Inheritance Tax for Children: How to Pass on Wealth to the Next Generation Tax-Free

When we think about our family’s future, it’s not just about a good education and a stable environment. It’s also about providing our children and grandchildren with financial security and giving them a strong foundation for important life milestones—even if life circumstances change unexpectedly. Many families tend to put off discussing inheritance until later. However, they often overlook the fact that inheritances can have tax implications and, under certain circumstances, can place a financial burden on the next generation.

In Germany, inheritance tax is levied on the assets that heirs receive from a deceased relative. Everyone hopes that as much of their hard-earned money as possible will actually go to their family rather than to the tax office.

At what amount does the government step in? What exceptions apply to the family home? And how can forward-thinking planning prevent large portions of an estate from going to the government? This comprehensive guide provides clear answers, explains the legal framework, and shows how to legally minimize this burden. After all, sound financial security begins long before inheritance takes place.

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The Basics of Inheritance Tax in Germany

To understand the system, one must first take a look at the applicable laws. Inheritance tax is governed by the Inheritance and Gift Tax Act (ErbStG). The government taxes the transfer of assets from one person to another upon the decedent’s death. The basic idea behind this is that such an acquisition increases the heirs’ economic capacity, which justifies the public’s share in the tax revenue.

The amount of inheritance tax depends primarily on two factors: the value of the estate and the degree of kinship between the decedent and the heirs. Close relatives receive preferential treatment under the law. They are granted higher exemptions and benefit from lower tax rates than distant relatives or individuals with no family ties. Inheritance tax is also structured progressively, meaning that higher asset values are subject to a higher tax rate. Tax liability always begins where the personal exemption ends.

Important: The law treats inheritances and gifts in much the same way. Anyone who transfers assets during their lifetime is subject to gift tax. In many respects, the rules are similar to those governing inheritance tax.

Inheritance Tax for Children: Exemptions

The law protects immediate family members through generous tax-exempt allowances. Children are entitled to a tax-exempt allowance of 400,000 euros per parent, which remains tax-free in the event of an inheritance. In practice, this means that if a child inherits from both parents, they can receive up to 800,000 euros tax-free in total. If the value of the inherited assets exceeds the exemption, the heirs must pay inheritance tax on the amount exceeding the exemption.

In addition to this basic exemption of 400,000 euros for cash or real estate, the tax authorities grant other tax exemptions that are often overlooked:

• Household goods: For furniture, clothing, or works of art, there is a tax-free allowance of 41,000 euros for children.
• Movable property: For other movable property, such as a car, an additional exemption of 12,000 euros applies.
• Dependents' Exemption: Depending on the child's age, an additional maintenance exemption of up to 52,000 euros may be granted. This amount is intended to ensure the support of orphans.

Place within the family: Spouses and registered domestic partners are entitled to an even higher tax exemption of 500,000 euros, as well as a pension exemption of up to 256,000 euros. Grandchildren receive 200,000 euros, provided their parents are still alive. For parents, grandparents, and distant relatives, the amounts are often only 20,000 euros.

How much is the inheritance tax? A look at the tax brackets

The tax brackets for inheritance tax are based on the relationship between the decedent and the heirs. This classification should not be confused with the income tax brackets shown on a pay stub. Inheritance tax law distinguishes between three tax classes. These determine which tax rates apply to the taxable portion of the estate and, consequently, how high the potential tax liability will be.

Tax Class I:

This lowest tax bracket includes spouses, registered domestic partners, children, stepchildren, and the descendants of these children (i.e., grandchildren). Heirs in this group pay the lowest tax rates. Tax liability for inheritances in Tax Class I does not begin until the portion of the inheritance exceeds the personal exemption.

Tax Class II:

These include parents, grandparents (in the case of inheritances, but not gifts), siblings, nieces, nephews, stepparents, children-in-law, and parents-in-law. The tax rates in these cases are already significantly higher.

Tax Class III:

This category includes all other individuals, such as distant relatives, friends, neighbors, or unmarried partners. The tax-free allowance here is only 20,000 euros, and the tax burden is immense.

