Source: https://www.german-probate-lawyer.com/detail/article/us-trusts-in-german-american-estate-planning-2140.html
Timestamp: 2019-06-17 13:28:04
Document Index: 478348324

Matched Legal Cases: ['§ 2', 'Art. 4', '§ 7', '§ 16', '§ 19', '§ 3', '§ 15', '§ 7', '§ 15', '§ 19', '§ 7', '§ 15', '§ 14', 'Art. 12']

Basic Principles of the German Inheritance and Gift Tax Act
Nature and Calculation of the German Inheritance Tax
In contrast to U.S. federal estate tax law, German inheritance tax (Erbschaftsteuer) does 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”.
Germany taxes all worldwide transfers, if either the beneficiary or the deceased is a German taxpayer (Inländer) at the time of his death (§ 2 ErbStG). For more information on the German inheritance tax please see our article “The German Inheritance Tax, Secion Taxable Transfers in Germany”.
Please note: If the decedent`s domicile at the time of death was in Germany, the U.S. or in both countries, the “fiscal domicile” of the decedent, donor or beneficiary is determined under Art. 4 of the Germany-U.S. Estate and Gift Tax Treaty.
Special Provisions for the Taxation of Trusts
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.
Transparent Trusts and Non-Transparent Trusts
The special rules available to trusts are only applicable if control is released by the Grantor. If the trustee is, from a German perspective, a mere agent of the Grantor (or the beneficiary) the rules described above will not be applicable. Specifically, if the Grantor has the right to the following, the trust will not be deemed a legal entity and any transfer to the trust will not be taxed:
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), the trust is a deemed legal entity for inheritance and gift tax purposes.
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 (Schenkungsteuer). 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%.
Example: Grantor A transfers € 500,000 to an AB Trust, which is managed by the trustee who is fiscally domiciled in Germany. Upon transfer of the assets to the trust, a tax base of € 480,000 would be found resulting in a tax assessment of € 144,000. Calculations: Taxes payable at transfer: Transfer to the Trust = Taxable acquisition of the trust: €500,000 Tax allowance under § 16 ErbStG: - €20,000 Tax Base: €480,000 Application of tax rate according to § 19 ErbStG (x 0.3) = Tax Due: € 144,000
Taxation of the Transfer of Assets to a Trust upon Death of Settlor of Revocable Trust
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 of the Foreign Transaction Tax Act (AStG) contain relevant provisions. 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(1) Nr. 9, S 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 (2) S. 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 (1) Nr. 9 S. 2 ErbStG. The applicable tax class is determined by the familial relationship between the Grantor and the beneficiary. See § 15(2) Nr. 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
Example: In 2001, Grantor A transfers €500,000 to an AB trust (tax consequences, see example above). The trustee is T, a professional trust manager residing in Germany. Under the terms of the trust instrument T is free to administer the trust assets. The income of the trust (€100,000) is distributed to the A`s son B during the lifetime of A. Upon the death of A, the trust assets are distributed to A´s son, B (beneficiary). Final distribution (€500,000) + Distributions to B in the last 10 years (€100,000) = Total taxable acquisition: € 600,000. Tax base after deduction of tax allowance (€400,000) = € 200,000; Tax due (see tax table): € 22,000
Election Right under the German-American Estate and Gift Tax Treaty
Under Art. 12 (3) of the Germany-U.S. Estate and Gift Tax Treaty the beneficiary of a trust may elect to be subject to all German taxation (including income taxation) as if a taxable transfer had occurred to him at the time of such transfer and not to the trust provided that
the transfer to the trust did not trigger German inheritance or gift tax and
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.
If the beneficiaries are minors or there is any other reason to retain rights in the estate, use German legal instruments that are similar to a trust in replacement of a trust
Jan-Hendrik Frank 07/11/2018