Many people want their hard-earned assets to pass to their children in later life - without high taxes or disputes being a burden on their inheritance. If you approach estate planning early on, you can ensure that your assets actually end up where they belong with a will or inheritance contract, a clear distribution and smart allowances. Read this article to find out how you can best pass on your assets to your children.
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Inheritance to children - an overview
The subject of inheritance is often an emotional one: after all, it's about your responsibility towards your children and descendants and a fair division of your money. Without clear rules, the statutory succession applies, which does not always take into account all the wishes of the testator. This can quickly lead to disputes within the community of heirs - especially if several relatives assert claims.
Anyone who deals with asset succession during their lifetime can ensure that their assets are distributed according to their own wishes by means of a well-drafted will or inheritance contract. As death can also occur unexpectedly, it is worth thinking about this sooner rather than later.
With well thought-out estate planning, you can think ahead and prevent uncertainties and disputes, because then your assets will end up exactly where you want them to be, without your heirs having to agree on who will receive which parts of the estate. Parents should know how they can avoid tax losses by making smart decisions - for example through tax-free allowances or targeted gifts.
Tip: It is worth clarifying the situation, especially when it comes to real estate, investments and other assets. Depending on the degree of relationship, different regulations, tax classes and allowances apply, which play a decisive role in the tax burden. Clever planning ensures that as much money as possible actually reaches the heirs in the event of inheritance and is not used up for factors such as inheritance tax.
Inheritance without a will: statutory succession & compulsory portion
If you do not draw up a will, the statutory order of succession automatically applies. This determines who inherits your property and assets according to the degree of kinship - and in what amount. The heirs are divided into classes:
- 1st order: Your children and grandchildren. They inherit in equal shares.
- 2nd order: Your parents, siblings and their descendants.
- 3rd order: Your grandparents, uncles, aunts, cousins.
If you have children, they inherit in equal shares. If there are no children, the heirs of the next order come into play.
This legal provision can lead to unintended results, for example if you actually want to disinherit a child. Without a will, all children are automatically entitled to the compulsory portion. This amounts to half of the statutory inheritance share and is a monetary claim against the other heirs - it is therefore a burden on the community of heirs.
Without a will, your entire estate and all assets (including your property, your account and your custody account) automatically become part of the statutory estate. This can lead to disputes, for example in the case of a property that the heirs have to sell in order to pay out compulsory portions. In addition, your children or other heirs cannot make individual arrangements for items that are close to your heart.
💡 Good to know: In inheritance law, partners are not included in the "orders" of succession in the strict sense. Instead, they are considered alongside relatives - i.e. in addition to the heirs of the first, second or third order.
In concrete terms, this means
- Spouses or registered partners inherit together with the heirs of the 1st order (children, grandchildren) or the 2nd order (parents, siblings).
- If there are no relatives of the 1st or 2nd order, the spouse inherits the entire estate.
- The exact quota depends on the matrimonial property regime: In the statutory matrimonial property regime (community of accrued gains), the spouse receives a quarter plus a further quarter as a lump-sum equalization of accrued gains (i.e. half in total).
A non-marital partner (without a registered civil partnership) has no legal right to inherit. Without a will, your partner can therefore go away empty-handed if children leave him or her out as sole heir.
Legal succession can be particularly unfortunate for patchwork families or unmarried couples. Your partner goes away empty-handed without a will, while distant relatives inherit. This is also unfavorable from a tax perspective: without individual estate planning, often not all allowances and tax brackets are utilized - this can unnecessarily increase inheritance tax and increase the financial burden for your heirs.
In short: without a will or inheritance contract, you have no opportunity to make individual arrangements to protect your family and minimize the tax burden. That's why it's worth thinking about and acting on estate planning issues at an early stage to create clarity and security for everyone involved.
What can diminish the inheritance to your children?
Even if you have built up your wealth with a lot of hard work and love, it can happen that your children inherit less than you would actually like. There are various reasons for this that you should be aware of when planning your estate - first and foremost inheritance tax, compulsory portions and debts.
1. inheritance tax
Inheritance tax is the best-known factor that reduces your inheritance. Different tax brackets and allowances apply depending on the degree of relationship. For children, the tax-free amount is 400,000 euros per parent. Anything over this amount is taxed at between 7% and 30%, depending on the value. This can quickly become expensive, particularly in the case of real estate, if the value of the house or apartment is high. Compulsory portion payments to other heirs can also put a strain on the liquidity of the community of heirs, which in the worst case could make it necessary to sell a property.
2. compulsory portion claims
Even if you have made clear provisions in your will, close relatives - such as your children or spouse - can claim the compulsory portion. This entitlement exists even if they have been disinherited. It usually amounts to half of the statutory inheritance share and is asserted as a monetary claim against the heirs. This means that your heirs may have to sell some of the assets or property in order to pay out the compulsory portion.
3. debts of the testator
Your own debts can also reduce your children's inheritance. This is because the heirs not only inherit the assets, but also the liabilities. This can be particularly problematic if there are large loans on a property or other loans. An overview of your assets and debts will help your children to avoid any unpleasant surprises later on.
4. disputes within the community of heirs
Missing or unclear provisions in wills or inheritance contracts often lead to disputes. Not only can these put a strain on the family atmosphere, they can also result in costs for lawyers, expert opinions or mediation. In the end, this reduces the assets that end up with your children.
