With a “Berlin Will” married couples can protect each other financially; children only inherit after the death of both parents. But the model also has disadvantages, as a ruling by the Federal Finance Court now shows.
An inheritance dispute can tear even the most harmonious families apart. If you arrange your inheritance early, you are taking precautions. When married couples plan their estate, the Berlin will is popular. With this arrangement, married couples appoint each other as sole heirs: If one dies, the person living longer inherits everything and can dispose of the assets. The children are left out. Only when the second parent also dies do the descendants become final heirs.
The Berlin will is attractive for married couples for financial security. In 2018, 59 percent of those who wrote a joint will chose this option. This was the result of a representative survey by the Allensbach Institute on behalf of Deutsche Bank.
However, depending on the structure and estate assets, there may be financial disadvantages. This confirms a ruling by the Federal Finance Court (BFH), Germany’s highest financial court. It is in accordance with the rules that the state may collect inheritance tax twice.
Penalty clauses for children
“The Berlin will ensures that the longer-living spouse is taken care of and becomes the sole heir,” says lawyer Heinz-Willi Kamps. “It saves you from having to pay out the offspring after the death of your partner and then having to sell a property that was previously used together.” Nevertheless, the offspring can still demand their compulsory share. This amounts to half of the statutory share of the inheritance.
To make this option unattractive, there is a trick in inheritance law: the Berlin will can contain a compulsory portion penalty clause. If a child claims their compulsory share after the death of the first parent, they will only receive their compulsory share even after the death of the longer-living parent. It therefore loses its status as the final heir.
This doesn’t deter some: “If, for example, the spouse who lives longer becomes in need of care and is likely to use up the assets, the compulsory portion in the first inheritance case may be more attractive than the inheritance that can still be expected after the death of the second parent,” explains Steuer- and inheritance law expert Kamps. “In order to prevent children from demanding such a compulsory share, couples can further tighten the penalty clause.”
Money for patience
Such a stricter version played a decisive role in the case before the BFH. A woman sued whose parents had added a so-called “Jastrow clause” to the Berlin will. This punishes the impatient twice and rewards the patient: If a child demands his compulsory share after the death of the first parent, all others who forego receive a bequest in addition to their actual inheritance after the death of the person living longer.
You are entitled to this bonus when the first partner dies, but it is only paid out after the death of the remaining parent. This mathematically reduces the estate left by the first deceased and thus also the compulsory portion of the child who claims it – an additional dampener.
Taxed twice or just twice?
In the case heard in court, the plaintiff’s father died first. Since two of her five siblings claimed their compulsory share, the woman was entitled to a corresponding legacy. First, her mother became the sole heir and had to pay tax on the inherited assets, including future legacies. When the mother also died, the plaintiff inherited and also had to pay inheritance tax. She sued and complained that her legacy – more than one million euros – had been taxed twice.
The Federal Finance Court confirms that inheritance tax arises twice for the same bequest amount – but for different people, namely once for the surviving parent and later for the plaintiff. This is unfavorable for the taxpayer, “but not objectionable”. There was no double taxation for the woman herself. Rather, the plaintiff was able to deduct the legacy as a liability from her mother’s estate. That neutralized the fact that she had to pay tax on the legacy.
Judgment on Berlin will no surprise
Attorney Kamps is not surprised by the verdict. However, it underlines that couples should consider tax disadvantages and other aspects when settling their estate. The Berlin Will continues to be a useful construct for many married couples. “Whether it’s worth it depends on how high the assets are and how great the need is to protect the surviving spouse,” says Kamps.
“Married couples should always discuss their family and financial situation with an inheritance law professional.” This applies especially to larger inheritable assets, such as in the case that the Federal Finance Court has now heard. For example, penalty clauses in the Berlin will also mean that a child cannot use their personal tax allowance of 400,000 euros upon their first inheritance. “Because the parent who lives longer inherits everything initially, tax flexibility is wasted.”
Source: Stern
