DIFFERENCES GERMAN VERSUS AMERICAN PROBATE AND ESTATE LAW INCL. TAX LAWby Dr. Peter K.-D. Barandt, Attorney at Law (New York), Attorney at Law (Rechtsanwalt) (Frankfurt), Bar-Certified Specialist in Tax Law (Frankfurt), M.B.A. (U. of Cologne), LL.M. (SMU, Dallas, Texas)
German Estate Law, German Inheritance Law and German Succession Law is all part of the continental-European Civil Law system and, therefore, makes a fundamental distinction between the Heirs (“Erben”), i.e. the successors to the Decedent (“Erblasser”), on one side and any other beneficiary to the Estate (“Nachlass”), including, but not limited to, Legatees (“Vermächtnisnehmer”), on the other side.
Whilst a German Heir (“Erbe”) under German Estate Law and German Succession Law directly steps into the shoes of a German Decedent at the moment of the German Decedent’s death without any interposition of a Fiduciary, Personal Representative, Executor of Estate, Administrator of Estate or the like, any other Beneficiary of a German Decedent’s Estate will have a claim and cause of action against the German Heir or against the German Joint Tenancy in Common of several Heirs (“Gesamthandsgemeinschaft”, “Erbengemeinschaft”) consisting of several Heirs only and will not have such a claim against the Estate itself due to the Estate’s non-existence under German Law.
German Freedom of Testatorship (“Testierfreiheit”) will be limited by German Forced Heirship Rules (“Pflichtteilsrecht”) in Germany to a Decedent’s surviving spouse and to his or her surviving children, i.e. to his or her descendants of first degree, but not to their offspring/issue of any further degree, i.e. not to a Decedent’s grand children nor to his or her great grand children nor to any other of his or her descendants of a more remote degree.
Neither per stirpes rules nor representation rules are applying to the German Forced Heirship Rule (“Pflichtteilsrecht”), instead, solely a surviving spouse and surviving children will qualify for taking under those rules.
A German Last Will and a German Testamentary Will (“Testament”) will not have to be witnessed or approved by two or three witnesses nor by any witness at all.
Instead, German Wills (“Testamente”) may either be established by means of being sworn before a German Notary Public (“Notar”) in the form of a German Notarial Will (“Notarielles Testament”) or they may be established in the form of a German Holographic Will (“Eigenhändiges Testament”).
The U.S. concept and legal notion of the contestability of a Testamentary Will for alleged exercise of undue influence on a Testator or a Testatrix is unknown to German Probate and Estate Law.
In particular, there is nothing like the American “Putnam scrutiny principle” preventing the making of testamentary bequests to persons standing in a confidential relationship with the Testator or the Testatrix, such as testamentary bequests made to the attorney drafting the will, the drafting attorney’s law partner, the drafting attorney’s spouse, physicians, nurses, clergymen, administrators of nursing homes or similar holders of personal confidence in German Probate and Estate Law.
All German substantive Estate Law, Inheritance Law and Succession Law in Germany and all German procedural Probate Law in Germany is Federal Law only and will be applied on a uniform and nationwide basis all over Germany.
There are no deviations of German Estate Law and German Probate Law on a State (“Bundesland”) by State (“Bundesland”) basis.
Unlike in the U.S., a German Estate (“Nachlass”) is not viewed by German Estate and Probate Law as a separate legal entity (“Juristische Person”).
Consequently, the office of a Personal Representative of Estate, of an Executor of Estate or of an Administrator of Estate in the sense of U.S. Estate and Probate Law is virtually unknown to German Law, even though a German Executor may be named by a German Decedent in his or her Will (“Testament”), which in practice, however, is rarely done, because, as already outlined above, a German Heir (“Erbe”) is deemed to directly step into a Decedent’s shoes at the moment of his or her death as a single Heir (“Erbe”) or as a German Joint Tenancy in Common of Heirs (“Gesamthandsgemeinschaft”, “Erbengemeinschaft”).
