In order to successfully manage an inheritance with a foreign connection, it is important to find out about the applicable legal provisions and tax regulations at an early stage in order to avoid possible conflicts and to safeguard the rights of the heirs. Careful preparation and cooperation with experts such as notaries, lawyers and tax advisors who have experience with cross-border inheritances is essential here.
- Introduction: Inheritance with a foreign connection – what you need to know
- Different legal systems: Inheritance law at home and abroad
- German inheritance law
- Foreign law of succession
- Wills and inheritance contracts: Provisions for the case of succession with a foreign connection
- International wills
- Inheritance contract and renunciation of inheritance
- Choice of the applicable legal system
- Tax aspects in cases of succession with a foreign connection
- Inheritance tax in Germany
- Foreign inheritance taxes
- Tax structuring options
- Real estate abroad: sale and transfer
- Applicable law
- Land Register Adjustment
- Conclusion: Successful handling of an inheritance case with a foreign connection
Introduction: Inheritance with a foreign connection – What you need to know
Globalisation has led to more and more people living, working and owning assets across borders. In such cases, a foreign succession may arise, which poses a number of legal, tax and practical challenges. This section of the text gives you a comprehensive overview of the legal aspects and some examples to help you understand successions with a foreign connection.
An inheritance with a foreign connection exists if at least one of the following 3 circumstances is given:
- The deceased has his habitual residence or domicile abroad.
- The testator owns assets (e.g. real estate, bank accounts) abroad.
- The heirs live abroad or have a different nationality than the deceased.
Legal challenges in inheritance cases with a foreign connection can be:
(a) Different legal systems: The inheritance may be affected by several legal systems, e.g. German inheritance law and foreign inheritance law, which may lead to a complex legal situation.
b) International jurisdictions: It may be unclear which courts and authorities are competent to settle the inheritance.
c) Recognition and enforcement of deeds and decisions: The recognition of wills, certificates of inheritance and court decisions can be problematic in other countries.
Examples of inheritance cases with a foreign connection:
A German national living in Spain and owning real estate there dies. His heirs live in Germany. In this case, both German and Spanish inheritance law are relevant.
A British national living in Germany owns a bank account in Switzerland and dies. Her children, who live in the UK, are the heirs. German, British and Swiss law are involved here.
An Austrian national living in Germany owns a home in Austria and has named a person living in the US as his heir in his will. In this case, German, Austrian and US law are relevant.
Different legal systems: Inheritance law at home and abroad
The legal regulation of inheritance cases with a foreign connection can be complex, as several legal systems are often involved. This section explains the main features of German inheritance law, foreign inheritance law and the application of the law in cross-border inheritance cases.
German inheritance law
German inheritance law is regulated in the German Civil Code (BGB) and is based on the principle of universal succession. This means that the heir or heirs take over the rights and obligations of the testator immediately upon his or her death. The most important regulations in German inheritance law include:
Legal succession: If the deceased did not leave a will or a contract of inheritance, the legal succession according to §§ 1922 ff. BGB.
Here the heirs are divided into the following groups according to degree of relationship and order:
- Spouses,
- Children,
- Grandchildren,
- Parents,
- Brothers and sisters,
- Nephews and nieces,
- Grandparents and their descendants.
- Testamentary succession: The testator can also designate his or her heirs by means of a will. This can take the form of a personal will (§ 2247 BGB) or a public will (§ 2231 BGB).
- Right to a compulsory portion: Close relatives, such as children and spouses, are entitled to a compulsory portion if they have been passed over in the will or inheritance contract. The compulsory portion amounts to half of the statutory share of the inheritance (§§ 2303 ff. BGB).
Foreign law of succession
Foreign inheritance law varies depending on the country and the legal system. In many countries, however, there are similar rules to German law, e.g. statutory and testamentary succession, compulsory portion law and inheritance contracts. Some important differences may exist, however, e.g.:
- Different rules for determining heirs: In some countries, the legal succession may differ from the German rules. This can be particularly relevant in the case of patchwork families or illegitimate children.
- Other formal requirements for wills: The requirements for the form and content of a will may vary in other countries. In some countries, for example, notarial wills are the rule.
- Different regulations on the right to a compulsory portion: The right to a compulsory portion may differ in other countries, e.g. with regard to the amount of the compulsory portion or the persons entitled to it.
Wills and inheritance contracts: Provisions for an inheritance with a foreign connection
In order to settle an inheritance with a foreign connection in the best possible way and to avoid legal uncertainties or conflicts between the heirs, it is advisable to make provisions by means of a will or a contract of inheritance. This section explains the various possibilities of testamentary disposition and their application in an international context.
International will
An international will is a special form of testamentary disposition created under the Hague Convention on the Law Applicable to Contracts of Succession (Hague Testamentary Convention). It offers the possibility of making a will that is recognised in all Contracting States to the Convention, irrespective of national formal requirements. The international will must meet the following requirements (Art. 5 of the Hague Testamentary Convention):
- Written form: the will must be handwritten or typed by the testator.
- Signature: The testator must sign the will in his or her own hand.
- Witnesses: Two witnesses must be present at the signing and must also sign the will.
- Notarial certification: A notary must certify the signature of the testator and the witnesses and draw up a notarial certificate.
