Source: https://www.german-probate-lawyer.com/en/detail/article/us-trusts-in-german-american-estate-planning-2140.html
Timestamp: 2019-04-23 08:20:34+00:00

Document:
Trusts are virtually unknown in German Civil law and German land law does not allow for the transfer of assets located in Germany to a trust. However, such a transfer does not necessarily have to be without effect. For example, a testamentary trust may be interpreted as a German legal instrument which has similar effects. For example, it may be interpreted as a durable execution of the estate (Dauertestamentsvollstreckung), subsequent heirship (Vor- und Nacherbschaft), life tenancy (Nießbrauch) or a combination thereof.
German inheritance and gift tax law is codified in the German Inheritance and Gift tax Act (Erbschafts- und Schenkungssteuergesetz, hereinafter “ErbStG”). Additionally, other German tax laws, such as the General Revenue Code (Abgabenordnung, hereinafter AO) and the Foreign Tax Act (Außensteuergesetz, hereinafter AStG) contain relevant provisions.
In contrast to U.S. federal estate tax law, German inheritance taxes do not attach to the estate itself, but instead the acquisition of each beneficiary is taxed. Tax rate and tax free exemptions depend on the familial relationship between the deceased and the beneficiary. Tax free exemptions are granted per capita.
Estate Planning Consideration: If more than one family member lives in Germany, consider making distributions to each of them individually as the tax free amount is granted per capita.
There is no generation skipping tax in Germany.
Estate Planning Consideration: If there is more than one generation living in Germany, consider skipping one generation.
For more information on the German inheritance tax please see our article “The German Inheritance Tax”.
In case of a lifetime gift: either the donor or the donee is a German taxpayer in the meaning of § 2 ErbStG.
Under § 2 ErbSt, an individual is a German taxpayer (Inländer) if he or she has either a residence (§ 8 AO) or a habitual abode (§ 9 AO) in Germany or if that person is a German citizen, had a residence and/or habitual abode in Germany 5 years prior to the acquisition. A trust is a German taxpayer, if the trust`s place of management is Germany.
Please Note: If the decedent`s domicile at the time of death was in Germany, the U.S. or in both countries, the Germany-U.S. Estate and Gift Tax Treaty is applicable and the “fiscal domicile” of the decedent, donor or beneficiary is determined under Art. 4 of the Germany-U.S. Estate and Gift Tax Treaty.
For more information on the German inheritance tax please see our article “The German Inheritance Tax, Secion Taxable Transfers in Germany”.
Pursuant to traditional German Civil Law analysis, the German Inheritance and Gift Tax Act did not recognize trusts as legal entities until 1999. Following the introduction of regulations drafted to target tax avoidance in 1999, the German government enacted special provisions treating trusts as legal entities for inheritance and gift tax purposes.
Should the Grantor lose the requisite control of the trust assets (e.g. following the creation of the trust through death) and the (successor) Trustee holds the trust assets in favor of a beneficiary without being obliged to distribute the trust assets to the beneficiaries without delay (like an executor or administrator), German gift or inheritance tax is triggered (see decision of the German Federal Fiscal Court (Bundesfinanzhof) dated 27th September 2012, file number II R 45/10).
All trusts that are not deemed to be legal entities under German tax law are referred to as “transparent trusts” hereinafter. If not explicitly stated otherwise, the following only applies to non-transparent trusts.
Pursuant to § 7 Section 1 Lit. 8, Sentence 2 ErbStG, transfers of assets to a trust that is deemed a legal entity for tax purposes, trigger German gift tax. There is a nexus to Germany, if either the Grantor or the Trustee is domiciled in Germany at the time of the transfer. If only the beneficiary is domiciled in Germany, no German gift tax is triggered by the mere fact of transferring the assets to the trust.
Example: Grantor A, U.S. citizen, without a fiscal domicile in Germany, transfers € 500,000 into an irrevocable living trust and does not retain any rights with respect to the trust assets. The Trustee is fiscally domiciled in the U.S. Despite the fact that the beneficiary resides in Germany, the transfer is not taxable in Germany.
If the transfer is taxable in Germany, the asset transfer is subject to least favorable tax class III, which provides for a minimal € 20.000 tax-free allowance and tax rates from 30% to 50%.
If a non-tax-transparent trust is created upon the death of the grantor (e.g. because a revocable trust becomes irrevocable and the successor trustee shall hold and administer the trust assets for the lifetime of a beneficiary) and the trust has a nexus to Germany, German inheritance tax is triggered. See § 3 Section 2 lit 2 ErbStG. There is a nexus to Germany, if either the Grantor or the Trustee is domiciled in Germany at the time of the creation of the trust. If only the beneficiary is domiciled in Germany, no German gift tax is triggered by the mere fact of transferring the assets to the non-tax-transparent trust.
Estate Planning Consideration: This may be used to avoid the German inheritance tax if the beneficiary does not permanently lives in Germany and considers to return to the U.S.
However, the Trust income may be attributed to a German resident beneficiary if the trust is a “family trust” in the meaning of § 15 AStG. A trust is a “family trust” in the meaning of German tax law, if the Grantor, his close relatives or their offspring are beneficiaries of at least 50 % of the trust assets. The taxation imposed on the beneficiary is irrespective of whether the income is reinvested or distributed to the beneficiary.
If the successor trustee shall distribute the trust assets outright and free of trust to the beneficiaries, the trust is tax transparent and the interest of beneficiary is subject to German inheritance tax.
Example: Grantor A, U.S. citizen, without a fiscal domicile in Germany, transfers € 500,000 into a revocable living trust and retains the right to revoke and amend the trust. Upon his death, the trust become irrevocable and German inheritance tax is triggered (for calculation of the tax see prior example).
Distributions during the existence of the trust are subject to German gift tax under § 7 Section 1 Lit. 9 Sentence 2 ErbStG (see decision of the German Federal Fiscal Court (Bundesfinanzhof) dated 27th September 2012, file number II R 45/10). The tax class is determined by the familial relationship between the Grantor and the beneficiary (see § 15 Section 2 Sentence 2 ErbStG).
In addition, distributed trust income is subject to German income tax under § 19 of the German Income Tax Act (EStG) unless already attributed to the German beneficiary. In our opinion distributed trust principle is not subject to German income tax. Unfortunately, the German tax court has not rendered a decision on this matter and, there remains a risk that a tax authority opines otherwise.
The final distribution of trust assets to beneficiaries is subject to German gift tax under § 7 Section 1 lit. 9 Sentence 2 of the German Inheritance and Gift Tax Act. The applicable tax class is determined by the familial relationship between the Grantor and the beneficiary (see § 15 Section 2 Sentence 2 ErbStG). Any distribution within the 10 years preceding the final distribution is added to the taxable acquisition for the calculation of the tax (see § 14 ErbStG).
the election is made within five years after the transfer to the trust.
If the Grantor has a fiscal domicile in Germany it is generally not advisable to create a trust that is deemed to be a legal entity under German tax law.
If the Grantor`s fiscal domicile is in the U.S. and the beneficiary`s fiscal domicile is Germany, the creation of a trust that is not transparent under German law may be advantageous if the beneficiary may later move back to the U.S.
Do not transfer German assets to a trust. Trusts are not recognized by German civil law and any transfer to a trust may complicate estate administration.

References: § 2
 § 2
 Art. 4
 § 7
 § 3
 § 15
 § 7
 § 15
 § 19
 § 7
 § 15
 § 14