Inheritance tax in the context of a community of heirs

If there are several heirs due to legal or voluntary succession, they form a community of heirs. In principle, the community of heirs is managed jointly by all heirs and the estate assets belong to the heirs jointly. This is a so-called community of joint owners. This means that an individual heir in the community of heirs cannot dispose of their share of individual estate objects (property, bank account, company shares, etc.).

Who is responsible for filing a tax return and paying inheritance tax?

Although the estate is jointly managed in a community of heirs, the obligation to file an inheritance tax return and to pay the inheritance tax does not apply to the community, but to each individual co-heir. The estate assets held by the community of heirs are attributed to the individual co-heirs in proportion to their inheritance shares, to the extent that this is required from a tax perspective (Section 39 (2) no. 2 General Tax Code (AO).

How is the inheritance tax of the individual co-heirs calculated?

The inheritance tax of the individual co-heir depends, first of all, on the value of the estate attributed to the individual co-heir in accordance with his or her share. However, the amount of the inheritance tax burden also depends on very individual circumstances, which may differ for each co-heir. Above all, the relationship between the co-heir and the testator is decisive for the tax bracket and the tax-free allowances. The spouse, children, stepchildren, grandchildren and parents are assigned to tax class I, siblings, nephews/nieces and parents-in-law to tax class II and other third parties, including the testator's life partners, to tax class III. Depending on the tax class and the amount of the acquisition, different tax rates then apply. The tax-free allowances also depend on the relationship between the beneficiary and the testator. For this reason, the inheritance tax liability is to be determined separately for each co-heir and, as a result, can be different even with the same inheritance rate.

Can the inheritance tax be paid from the estate?

The obligation to pay inheritance tax does not fall on the community, but on each individual co-heir. If the inheritance tax to be paid by the co-heir has been determined by the tax office, the question arises as to whether the co-heir can pay the inheritance tax debt from the estate. The separate assessment of inheritance tax for each individual co-heir does not change the fact that the heirs can only dispose of the estate jointly. It is therefore not possible for a co-heir to instruct the bank managing an estate account, for example, to pay his personal inheritance tax from the testator's account. The consent of all co-heirs would be required for this. The basis for such an instruction from all co-heirs would be a (partial) inheritance distribution. The heirs can, of course, agree within the framework of the distribution that parts of the assets belonging to the estate be distributed among the heirs. It is conceivable, for example, that the co-heirs agree before a final distribution that the inheritance tax liabilities of the individual co-heirs are paid from the estate account. Typically, a co-heir is willing to agree to the payment of the inheritance tax liability of the other co-heir from the estate account if his or her own inheritance tax liability is also repaid by a payment from the estate account. If the inheritance tax liabilities are different, such a (partial) inheritance distribution agreement can be structured, for example, so that the co-heir with the lower inheritance tax liability receives a compensatory payment from the estate.

Does the inheritance tax liability still exist even if the co-heir has not yet received anything from the estate?

Yes, the inheritance tax liability of the individual co-heir arises upon inheritance. The settlement of the community of heirs and the distribution of the estate assets is not a prerequisite for the incurrence of the inheritance tax liability. If the heirs cannot agree on a distribution, the dispute can take a very long time. The co-heirs could “at least” agree on the payment of inheritance taxes from the estate. However, if there are fundamental differences or if the co-heirs disagree on the correct way to manage the estate, it will be difficult to reach an agreement on the payment of inheritance taxes from the estate. The co-heirs are then faced with the problem of having to pay the inheritance tax out of their own funds even though they have not yet received anything from the estate. In certain circumstances, a co-heir can apply to the tax office for a deferment of the inheritance tax debt in this case.

How does the distribution of the estate affect the inheritance tax?

The estate is distributed as part of the process of dividing the estate among the heirs. The way in which the estate is distributed is not relevant for the amount of inheritance tax. In principle, it is also irrelevant for the amount of inheritance tax owed if, as a result of the distribution, a co-heir receives more or less than he would have been entitled to based on his inheritance share.

Caution: Even if it is not relevant for inheritance tax, such unequal distribution can nevertheless have unwanted tax consequences. If a co-heir receives more than he is entitled to according to the quota or the instructions of the testator, at the expense of the other co-heirs, this can be assessed by the tax office as a taxable gift from one co-heir to the other.

Example:

Brother B and sister S are both heirs to their mother, each inheriting ½. The estate includes a property worth €600,000.00 and a securities account worth €400,000.00. Since B is very wealthy, he wants to leave the property to his sister S and is content with the securities account as part of the estate distribution. Although B only receives a value of €400,000 and the tax-free allowance for children is €400,000 (other allowances and benefits are not taken into account), the tax office assesses inheritance tax against B: the estate has a total value of €1 million. According to the inheritance quotas, the tax office attributes inheritance tax acquisitions of €500,000.00 each to A and B. Even though B only received €400,000.00, he must pay 7% inheritance tax on the amount of €100,000.00. Although sister S received €600,000 due to the unequal distribution and thus €200,000 more than the allowance for children, she – like her brother – only has to pay inheritance tax of 7% on the amount of €100,000. However, the tax office also views this as a gift between B and S. Gifts between siblings are assigned to tax class II and are subject to a tax rate of 15% to 43%, depending on the amount of the gift. In the example, the tax office would assess gift tax of 15% on B, i.e. €15,000, on the gift of €100,000 from B to S (greatly simplified).