Careful estate planning is crucial to avoid your inheritance being diminished by taxes, compulsory portions or disputes. This will ensure that your assets are passed on to your children as you would wish - and that they actually receive the value you intended for them.
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How should provisions be made? Will or inheritance contract?
If you want to distribute your assets after your death in the way that is best for you and your family, you have two main options: a will or an inheritance contract. Both offer you the opportunity to deviate from the legal order of succession and make individual arrangements - and thus minimize taxes, disputes and financial burdens.
- A Will You can draw it up yourself at any time, even by hand - the main thing is that you sign it and add the date and place. This allows you to specify various information, for example who should receive your property, your assets or other assets.
With a Berlin will, for example, spouses can stipulate that the longer-living partner becomes the sole heir before the assets go to the children. With integrated tax clauses, you can also transfer a small share to your offspring.
- The Contract of inheritance on the other hand, is a contractual agreement between you and your future heirs or descendants. It is notarized and binds both parties. This means that you can no longer change your arrangements unilaterally unless all parties to the contract agree.
An inheritance contract is particularly suitable if you want to transfer larger assets such as a property or a company with clear conditions. This way, you can ensure stability during your lifetime and avoid disputes.
Both options help you to make the best use of the tax-free allowances and tax brackets so that your children have to pay as little inheritance tax as possible when they inherit. With a will, you retain maximum flexibility, while the inheritance contract provides security for special constellations such as business succession or larger gifts.
💡 Disinherit: This applies in Germany
In Germany, children cannot be completely disinherited because they are protected by the right to a compulsory portion. This means that even if you exclude your children as heirs in your will, they are entitled to a compulsory portion. This amounts to half of the statutory inheritance share and is always asserted as a monetary claim against the heirs - even if you disinherit your children.
You can only withdraw the compulsory portion in very few exceptional cases. Prerequisites for this are, for example, offenses such as a serious crime against you or other close relatives (§ 2333 BGB). However, this requires a very precise justification in the will and is often only recognized in extreme cases.
Understanding inheritance tax
If you leave assets to your descendants or other relatives, inheritance tax is generally payable. To ensure that your assets are not unnecessarily burdened, you should know the most important regulations on tax brackets, allowances and the amount of tax - and how you can make the best use of them.
The amount of inheritance tax depends on the degree of relationship between you and your heirs. Tax class I applies to your children and your spouse - this means particularly high tax-free amounts: For spouses currently 500,000 euros and for children 400,000 euros per parent. Everything that exceeds this tax-free amount is taxed.
The tax rates vary depending on the value of the inherited assets:
- up to 75,000 euros: 7 %
- up to 300,000 euros: 11 %
- up to 600,000 euros: 15 %
- up to 6 million euros: 19 %
- up to 13 million euros: 23 %
- up to 26 million euros: 27 %
- over 26 million euros: 30 %
This can quickly lead to a considerable burden, especially if you have a property or large bank balances - and your children may have to sell part of the inheritance to pay the tax. You should therefore consider early on how you can use gifts or a well thought-out will to reduce the tax burden.
❗By the way: Claims to a compulsory portion are also subject to inheritance tax. Disinherited children or other persons entitled to a compulsory portion must pay tax on their share, even if they only assert this claim as a monetary claim.
Strategies for tax reduction and inheritance optimization
Do you want to ensure that your assets are reduced as little as possible by inheritance tax in the event of an inheritance and that your children are protected in the best possible way? Then it's worth combining various points:
- Gifts during your lifetime
Every ten years, you can give your children 400,000 euros per parent tax-free. For your spouse, the tax-free amount is 500,000 euros. By gradually transferring your assets before you die, you can significantly reduce your tax burden.
- Berlin will with tax clauses
You can stipulate that the children inherit a small compulsory portion alongside their spouse when they first inherit and thus already use their tax-free amounts. This allows you to combine the advantages of a Berlin will with the tax benefits of the tax-free amounts.
- Usufruct right for real estate
If you transfer a property to your children and retain a usufruct right, this reduces the taxable value. This reduces inheritance tax and you can continue to use the property yourself or rent it out.
- Family company or real estate GmbH
These considerations make sense for larger assets or complex asset structures. You can transfer real estate or company shares in a tax-optimized manner while retaining control over your assets.
- Use of tax class I and allowances for grandchildren
Grandchildren also have their own tax-free allowance of 200,000 euros. Consider transferring some of your assets directly to your grandchildren during your lifetime - this saves tax and strengthens the next generation.
- Children's investments
With custody accounts or savings plans for your children, you can build up assets outside of the traditional inheritance. Income and increases in value in the children's custody account will later belong to your children - and no longer to the estate. This reduces the tax burden in the event of inheritance and provides a secure financial basis at the same time.
Whether a Berlin will, usufruct or family company: with the right strategy, you can significantly reduce inheritance tax and ensure that your assets are passed on to your children and other people as you wish - without any unnecessary tax burden.
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Conclusion
Protecting your assets for your children requires more than just a will. Clever estate planning, tax-optimized gifts and children's custody accounts help you to make full use of allowances and cushion the impact of compulsory portions. In this way, you can ensure that your inheritance goes to the people you care about - and not to the tax authorities.
We'll help you find the right investment for your child!
- An additional $25,703 per child, thanks to our modern ETF strategy
- Find the perfect ETF investment for your child in a 30-minute video conference from the comfort of your own home.
- Sit back and watch your child's assets grow – our experts will take care of the rest.
