Key Points at a Glance
- A lifetime gift of real estate is an effective way to reduce inheritance tax.
- It is common practice to include rights of use (e.g., rights of residence or usufruct) and rights of retransfer (e.g., in the event of the donee’s insolvency) in a gift agreement.
- The transfer of real estate by way of a gift requires the involvement of a notary.
Is it advisable to gift real estate?
Whether it is advisable to gift real estate cannot be answered in general terms. Instead, the specific pros and cons must be weighed on a case-by-case basis. Gifting real estate has the following advantages:
- Flexible: Structuring one's inheritance is a very time-consuming process. Gifting real estate during one's lifetime is much simpler and offers significantly more flexibility and room for design (e.g., through rights of reversal and reservations of use).
- Inheritance tax: The recipient of a gift must pay gift and inheritance tax on the value of the gift. However, the inheritance and gift tax includes certain exemptions. For example, parents can transfer assets worth EUR 400,000 to their children without incurring gift tax.
- Wealth distribution: Gifting real estate can also be beneficial for parents with children without independent income (e.g., if the children are studying).
How is the gift of real estate completed?
The gift of real estate is completed in two steps. First, a notarized gift agreement is concluded, which is then executed by the notary.
- Gift Agreement: The gift of real estate begins with the conclusion of a gift agreement. Due to the high value, the details of the gift are regulated in the gift agreement. This often includes, for example, the possibility of reversing the gift under certain circumstances. The gift agreement must be notarized to be valid, according to § 518 BGB.
- Transfer of Ownership: After the gift agreement is concluded, the ownership of the property is transferred. The transfer of ownership also requires the involvement of a notary. Therefore, the declarations for the transfer of ownership are usually made at the same appointment where the gift agreement is concluded.
- Processing: The transfer of ownership of real estate requires cooperation with the land registry office. This is generally handled by the notary, who takes over the remaining tasks after the transfer declarations are made, until the ownership of the property is effectively transferred.
Is it permissible to set a consideration?
It is permissible for a gift to be subject to a condition or consideration. However, if the consideration corresponds to the value of the property, it is no longer considered a gift but a purchase or exchange contract.
The following conditions or considerations are commonly used in practice:
- Use: When parents gift real estate to their children, it is common for the parents to reserve a right of residence. This allows the donors to continue living in the property, although the ownership has already transferred to the recipient. Alternatively, the donor may reserve a usufruct right, which allows them to rent out the property and receive rental income, even though the ownership has already transferred.
- Monetary Payment: Monetary payments can be agreed upon as a lump sum or as pension payments. It is important that, as mentioned, the value of the payment is less than the value of the gift.
- Services: Other actions can also be agreed upon as consideration. For example, it may be agreed that the recipient must care for the donor in old age.
How can the donor protect themselves?
The donor has the option to protect themselves through rights of reversal for the future. The gift presents a risk for the donor. If the donor were to have a dispute with the recipient in the future, it may be of interest to the donor to be able to reverse the gift.
The right of reversal exists in the following cases:
- Agreement: Rights of reversal can be agreed upon contractually. It is advisable to secure the corresponding rights of reversal through a notation. Otherwise, there is a risk that, while a right of reversal exists, it may not be enforceable. If a right of reversal is to be agreed upon, it is important that it is directly incorporated into the contract. Additionally, the right of reversal should be linked to specific conditions.
- Law: The law also governs certain cases where a gift can be reversed. In the case of a severe dispute (so-called gross ingratitude) or if the donor becomes impoverished, there may be the possibility to reverse a gift.
What options exist to reduce the value of a gift?
The inheritance and gift tax law provides extensive exemptions for gifts. For example, parents can gift assets worth up to EUR 400,000 to their children every ten years without incurring gift tax. To minimize the tax burden, it is therefore advantageous to reduce the value of the real estate. Residential and usufruct rights are particularly suitable for this purpose. For instance, if parents gift real estate to their children but reserve a usufruct right, it significantly reduces the value of the gift. The amount of the reduction depends on the value of the property and the duration of the usufruct (typically the parents' life expectancy).
What are the costs of gifting real estate?
Costs and fees for the notary and the land registry office are incurred for the gift and transfer of real estate.
- Certification: A 2.0 fee (KV No. 21100) is charged for the certification of the gift agreement. For gifting real estate valued at EUR 500,000, the fee is EUR 1,870.00 plus VAT.
- Land registry fee: A 1.0 fee is charged for the registration in the land registry. For a property valued at EUR 500,000, the fee is EUR 935.
What should be considered when gifting real estate?
The gift of real estate usually leads to a significant depletion of the donor's assets. Therefore, this step should be carefully considered and well-planned. The following aspects must be taken into account:
- Notary: Both the transfer of the property and the gift agreement require the involvement of a notary.
- Claim for Supplementary Share of Inheritance: If the gift leads to a significant reduction in the inheritance, heirs entitled to a compulsory share may assert a supplementary share claim. The goal of this claim is to prevent the inheritance from being entirely depleted by gifts.
- Care Costs: State support for care costs is partially dependent on the prior depletion of one's own assets. There may be the possibility to challenge previously made gifts, so that the donor must cover the care costs themselves. Such a challenge is only excluded ten years after the gift. Therefore, it is advisable to transfer the inheritance early.
- Alternative: Instead of gifting real estate, it is also possible to establish a company, such as a limited partnership or a GmbH & Co. KG, contribute the property, and then gift shares in the company. This approach has the advantage that the donor can effectively gift the value of the property without losing control over it. Such structures are particularly useful when dealing with a larger real estate portfolio.
