Assets: Gifts to Children – Why this can get complicated

Frankfurt. Give away money and real estate during your lifetime instead of inheriting it later. This has long been a proven strategy for wealthy people to save inheritance tax. Given the uncertainties surrounding a possible inheritance tax reform, it is currently gaining popularity.

The focus is not only on transmission to adults, but also to children. “We are currently increasingly supporting donations to minors,” says Kerstin Linder, specialist lawyer for inheritance and tax law at the Heussen law firm.

Depending on the age of the children and the type of assets being donated, things can often be more complicated than many people assume. Two lawyers explain what gift givers should consider and why such considerations are particularly important at the moment.

What could change with inheritance tax?

A few weeks ago, the question before the Federal Constitutional Court was whether the exemption rules for inherited business assets are constitutional (ref.: 1 BvR 804/22). In some cases, company heirs can benefit from tax relief amounting to millions, while private inheritances have significantly lower tax allowances. Between aunt and nephew – as in the court case – only 20,000 euros.

If the constitutional judges announce their decision in a few months, it could provide the impetus for a reform of inheritance tax. Many lawyers are certain: This reform could lead to a higher tax burden not only for company heirs, but also for wealthy individuals. A concept paper from the SPD parliamentary group, which caused a stir at the beginning of the year, pointed in this direction.

“Many of our clients are currently bringing forward their already planned asset transfers in order to take advantage of the existing legal situation,” says specialist lawyer Linder.

Which gifts are tax-free?

Close relatives in particular benefit from the current tax allowances. 500,000 euros can be transferred to your spouse tax-free every ten years - even more with additional arrangements. A child can collect 400,000 euros from each parent tax-free every ten years.

For grandchildren it is 200,000 euros per grandparent. For everyone else, including acquaintances and friends, it is only 20,000 euros. Taxes apply above these limits. The tax rates depend on the family relationship and the value of the gift.

What is special about gifts to minors?

Children under the age of seven are considered legally incompetent (§ 104 BGB). If they are to receive a gift, their custodial parents must legally represent them. Between their seventh birthday and up to the age of 18, children have limited legal capacity. “During this time, they are only allowed to act independently if a transaction is ‘only legally advantageous’ for them,” says Julia Roglmeier, specialist lawyer for inheritance law at the RPE law firm.

If this is not the case because the donation may entail legal obligations, children aged seven and over also need the consent of their legal representative (§107 BGB). However, it can't always be the parents. A supplementary guardian is often appointed by the family court (§ 1809 BGB).

How important is the degree of relationship to the child receiving the gift?

Case 1: If parents want to transfer assets to a child, they find themselves in a dual role as donor and at the same time legal representative of the recipient. “This can lead to a conflict of interest,” says lawyer Linder. So-called self-dealing is therefore prohibited. If a gift is not “merely legally beneficial,” a supplementary guardian must be appointed.

For children under the age of seven, this even applies to any gifts from their parents. Even if the child does not suffer any legal disadvantages as a result - such as in the case of cash assets. Married parents are viewed as a unit: if the mother gives something to the child, the father cannot represent him - and vice versa.

Case 2: Grandparents often want to transfer assets to their grandchildren at an early stage. In this case, too, parents are not allowed to represent their children in gifts that are not only beneficial. The reason: They are directly related to the grandparents and this could also result in a conflict of interest.

It would be different if the assets were transferred from an aunt to the niece. In practice, however, this constellation plays a minor role, among other things because there is only a tax allowance of 20,000 euros.

Parents or grandparents usually want to transfer assets to their children and grandchildren. Whether a supplementary carer is necessary depends crucially on whether a gift for the child is associated with obligations. Depending on the situation, approval from the family court may also be necessary.

When is a gift not “merely legally beneficial”?

“Rented apartments are often given as gifts,” says lawyer Roglmeier. The gift places the child in a landlord position that comes with extensive responsibilities. It also becomes a member of an owners' association. That's why such gifts are not only beneficial. “If a rented apartment is given as a gift, it always requires a supplementary carer and, as a rule, the approval of the family court,” says the lawyer.

The case is less clear when an apartment is donated that is used by the family. In the past, case law has also come to different assessments when it comes to the transfer of company shares to minors. This applies in particular to the transfer of fully paid-up limited partnership shares, says Linder.

In order to be able to plan the donation well, Roglmeier advises coordinating the process with a notary or lawyer at an early stage. As soon as a concrete draft contract is available, an application must be made to the responsible family court for the appointment of a supplementary guardian and court approval. The court then examines the transaction in detail to determine its legal admissibility.

Who is appointed as a supplementary carer?

Ideally, when you first contact the family court, someone should be suggested as a possible supplementary carer. “In principle, this does not have to be a lawyer, but the courts often prefer people with a legal background,” says Roglmeier.

If the court does not follow the suggestion, it will appoint a person from a supplementary guardian list. This usually includes lawyers who have agreed to this task and with whom the court works regularly.

What exactly does a supplementary nurse do?

When a donation agreement is concluded, a supplementary guardian takes over the legal representation of the child. He examines the contract and its effects on the child. After the donation agreement has been concluded and executed, its activity ends.

In order to avoid expensive planning errors, Roglmeier recommends: “You should submit the notary’s draft to the family court in advance and ask for a preliminary review.” In this way, requests for changes from the court or the supplementary guardian can be flexibly incorporated into the draft.

Only when the court signals that the contract can be approved should the final notary appointment for certification take place. This prevents the family from ending up with high notary costs if the court unexpectedly refuses approval.

If company shares are donated, a supplementary guardian may be required again after the donation agreement has been completed in order to exercise the rights of the gifted child at the shareholders' meeting, in which his parents also take part as shareholders.

“In this case, a supplementary guardian will then be appointed again, now with the responsibility of exercising shareholder rights,” says Linder. Whether an order is actually necessary depends on the individual case and the planned resolutions.

How much does a supplementary nurse cost?

The remuneration for a supplementary carer is generally a matter of negotiation. “Lawyers usually charge based on the value of the donation,” says Linder.

The accompanying costs of a gift to a minor can be high. “If a 16-year-old child is to receive a gift, I would advise, if in doubt, to wait another two years before making the gift and to transfer it exactly on the 18th birthday,” says specialist lawyer Roglmeier. Younger children are more likely to accept the additional costs.