After the inheritance: Super legacy can save tax allowances

In estate planning between spouses, the primary focus is often on protecting the surviving spouse. This spouse should initially receive the marital assets as the sole heir, while the children of the spouses are only considered after the surviving spouse has also died. This desire is even more pronounced the less liquid the marital assets are. For example, the owner-occupied property should not have to be sold in order to allow the children to participate in the estate of the first spouse to die.

A frequently chosen option in practice is the Berlin Testament. The children are disinherited by the first spouse to die, in order to later inherit the second spouse, who has combined the spouses' entire assets. While this approach effectively reflects the surviving spouse's interest in securing their inheritance, it inevitably leads to the unused tax allowance that the children could claim after the death of the first parent to die.

For example, each child or stepchild has an allowance of €400,000. If there are three (disinherited) children and the first spouse to die leaves an estate of €3 million, the tax liability increases by three times €400,000 (allowance) times 19 percent (tax rate) – a total of €228,000.

In order to avoid this tax burden, the so-called super legacy has established itself as a flexible and tax-efficient means of structuring.

Typical design of the super legacy

The super legacy is based on the classic legacy (combination of purpose and destination legacy), but gives it a special flexibility.

The super legacy is predominantly used in marital wills and is based on the Berlin Testament: The surviving spouse becomes the sole heir of the first to die. However, the surviving spouse is also granted the right to designate a legatee—for example, common children—after the death of the first to die and to endow this person with the estate of the first to die (so-called right of designation).

The special feature is that the surviving spouse can decide retrospectively (postmortem) on behalf of the deceased spouse whether and to what extent other persons will receive a share in the estate. The first spouse to die can thus delegate to the surviving spouse the decision as to whether the children or other persons will receive a share in the estate (and thus be able to utilize the tax allowances).

If, after the inheritance, the surviving spouse determines that there is no or insufficient free cash available to allocate assets from the estate to the children, they may waive their right to determine the inheritance. Otherwise, they may, at their discretion, pass on the estate assets of the first spouse to die to the legatees.

The extent of the sole heir's right of determination is determined by the first spouse to die in their will. On this basis, the sole heir determines the specific legatee, the date of fulfillment of the legacy (Section 2181 of the German Civil Code), and the value and subject matter of the legacy after the inheritance.

Super legacy and inheritance tax

For inheritance tax purposes, the super legacy is treated as an "acquisition mortis causa." The legatee must tax the super legacy after the first spouse to die. Because the taxation is determined in the relationship between the first spouse to die and the legatee, the legatee can take advantage of the existing tax allowance. The decisive factor for taxation is the date on which the legacy becomes due.

In the case of a legacy subject to a deferred condition – that is, when the legacy only accrues at a later date after the inheritance – the tax generally only arises when the condition is met. This opens up flexibility, but also carries risks: If the legacy becomes due too late, i.e., only after the death of the sole heir, the tax allowances for the first spouse to die are lost.

Aim and benefits of the super legacy

The super legacy pursues two main objectives: firstly, to optimise the tax burden, and secondly, to give the surviving spouse maximum flexibility and control over the estate.

In contrast to the traditional Berlin will, in which children only inherit after the death of both parents, the super legacy allows them to benefit from the first inheritance. This allows the children's personal tax allowances to be used from the first inheritance. Double taxation at the level of the tax allowances and a potential tax progression disadvantage are avoided.

The super legacy thus allows the inheritance of assets to be postponed until a time when the needs of the surviving spouse and the situation of the children are more clear. The sole heir can adjust the payment of the legacy to their own financial situation; since they can determine the maturity date themselves, they do not have to immediately transfer assets to the children. Above all, this gives the surviving spouse the opportunity to decide, based on significantly improved knowledge, whether their own long-term security interests permit an early participation of the children in the assets.

The super legacy can also be used to defuse disputes over compulsory shares or to flexibly take special family situations, such as those involving dependent children, into account and to distribute the estate more individually.

Risks and limitations

The super legacy lacks both an independent legal basis and supreme court rulings. In some higher court rulings, the super legacy has been explicitly recognized, provided the circle of potential beneficiaries and the purpose are sufficiently defined (Higher Regional Court of Hamm, Case No. 15 W 256/18).

More difficult is the question of tax recognition by the Federal Fiscal Court with regard to the desired tax advantages. While the accusation of abuse of legal form is unlikely, it cannot be ruled out with absolute certainty. Last but not least, the flexibility of the super legacy is also its greatest weakness. If the right of determination is defined too broadly, the legacy can be considered an impermissible appointment of an heir.

Conclusion

The super legacy is a modern and flexible instrument for estate planning that offers significant advantages, especially in wills between spouses. It helps to balance the often vague notion of how the future will unfold at the time of the will's execution. Decisions that cannot be made or can only be made provisionally at the time of the will's execution can be corrected within predetermined guidelines by the surviving spouse after the death of the first to die.

The super legacy primarily ensures that tax allowances are not left unused. However, it goes far beyond this and creates the conditions for targeted adjustments to testamentary dispositions that no longer reflect developments since their creation.

About the author:

Jens-Hendrik Kern is a lawyer and partner at SKW Schwarz in Munich. Kern advises primarily on corporate and asset succession, including all related inheritance, family, corporate, and tax law issues.