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Renouncing the inheritance as a tax-saving scheme

Many people are aware that an inheritance does not necessarily have to be accepted, but can also be renounced if necessary. However, this option is generally only used when the estate is heavily indebted. Yet a renouncement can also make sense when the estate has a positive balance. For instance, inheritance tax advantages can often arise from a renouncement in exchange for compensation.

Although the compensation paid to the renouncer is deemed to be a taxable transfer by reason of death and therefore subject to taxation, the compensation permits an economic “distribution” of the inheritance across many parties, for instance, from the widow of the testator to the mutual children or grandchildren. This means that several personal tax-exempt allowances can be exercised and thus used to reduce the tax burden incurred by the entire inheritance. This model is a option at any rate if the testator has not already exploited these tax exemption amounts via gifts in the ten years prior to his/her death.

Furthermore, the compensation must not necessarily be paid out as a sum of money. It can also be other economic goods, such as a plot of land, which then have to be assessed with the respective taxable value. Nonetheless, depending on the individual case, renouncing the inheritance in exchange for compensation can have repercussions in the area of income tax and land transfer tax, which can reduce or eliminate the advantages illustrated above. However, there will often be advantages on the bottom line - above all if the estate includes leaseholds.

The model only works of course if the renouncement of the inheritance is still possible at all. If the six-week deadline since notification of the death of the testator and one’s own status as an heir has passed, a renouncement is no longer possible. The same applies if the inheritance has already been accepted explicitly or by implication. Even though a renouncement should still be possible in principle, it first has to be determined who then would replace the renouncer as the substitute heir. The utmost care is required here to avoid nasty surprises. Under some circumstances, it may also be appropriate to conduct research into unknown illegitimate offspring.

Conclusion: In cases where “the horse has bolted” in terms of inheritance tax, renouncement in exchange for compensation is an option to rectify the situation.

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