Inheritance Tax Amount: Tax Rates and Calculation

If the value of the inheritance exceeds the exemption limit of 400,000 euros, children must pay inheritance tax. But how exactly is this amount taxed? In tax bracket I, the following tax rates apply if the inheritance exceeds the exemption limit:

The inheritance tax for children ranges from 7 to 30 percent, depending on the value of the inheritance that exceeds the exemption amount.

Example of tax calculation:

A single woman bequeaths assets, securities, and cash with a total value of 700,000 euros to her only child.

The personal exemption of 400,000 euros is deducted from the value of the inheritance. This leaves 300,000 euros as taxable inheritance. A look at the table shows that, for amounts up to 300,000 euros, the tax rate in tax bracket I is 11 percent. In this case, the child must pay 33,000 euros in inheritance tax.

This example illustrates that even in the case of direct descendants, high five-figure sums can quickly become due. Families can quickly find themselves liable for taxes, especially when it comes to real estate that has risen sharply in value over the past few decades.

Inheriting Real Estate: Tax-Free Under Strict Conditions

The inheritance of real estate is a key issue. As a result of rising real estate prices, the market value of a typical single-family home in metropolitan areas often exceeds one million euros today. Inheritance tax is always calculated based on the market value of the estate as determined by the tax office.

However, there is one major exception designed to ensure that the family home is preserved: Children can inherit the family home they live in completely tax-free if they have lived there for at least ten years and move in immediately. A property can therefore be completely tax-free for children if certain conditions are met.

Strict requirements for the family home:

1. Immediate collection: The child must move into the property within 6 months of the opening of the estate for the tax exemption to apply.
2. Size limit: The tax exemption for a property applies only to living space up to 200 square meters; any space beyond that is taxed on a pro rata basis.
3. Holding period: Living in the inherited family home for at least ten years may result in a tax exemption. If the child moves out after eight years or sells the house, the tax exemption is retroactively revoked, and the tax office will demand payment (exception: reasons such as a sudden need for long-term care).

Incidentally, there is no limit on living space for spouses when they take over the house; however, the strict deadline applies here as well.

Strategic Planning: Minimizing Taxes Through Donations

To avoid inheritance tax, families should consider making lifetime gifts to their children. Early planning and strategic gifts can help minimize inheritance tax for children. The key mechanism in German tax law is the so-called “ten-year rule.”

The tax-exempt limits for children apply to both inheritances and lifetime gifts. What makes this unique is that the tax-exempt limits can be utilized again every ten years to make the most of them. Therefore, anyone with substantial assets should not hold onto them until the end of their life but rather transfer them in stages. The tax-free allowances for inheritances and gifts apply every 10 years, which allows for strategic planning.

💡 A real-world planning example:

If one parent has assets worth 1.2 million euros, in the event of inheritance, after deducting the exemption (400,000 euros), an amount of 800,000 euros would be subject to tax (tax rate of 19 percent = 152,000 euros).

However, if the money is given in small increments every ten years, the math looks different:

• At age 55, the parent gives away 400,000 euros (tax-free).
• At age 65, an additional 400,000 euros will be given away (tax-free).
• If the parent passes away at age 80, the remaining 400,000 euros will pass to the child (also covered by the tax exemption). Through this gradual transfer, the family saves over 150,000 euros in this case. Early planning and, if necessary, gradual gifting are advisable in order to make optimal use of the tax exemptions and minimize the tax burden.

Usufruct and Right of Residence: Stay in Control and Lower Taxes

When it comes to real estate in particular, owners often worry that they will lose control of their home if they transfer ownership prematurely. Civil law offers elegant solutions in this regard. Parents can gift a property during their lifetime while retaining a right of usufruct, which reduces the tax value of the gift.

A usufruct or right of residence means that while the house changes hands (the child is entered in the land registry), the parents retain the right to continue living in the property or to rent it out and keep the rental income. A usufruct or right of residence can reduce the value of a property and thus lower the tax burden.

By establishing a usufruct or right of residence, families can reduce the tax burden associated with a real estate transfer under certain conditions. For tax purposes, the capital value of the granted right is deducted from the value of the property. As a result, the property’s tax-related value may be significantly lower than its actual market value.

For example, it is possible that a property with a market value of 600,000 euros could fall below the applicable exemption threshold of 400,000 euros when usufruct is taken into account. Early estate planning with Gifts During One's Lifetime and appropriate planning options can therefore help structure the transfer of assets within the family in a tax-efficient manner.