A Trust in the sense of U.S. Common Law is not known in German Estate Law either, i.e. there is no German Trust.
For cases of a Decedent’s death before August 17, 2015 the legal situation is as follows:
Jurisdiction over German Probate Proceedings will be held by the German Probate Court/German Surrogate’s Court (“Nachlassgericht”), which, in turn, is a department of the local German Municipal Court (“Amtsgericht”) ranking on the respective German County level/German District Court level.
Unlike in the U.S. and different from U.S. Probate Law and U.S. Estate Law, in the event of a cross-border Estate, i.e. of an Estate involving assets in two or more countries, the nexus for the international jurisdiction of a German Probate Court/German Surrogate’s Court over personal assets, i.e. over movable assets, of an international Estate under German Conflict of Law Rules will be established by the citizenship of the Decedent at the moment of his or her death, not by his or her last domicile.
In the event that a Decedent should have died holding two or more citizenships, such as the American citizenship and the German citizenship, any foreign citizenship such as a Decedent’s additional American citizenship will be disregarded by a German Probate Court and a German Surrogate’s Court (“Nachlassgericht”) for purposes of determining their jurisdiction.
The differing concepts of Conflict of Law Rules in both countries for a Decedent’s personal property, i.e. for his or her movable property (Chattels), in some cases and under some circumstances will create the unwanted dilemma of a so-called Split Heirship (“Nachlassspaltung”).
In cases of such Split Heirship an American probate judge may apply German Law to the very same Estate a German probate judge may apply American Law to and vice versa.
Typically the bulk of a Dededent’s Estate will consist of personal property in the form of securities and bank deposits.
Let us take the following case scenario for illustration purposes:
A German citizen has his or her last domicile in the U.S. and, at the moment of his or her death, holds German shares and bonds of a German corporation or of a German debtor/issuer all held in a German investment account.
In this case the American probate judge will apply American Law based on the Decedent’s last domicile in the U.S., whereas the German probate judge will apply German Law based on the Decedent’s German citizenship.
If, conversely, an American citizen has had his or her last domicile in Germany and, at the moment of his or her death, has held German securities located in whatever country or jurisdiction, then the American probate judge will have to apply German Law based on the Decedent’s last domicile in Germany, whereas the German probate judge will have to apply American Law based on the Decedent’s American citizenship.
Under such circumstances practical solutions quite often can only be achieved on a case by case basis.
As to real property, i.e. immovable assets/real estate, fortunately American Rules of Conflict of Laws and German Rules of Conflict of Laws do coincide and both do refer to the location/situs (“Belegenheit”) of the respective land or other real property right.
For cases of a Decedent’s death on or after August 17, 2015 the legal situation is as follows:
Now the sole nexus is a Decedent’s last residence, both for personal property and for real property.
Conversely, in the U.S. under American estate law the nexus of a Decedent’s last residence will apply to personal property only and not to real property, which will be governed by the law of the location of the real property.
Unlike in the U.S., there is no German Estate Tax in Germany, and German Death Taxes will be raised on a “per beneficiary basis” only in the form of a so-called German Inheritance Tax/German Estate Tax (“Erbschaftsteuer”) and not in the form of a literal Estate Tax raised on the entirety of the Estate.
In other words, German Federal Inheritance Tax (“Erbschaftsteuer”) will be raised per each Beneficiary/Distributee and not per the entire Estate.
Consequently, allowances, exemptions, tax tables, and tax rates will apply per each Beneficiary/Distributee only and not per Estate, by which way the German Inheritance Tax burden will be somehow mitigated.
Amounts of allowances per each Beneficiary/Distributee range and vary from EUROS 2,000 through EUROS 756,000 depending on each Beneficiary’s/Distributee’s degree of kinship with Decedent.
Maximum tax rates and tax brackets of German Inheritance Tax range from 7 percent to 50 percent, once again depending on the degree of kinship of each Beneficiary/Distributee with Decedent.
