Estate planning in Germany by way of a property management partnership

Estate planning in Germany by way of a property management partnership (vermögensverwaltende Personengesellschaft, Familiengesellschaft)

If you own (or have inherited) property in Germany, it makes sense from a German tax mitigation perspective to transfer some or all of it to your children or grandchildren during your lifetime. In fact, as early on as possible. Because this allows you to take advantage of the high German gift and inheritance tax allowances multiple times. One particularly efficient way of doing this is to set up a German property management partnership (vermögensverwaltende Personengesellschaft). This opens up many interesting possibilities compared to the simple transfer of property ownership shares directly.

Utilise gift allowances and avoid inheritance tax

If real estate in Germany is gifted on death, German inheritance tax will apply if the value of the property is above the personal allowances of the respective beneficiaries. This is often the case, especially in view of the sharp rise in German property prices over the last 20 years (especially in larger German cities). For persons who do not have their residence in Germany, the problem is even greater because German tax law does not grant the full personal allowances in these situations.

It therefore often makes sense to transfer part or all of a property to your children (or even grandchildren) while you are alive. This permits the multiple use of the gift and inheritance tax allowances for children (€400,000) and grandchildren (€200,000). Multiple use means: (i) the allowance is available per person / beneficiary / done; and (ii) as soon as ten years have passed since the last gift, the tax-free allowance is renewed and can be utilized again for further gifts or inheritances. Thus, wealthy Germans usually do not wait until their 60s or 70s in order to transfer property to the next generation. Instead, they start this process early on. Especially since German law permits for the donor to retain a life interest (usufruct, Niessbrauch) without incurring negative tax effects. For details on this see:

How to mitigate German Gift and Inheritance Tax by way of Niessbrauch (usufruct, life interest, reservation of benefit)

Partial transfer of German real estate

In many cases, the owner (you) may not wish to transfer the entire German property to the next generation. Either because the value of the German real estate exceeds the tax allowances or because the owner wishes to retain a certain share for himself. In these situations, it is possible to transfer only a part of the property, i.e. a certain ownership share, which creates tenancy in common of this German property (Eigentümergemeinschaft, Bruchteilseigentum).

This is not ideal because it creates certain legal risks. If, for example, there is a dispute within the family as to whether the property shall be sold or not, each co-owner can demand the “division of the co-ownership”. If no agreement can be reached by the owners and the German house or flat can thus not be sold by mutual agreement, the court will order an auction to liquidate the German property.

Transfer of real estate in Germany by setting up a German property management partnership

In many such cases, the establishment of such a German partnership (Kommanditgesellschaft or Gesellschaft bürgerlichen Rechts) is a great tool to avoid these risks and ensure a flexible transfer of shares to the children and grandchildren. Also, such a “familie partnership” (Familiengesellschaft) in the form of a limited partnership protects its partners (i.e. the German family members) from personal liability, which is especially helpful when minors are concerned (who are able and permitted to own property under German law).

The structure of such a limited limited partnership (Kommanditgesellschaft) under German law – in a nutshell – is this: The Kommanditgesellschaft (referred to as “KG”) has one personally liable partner, the “general partner” (Komplementär), and at least one or more limited partners (Kommanditisten) whose liability is limited to a fixed amount (the liability deposit, in German: Kommanditeinlage).

As a rule, in such property management family partnerships, the parents usually take on the role of general partner, who also have the authority to manage the partnership. The children receive limited partner shares.

If no family member at all is to assume personal liability, this can be achieved by making a limited liability company (GmbH) the general partner. This very common corporate structure is referred to as “GmbH & Co. KG”, i.e. a German limited partnerships whose only fully liable general partner is a GmbH.

The main advantage of such a partnership over corporations (e.g. GmbH) in Germany is that income generated from the management of the property (rental and lease income) is not subject to German trade tax (Gewerbesteuer), but is considered personal private income from rental and lease. Such income is therefore only subject to the personal income tax of the respective shareholder (limited partner). Both the parents and the children can each use their own tax-free allowances. Furthermore, no German corporation tax (Körperschaftsteuer) is due.

Further advantages of the property-managing family company

The partnership also offers the possibility to regulated the rights and obligations of the partners in the articles of association (Partnerschaftsvertrag) as well as in bi-lateral side agreements by all or some partners. The articles usually also stipulate what shall happen in the event of the death of a limited partner, i.e. who shall inherit that partners share. For example, it is often included in the articles of association that only certain persons qualify to become shareholders: in this case, only children can become shareholders, but not their spouses. It is also common for the articles to state that the company will continue to exist if a partner terminates their membership and the terminating partner leaves. If a partner breaches their partnership obligations, they can be excluded from the company. You can also determine whether and to what extent the exiting partner receives compensation and how this is to be calculated. Furthermore, it is possible to use the partnership agreement to instruct the children to conclude prenuptial agreements with their spouses and to remove the partnership shares from any claims by the spouse in German divorce proceedings (an English family court may see this differently).

Conclusion: Setting up a limited partnership for the lifetime transfer of German real estate

Setting up a family limited partnership (Familien-KG) by contributing real estate and transferring limited partners’ shares to the children offers many legal and tax advantages and individual structuring options. Creating such a corporate structure in Germany makes only sense of course, it there is significant property value in Germany and if the German property shall be held by the family members for a significant time. If you merely own one or two apartments in Germany and your beneficiaries will most likely sell those after your death, the a Family partnership is probably “overkill”. In that situation, a high quality German will or a lifetime gift (with or without retention of a life interest for yourself) shall suffice.

More information on German inheritance tax, estate planning for UK-German families and on international probate:

The law firm Graf & Partners and its German-English litigation department was established in 2003 and has 20+ years of experience with British-German and US-German probate matters, including the representation of clients in contentious probate matters. If you wish us to advise or represent you in a German or cross border inheritance case please contact German expert lawyer Bernhard Schmeilzl, LL.M. (Leicester) at +49 941 463 7070.

Tags:

How to transfer German property to your children or grandchildren tax free