Inheritance contract and waiver of inheritance
In addition to the will, German inheritance law also offers the possibility of concluding a contract of inheritance (§§ 1941 ff. BGB). In the contract of inheritance, the testator and heirs can make binding arrangements about the succession and the estate. An inheritance contract must be notarised (§ 2232 BGB). In the international context, it should be noted that not all legal systems recognise the possibility of an inheritance contract and its recognition and enforcement abroad may therefore be limited.
The renunciation of inheritance is another possibility of provision under inheritance law (§§ 2346 ff. BGB). In this case, a person who is appointed to the legal succession waives his or her right to inherit vis-à-vis the testator or another legal heir. The waiver of inheritance also requires notarial certification (§ 2348 BGB).
Choice of applicable law
According to the EU Inheritance Regulation, testators may choose one legal system for the entire settlement of their inheritance, provided they are nationals of that country (Art. 22 EU Inheritance Regulation). This choice of law must be made expressly in a testamentary disposition (e.g. will or contract of inheritance) or must clearly result from the provisions of the disposition.
Tax aspects in cases of succession with a foreign connection
In addition to the legal aspects, the tax consequences are also of great importance in cases of inheritance with a foreign connection. Both German inheritance tax law and foreign tax law must be taken into account. This section explains the most important tax aspects in cross-border inheritance cases.
Inheritance tax in Germany
Inheritance tax in Germany is regulated by the Inheritance Tax and Gift Tax Act (ErbStG). In the case of an inheritance with a foreign connection, inheritance tax is generally levied according to the following criteria:
I. Unlimited tax liability: Both the testator and the heir have their domicile or habitual residence in Germany (section 2, paragraph 1, no. 1 ErbStG). In this case, the entire worldwide estate is subject to German inheritance tax.
II. Limited tax liability: If either the testator or the heir is domiciled or habitually resident abroad, only the assets located in Germany are subject to German inheritance tax (§ 121 BewG, § 2, para. 1, no. 3 ErbStG).
The amount of inheritance tax depends on the tax bracket and the value of the estate. Exemptions, which vary according to the degree of relationship, and tax rates between 7% and 50% (§§ 15-19 ErbStG) must be taken into account.
Foreign inheritance taxes
Depending on the country, inheritance tax regulations can vary considerably. Some countries do not levy inheritance tax, while others have inheritance tax with different allowances, tax rates and tax bases. In some countries the tax is levied on the heir, in others on the estate. It is important to inform yourself about the regulations in the respective country in order to avoid possible double taxation and to take advantage of tax structuring options.
Tax structuring options in the case of an inheritance with a foreign connection
In order to avoid double taxation in cross-border inheritance cases, Germany has concluded double taxation agreements (DTAs) with some countries in the area of inheritance tax. These agreements regulate which country has the right of taxation and how the taxes paid abroad are credited.
In addition to DTAs, there are other tax structuring options to optimise the tax burden in cross-border inheritance cases:
- Use of allowances: Both in German and foreign inheritance tax law, allowances can be used. The tax burden can be reduced by skilful planning and distribution of the assets among several heirs.
- Gifts during lifetime: Another possibility for tax optimisation is the transfer of assets through gifts during one’s lifetime. Here, too, tax-free allowances can be exhausted, and in some countries gifts are more tax-efficient than inheritances.
- Drafting a will: Careful drafting of a will can help to minimise the tax burden for the heirs. For example, the tax burden can be reduced by appointing a legatee or by setting up a foundation.
- Choice of applicable law: As already mentioned in section 4.3, the EU Succession Regulation allows testators to choose a legal system for the settlement of their inheritance. The choice of succession law may also have tax implications, in particular if the chosen law provides for more favourable tax regimes.
Tax advice and legal assistance
In the case of inheritances with a foreign connection, it is important to find out about the tax consequences and structuring options at an early stage. Professional tax advice and legal assistance can help to optimise the tax burden and avoid possible tax risks. Expert advice is indispensable, especially in the case of complex circumstances and several legal systems involved.
Real estate and property in the case of an inheritance with a foreign connection
In the case of an inheritance with a foreign connection, real estate and properties in Germany and abroad may also be affected. The legal and tax treatment of cross-border real estate and land is complex and requires careful planning. This section explains the most important aspects of the transfer of real estate and land under international succession law.
Applicable law
As a general rule, real estate and land are governed by the law of the country in which they are located (lex rei sitae). This means that in the event of succession, the respective foreign law is applicable to real estate and land abroad. However, there is an exception in the EU Inheritance Regulation: testators may make a choice of law so that the law chosen applies to the entire inheritance, including real estate (Art. 22 EU Inheritance Regulation).
Land register correction in the case of an inheritance with a foreign connection
After the death of the testator, the land register must be corrected in order to register the new owners of the real estate or property. In Germany, this is done by filing an application with the competent land registry office, which is usually done by a notary. In the case of foreign real estate and land, the respective national regulations apply, which may vary from country to country.
Conclusion: Successful handling of an inheritance case with a foreign connection
Careful international estate planning is crucial to overcome potential legal and tax challenges in foreign successions. By planning well in advance and working with experts, testators can ensure that their wishes regarding the succession of their assets are met and potential disputes between heirs are minimised. This section discusses the most important aspects of international estate planning and the role of experts.