Moreover, such German Inheritance Tax (“Erbschaftsteuer”) will be raised on a Federal level only and not on the level of any of the German States (“Bundesländer”).
In other words, there is no German State Estate Tax or State Inheritance Tax raised in any of the sixteen German States (“Bundesländer”).
Unlike in the U.S., there is no option or election right for an Alternate Evaluation Date six months after the Decedent’s death as provided in U.S. Federal Law by Internal Revenue Code (I.R.C.) Section 2032.
So-called Tie-Breaker Rules provided by the American-German Estate and Inheritance Tax Treaty Dated December 3, 1980, i.e. by the “Convention between the Federal Republic of Germany and the United States of America for the Avoidance of Double Taxation with Respect to Taxes on Estates, Inheritances and Gifts Dated December 3, 1980 (“Abkommen vom 3. Dezember 1980 zwischen der Bundesrepublik Deutschland und den Vereinigten Staaten von Amerika zur Vermeidung der Doppelbesteuerung auf dem Gebiete der Nachlass-, Erbschaft- und Schenkungsteuern”), provide that the right to raise Estate Tax or Inheritance Tax on an American-German Estate on a worldwide basis will solely go to the country of the Decedent’s last “residence” (“Wohnsitz”), in case of two or more “residences” (“Wohnsitze”) to his or her last “permanent home” (“ständige Wohnstätte”), in case of two or more “permanent homes” (“ständigen Wohnstätten”) to the country of his or her last “center of vital interests” (“Mittelpunkt der Lebensinteressen”), then to the country of his or her last “habitual abode” (“gewöhnlicher Aufenthalt”), then to the country of his or her last “citizenship” (“Staatsbürgerschaft”), and finally in the event that the individual at the moment of his or her death had been a citizen of both the U.S. and Germany or of neither of them, as a matter of last resort, the U.S. government and the German government will have to settle the question by means of mutual agreement (“Verständigungsverfahren”).
The German Inheritance Tax reporting system is a two-tiered one:
Within three months from the time of having learned about the death of the Decedent (“Erblasser”) or three months from the time of the probate of the Will (“Testamentseröffnung”), whichever is later, each Heir (“Erbe”), Co-Heir (“Miterbe”) or Legatee (“Vermächtnisnehmer”) must give notice in writing to the German Inheritance Tax Office (“Erbschaftsteuer-Finanzamt”) holding local jurisdiction over the Decedent’s last German domicile or else in the lack of a German last domicile of the Decedent to the German Probate Court of Berlin-Schöneberg (in the case of the Decedent being a German citizen at the time of his death) or to any German Probate Court in whose district some or all of the assets of the Estate (“Nachlass”) are located (in case of the Decedent being a non-German citizen at the time of his death).
The German Inheritance Tax Office (“Erbschaftsteuer-Finanzamt”) will then request the filing of a German Inheritance Tax return (“Erbschaftsteuererklärung”) with a due date of at least one month later.
No advance tax payment will have to accompany the filling of a German Inheritance Tax Return (“Erbschaftsteuererklärung”) as the German Inheritance Tax (“Erbschaftsteuer”) is not a tax to be self-assessed by the taxpayer/tax return filer.
Instead, the German Inheritance Tax (“Erbschaftsteuer”) will be assessed by the German Inheritance Tax Office (“Erbschaftsteuer-Finanzamt”) separately and later at the end of its ensuing inquiry proccedings.
In general, extensions of the filing date for the German Inheritance Tax return (“Erbschaftsteuererklärung”) will be granted generously.
Such extensions will not trigger off penalty interest charges.
Also for releasing any funds to a foreign country German banks, investment companies, insurance companies and other financial institutions will routinely request the issuance and presentation of the German equivalent of an American Federal Transfer Certificate (FTC) issued by the German financial authorities (“steuerliche Unbedenklichkeitsbescheinigung”).