Inherit and invest: How to do it the right way

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December 2022

The wealth of Germans increases year after year - and a not inconsiderable proportion of it is inherited. A study commissioned by the German Institute for Retirement Provision (Deutsches Institut für Altersvorsorge) and conducted by the empirica Institute shows just how much. According to this study, the assets of Germans have more than doubled in the past 20 years and even increased fivefold in the past 30 years. Of the total assets of all German households amounting to a good eleven trillion euros, according to the empirica study, 3.1 trillion euros will change hands through inheritance by 2024.

If you, too, unexpectedly have a larger amount of equity available to you through an inheritance or a gift, you will find yourself in an already challenging situation and, on top of all that, you will also be confronted with difficult questions. How do I handle all this money? Can I accept my inheritance without risk? What costs will I have to pay? We explain what you should bear in mind and how you can use the unexpectedly received money wisely.

Step one: Check your heritage / your gift

When you receive an inheritance, you will probably be overwhelmed at first. Despite all the grief over the death of a loved one, you should neither take too much time nor rashly just accept the inheritance. You have six weeks to decide whether or not to accept the inheritance - if you haven't made a decision by then, the inheritance is automatically considered accepted. You should think carefully about the decision to accept or reject the inheritance. If you take on horrendous debts with the inheritance, this could drive you into financial ruin. Therefore, check carefully what exactly is part of the inheritance. If the debts outweigh the benefits, it may be wiser to disclaim it.

In any case, you should plan your next steps carefully. In Germany, taxes must be paid on inherited assets – as well as on gifts. You must declare the amount of the inheritance or gift to the tax office within three months and submit it for taxation.. However, there are allowances and exceptions. For example, it is possible to inherit or give away household goods worth up to 41,000 euros to a spouse or partner, children, grandchildren, great-grandchildren or parents without incurring taxes.

Special case: Real estate as a gift

If you receive a property as a gift, you can be particularly pleased: you do not have to pay any taxes and the tax-free allowances also remain unaffected - an extremely practical special case under German law. However, there is one thing you must bear in mind: If the testator lived in the property himself before his death, you must use the house or apartment yourself for at least ten years after receiving it. If you move out before the end of this period, you will have to pay inheritance tax. If you sell the property, speculation tax may also be due. If you are the child of the deceased, the property must not exceed 200 square meters of living space in order to remain tax-free. However, these legal trifles should not dampen your joy over the property. An inheritance or a gift is an excellent way to finally be able to fulfill your dream of owning your own four walls.

Inheritance and gifts: Pay attention to allowances

When it comes to money, the tax-free amounts for inheritance and gifts differ, in some cases greatly, depending on the degree of relationship: For spouses and civil partners, up to 500,000 euros are exempt from tax, for children it is 400,000 and for grandchildren 200,000 euros. If you are a great-grandchild or inherit as a parent from your child, you can receive a maximum of 100,000 euros tax-free. If you are not related to the testator, the upper limit is 20,000 euros. Anything above is subject to inheritance tax. Again, the closer you are related to the deceased, the lower the tax rate. A maximum tax rate of 30 percent applies to parents, children, grandchildren and civil partners - but to do so, you would have to inherit more than 26 million euros, minus the tax allowances.

Step two: Analyzing your financial situation

Once all the formalities have been completed and you are now in possession of the inheritance to which you are entitled, you should consider whether it makes sense to first pay off any debts you may have of your own. You may be able to rid yourself of an annoying legacy that you have been carrying around for far too long, or you may be able to pay off a current loan much sooner than you would have thought possible. The latter is not necessarily a good idea: If you already own a property that you were able to finance on favorable terms, it's not a good idea to pay off the loan early - not least because an early repayment penalty is incurred if you repay a property loan before the fixed interest rate expires. In addition, especially with capital investments, expenses that you can offset against your income for tax purposes are always advantageous. So analyze your own financial situation thoroughly before you finally decide on your next course of action and take the next step.

Step three: Invest remaining capital properly

Once you have carefully reviewed your financial situation, the next step is to invest your remaining assets wisely. In general, it is recommended that you do not rely on bonds, call money accounts or even cash for your investments. All of these methods are highly susceptible to inflation, which, according to the Federal Statistical Office, exceeded ten percent in Germany in October 2022. Instead, you should invest your money in real estate or stocks. These forms of investment are tangible assets that represent a significantly better long-term investment than cash in times of strong inflation. For one very simple reason: tangible assets do not lose value due to inflation. Real estate is considered to be particularly stable in value and inflation-proof. Shares or precious metals such as gold are sometimes subject to strong market fluctuations. Especially if you own residential property and rent it out, you receive the monthly rental income in addition to the value of the property itself.

The ideal solution: diversify your investments by investing broadly in the real estate market. Real estate can also still be an excellent retirement provision - but be sure to consult the experts at ACCENTRO if you are unsure!

By the way, you don't have to worry about the potential to increase property values. The ACCENTRO Homeownership Report has stated for 2021 that the market for residential real estate has recovered from the effects of the Corona pandemic and is in the process of diligently catching up: at just under 43 billion euros, total sales in 2021 are up 19.4 percent on the previous year, and with 127,967 transactions, the number of sales in Germany has also climbed - by 4.4 percent. As residential property remains a scarce commodity - especially when it comes to new builds - and demand remains high, prices will only continue to rise - all to the benefit of the associated increase in value.

Wills, inheritance law and going to the notary public

Involving a notary is not always mandatory in the case of an inheritance or a donation. However, a professional can help eliminate ambiguities or prevent them from arising in the first place. If a notary is consulted while the will is being drafted, for example, he or she can help find the right wording and thus ensure that the document is valid as drafted. Remember: A will is only valid under German law if it was written by hand. If it is typed, it is invalid - even if it was signed by the testator. If you find a will of the deceased, you are obliged to file it with the competent probate court.

Going to a notary can also be worthwhile for you as an heir if, for example, it is necessary to issue a certificate of inheritance. This document clarifies who the heir is or who the heirs are and how large the respective inheritance share is. Such a certificate of inheritance may be necessary if a larger amount than assumed is inherited or if the succession is not clear.

What costs you will incur

In the context of an inheritance, you not only have to deal with the death of a loved one, you also incur some costs - for example, for the funeral and the gravestone or later for grave maintenance. You can claim these costs for tax purposes as part of the inheritance lump sum. This lump sum amounts to 10,300 euros per death and can be deducted when filing your inheritance tax return. Unless your costs exceed the amount of 10,300 euros, you do not even have to provide proof. Incidentally, you can claim the inheritance tax lump sum even if you have not paid any funeral expenses. According to a ruling from 2019, the only prerequisite is that you have incurred expenses directly in connection with the settlement or receipt of the estate. It doesn‘t matter how small these expenses are, but you must be able to verify them to the tax office.

Do you have any questions? ACCENTRO supports you with all your concerns!

You have inherited a large sum and are not sure how best to invest it in a freehold apartment? Feel free to contact us if you are interested - as an expert in real estate as a capital investment or for owner-occupancy with specific investment opportunities, we at ACCENTRO are here to help you with any questions you may have about investing in residential property and assist you in finding the property or properties that best suit your needs.

Further readings


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