acquisition, ranging from 7% to 30% in tax class I (spouses, children, grandchildren) and up to 50% in tax class III (§ 19 ErbStG). Personal allowances reduce the taxable amount: EUR 500,000 for spouses and EUR 400,000 for each child in cases of unlimited tax liability (§ 16(1) ErbStG). Allowances are available again every ten years, because acquisitions from the same person within ten years are aggregated (§ 14 ErbStG), which makes staged lifetime gifts a central planning tool.

Business assets, including shares in corporations of more than 25%, can benefit from substantial relief. Under the standard regime, 85% of qualifying business assets is exempt if the acquisition does not exceed EUR 26 million and the business maintains its payroll at a total of at least 400% of the initial payroll over five years and is not sold or wound up during that period (§ 13a(1), (3) ErbStG). Under the optional regime, 100% is exempt, but the payroll requirement rises to 700% over seven years (§ 13a(10) ErbStG).

Administrative assets such as surplus cash, securities and let real estate are generally excluded, and relief is not available at all if administrative assets amount to at least 90% of the business assets. For acquisitions above EUR 26 million, the relief is reduced or a needs test applies under which tax is waived to the extent the acquirer cannot pay it from his or her other assets (§ 28a ErbStG).

These rules require careful structuring and monitoring. Family companies often adopt articles with restrictions on distributions, transfers and withdrawals that allow a valuation discount. Breaches of the retention conditions lead to the partial retroactive loss of relief, so restructurings, sales of business units and changes to the workforce in the years after a transfer should be checked against the conditions before they are implemented. Heirs and recipients of gifts must also report relevant events to the tax office within statutory deadlines. Our page on corporate and transaction tax explains the income tax side of reorganisations that often precede a succession.

Valuation and staged gifts

Business assets are valued for inheritance and gift tax at fair market value, determined from recent sales, a recognised valuation method or a simplified capitalised earnings method set out in the Valuation Act. The simplified method can produce values that differ significantly from a market valuation, so the choice of method matters.

Lifetime gifts allow the entrepreneur to use allowances every ten years, to transfer shares while values are lower and to remain in control: the donor can reserve a usufruct over the shares, keeping the dividends, and voting rights can be retained through pooling agreements, voting trusts or non-voting share classes. The retention periods for business-asset relief start to run with the gift, so early gifts also mean earlier certainty.

Gifts must be carefully documented and, where GmbH shares are involved, notarised. Revocation rights for specific events, such as the death of the recipient before the donor, divorce or insolvency of the recipient, protect the family's long-term plan and are generally accepted for tax purposes if properly drafted.

Cross-border estates and the EU Succession Regulation

Families with assets or members in several countries face additional questions. The EU Succession Regulation (Regulation (EU) No 650/2012) determines which country's law applies to the succession: generally the law of the state of the deceased's habitual residence at the time of death, unless the deceased chose the law of his or her nationality. A German entrepreneur who retires to Spain may therefore have his estate governed by Spanish law unless he chooses German law in his will. The Regulation also introduced the European Certificate of Succession, which proves the status of heirs and executors across member states. A choice of law in the will is therefore an important element of succession planning for internationally mobile entrepreneurs.

Inheritance tax is not harmonised. Germany taxes the worldwide estate if the deceased or the heir was resident in Germany, with extended liability for German nationals who moved abroad within the previous five years, and taxes German assets of non-residents. Germany has concluded only a small number of inheritance tax treaties, so double taxation is a real risk, mitigated by a credit for foreign inheritance tax in some cases. Foreign trusts and foundations raise further questions; see foundations, trusts and family offices.

Succession planning in practice

Effective succession planning in Germany starts with an inventory of assets, corporate documents and family circumstances, and with a clear view of the entrepreneur's objectives: who should own, who should manage, how should non-active family members be treated, and what happens if the next generation does not want to continue. The plan is then implemented step by step, often over several years, using lifetime gifts with reserved usufruct rights or voting rights, adjustments to the articles, a family constitution, and a will or inheritance contract that covers the remaining assets.

• Inventory all assets, corporate documents, marriage contracts and existing wills.
• Align articles, shareholder agreements and wills, including succession clauses.
• Use ten-year allowance cycles and business-asset relief through staged gifts.
• Address compulsory portion claims through waivers or liquidity planning.
• Review the plan after changes in family, residence, business or law.

Where no family member will continue the business, a sale to a strategic or financial buyer, a management buyout or a transfer to a foundation are alternatives. See our pages on mergers and acquisitions and private equity.

Communication within the family is as important as the legal documents. Succession planning in Germany works best when the next generation understands the plan, the reasons behind it and its own role, and when family members who will not be active in the business see that they are treated fairly. Family meetings, a family constitution and, in larger families, a family council provide the forum. Regular reviews ensure that the plan keeps pace with changes in the business, the family and the law, and that succession planning remains a living process rather than a one-off project.

How TRW & Co helps

We advise entrepreneurs, family shareholders and family businesses on succession planning in Germany, working with their tax advisers and the notary of their choice. We review and align articles, shareholder agreements and family constitutions with wills and inheritance contracts, design staged gift and holding structures, structure transactions to preserve business-asset relief, and prepare waivers of compulsory portions. For international families we coordinate the choice of applicable law under the EU Succession Regulation and the tax position in several countries. We also advise heirs and executors on the administration of estates that include company shares. To discuss your plans, please contact us.