When Do You Have to Pay Inheritance Tax? Deadlines and Procedures

When a death occurs, families often find themselves in a state of turmoil. Grief over the loss of a loved one takes center stage. Nevertheless, there are legal obligations that cannot be postponed. Heirs must file an inheritance tax return within three months of the opening of the estate and, if necessary, request a tax assessment notice. The filing is made informally with the appropriate tax office.

Following this notification, the authorities typically require the filing of a detailed inheritance tax return. This return must list all of the deceased’s assets: bank account balances, securities, real estate, as well as any outstanding debts and funeral expenses. Debts reduce the value of the estate and thus lower the amount of tax owed to the government.

The tax office carefully reviews this information. For real estate, the agency often determines the value using standardized procedures. In some cases, this valuation may be too high. Heirs can file an appeal against the tax assessment if they disagree with the tax office’s valuation. In such cases, it is often advisable to have an independent appraisal prepared that substantiates a lower market value. Only after this review is complete will you receive the final payment notice.

Lack of Liquidity: A Risk When Inheriting Tangible Assets

One problem with taxation is a lack of liquidity. What happens if a child inherits an apartment building worth one million euros but has no savings? The tax on the taxable portion is due in euros, not in kind.

If there are no liquid funds available to pay the tax liability to the government, the only option is often to sell the inherited properties in a fire sale—usually for far less than their actual value. Alternatively, loans must be taken out, which in turn represents a financial burden.

To prevent such situations, it is advisable to plan for the tax burden with foresight by structuring one’s assets strategically. Alternatively, property owners can take out term life insurance policies early on, with a death benefit that exactly covers the tax liability in the event of death.

Smart Planning for the Future: Invest4Kids as a Solution for Your Children

If you want to support your child, you should think not only about avoiding taxes but also about investing your money wisely. Cash in a checking account is steadily losing purchasing power due to ongoing inflation.

Those who build up a financial cushion early on often choose investment vehicles that promise returns above the inflation rate. If these investments are structured wisely—for example, within an insurance policy—the amounts grow over the years without the tax authorities taking a cut through the flat-rate withholding tax every time the portfolio is rebalanced.

This is exactly where the Invest4Kids concept comes in: It enables families to save capital while retaining a high degree of legal control. Unlike with a traditional Children's AccountWhile a program in which young adults gain immediate and unrestricted access to the full amount on their 18th birthday allows for a controlled transfer through an insurance solution with a right of designation. This ensures that the money is actually used for education, college, or a first apartment—and doesn’t disappear into impulsive purchases.

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Do minor heirs also have to pay taxes?

A frequently discussed topic is the age of the heirs. Under German tax law, age plays no role in determining tax liability. If a minor child inherits, he or she is treated exactly the same as an adult for tax purposes. The calculation, the tax-exempt amounts, and the strict deadlines are identical.

The only difference lies in the legal capacity to act. The legal representatives—usually the surviving parent—assume responsibility for the formal settlement of the estate. They must file the necessary reports, sign the required declarations, and ensure that the amounts due are paid from the inherited assets. The remaining assets must be held in trust by the parents until the child reaches the age of majority. This requires a high degree of diligence, as the money belongs to the child and may only be used for the child’s benefit.

Conclusion: Secure Your Financial Future Through Planning

Dealing with the regulations surrounding death is rarely a pleasant experience, but it is absolutely necessary to protect what you have worked to build. Without adequate preparation, government requirements can leave significant gaps in your estate.

Although the next generation has a comfortable cushion of 400,000 euros, rising real estate values mean this threshold is reached more quickly than it was just a few decades ago. If the value of the inherited assets exceeds the exemption limit, children must pay inheritance tax—and at substantial rates.

Anyone who does not want to hand this money over to the tax authorities must take action during their lifetime. Whether through the gradual transfer of assets every ten years, the use of a usufruct right for buildings, or the targeted establishment of tax-optimized retirement plans—the tools provided by the legislature are diverse. Those who develop a strategy early on ensure that their life’s work is preserved. A solid, undiminished foundation gives the next generation the best possible start to build a secure future for themselves.

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