If you suddenly find yourself with a five-figure sum—or even more—in equity as a result of an inheritance or a gift, you’ll be faced with the question of how to handle it. We’ll explain what you need to know.
Germans’ wealth is growing year after year—and a significant portion of it is passed down through inheritance. A study conducted by the empirica Institute and commissioned by the German Institute for Retirement Provision shows just how much. According to the study, the wealth of Germans has more than doubled over the past 20 years and has even increased fivefold over the past 30 years. Of the total wealth of all German households, amounting to just over 11 trillion euros, the empirica study estimates that 3.1 trillion euros will change hands through inheritance by 2024.
If you, too, unexpectedly find yourself with a large amount of capital through an inheritance or a gift, you’ll find yourself in an already challenging situation and, on top of that, faced with difficult questions. How do I handle all this money? Can I accept my inheritance without risk? What costs will I face? We’ll explain what you need to consider and how you can put this unexpected money to good use.
Step One: Review Your Inheritance or Gift
If you receive an inheritance, you’ll likely feel overwhelmed at first. Despite your grief over the death of a loved one, you shouldn’t take too long to decide—nor should you simply accept the inheritance without careful consideration. You have six weeks to decide whether to accept the inheritance or not—if you haven’t made a decision by then, the inheritance is automatically considered accepted. You should carefully consider whether to accept or renounce the inheritance. If you inherit exorbitant debts along with the estate, this could drive you into financial ruin. Therefore, carefully review exactly what is included in the inheritance. If the debts outweigh the assets, it may be wiser to renounce the inheritance under certain circumstances.
In any case, you should plan your next steps carefully. In Germany, taxes must be paid on inherited assets—just as they must be on gifts. You must report the value of the inheritance or gift to the tax office within three months and pay the corresponding taxes. However, there are tax-free allowances and exceptions. For example, it is possible to bequeath or gift household goods worth up to 41,000 euros to a spouse or domestic partner, children, grandchildren, great-grandchildren, or parents without incurring any taxes.
Special Case: Real Estate as a Gift
If you receive real estate as a gift, you have reason to be particularly pleased: You do not have to pay any taxes, and the tax-free allowances remain unaffected—an extremely practical special case under German law. However, there is one thing you must keep in mind: If the decedent lived in the property themselves before their death, you must use the house or apartment yourself for at least ten years after receiving it. If you move out before this period expires, you’ll have to pay inheritance tax. If you sell the property, you may also be liable for capital gains tax under certain circumstances. If you’re a child of the deceased, the property’s living area must not exceed 200 square meters to remain tax-free. But don’t let these legal details dampen your joy over the property. An inheritance or a gift is an excellent opportunity to finally fulfill your dream of owning your own home.
Inheritance and Gifts: Be Aware of Exemptions
When it comes to money, the tax-exempt limits for inheritances and gifts vary significantly depending on the degree of kinship: For spouses and domestic partners, up to 500,000 euros are tax-exempt; for children, the limit is 400,000 euros; and for grandchildren, 200,000 euros. If you are a great-grandchild or are inheriting from your child as a parent, you can receive a maximum of 100,000 euros tax-free. If you are not related to the decedent, the upper limit is 20,000 euros. Any amount exceeding these limits is subject to inheritance tax. Here, too, the closer your relationship to the deceased, the lower the tax rate. For parents, children, grandchildren, and spouses, the maximum tax rate is 30 percent—but to be subject to this rate, you would have to inherit more than 26 million euros, after deducting the tax-exempt amounts.
Step Two: Analyze 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. This may allow you to free yourself from a burdensome financial liability that you’ve been carrying around for far too long, or to pay off an existing loan much sooner than you would have thought possible. The latter isn’t 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 applies if you repay a mortgage before the fixed-rate period expires. Furthermore, especially when it comes to investments, expenses that you can offset against your income for tax purposes are always advantageous. So analyze your own financial situation thoroughly before you make a final decision on how to proceed and take the next step.
Step Three: Invest Your Remaining Capital Wisely
Once you’ve carefully reviewed your financial situation, the next step is to invest your remaining assets wisely. In general, it’s recommended that you avoid relying on bonds, money market accounts, or even cash for your investments. All of these investment methods are highly vulnerable to inflation, which, according to the Federal Statistical Office, exceeded the 10 percent mark in Germany in October 2022. Instead, you should invest your money in real estate or stocks. These investment forms are tangible assets that, in times of high inflation, represent a significantly better long-term investment than cash. For one simple reason: tangible assets do not lose value due to inflation. Real estate is considered particularly stable in value and protected against inflation. Stocks or precious metals like gold are subject to market fluctuations, some of which can be severe. Especially if you own residential real estate and rent it out, you receive monthly rental income in addition to the property’s intrinsic value.
The ideal solution: Diversify your investments by spreading your holdings broadly across the real estate market. Real estate can also continue to be an excellent retirement plan—but if you’re unsure, be sure to consult the experts at ACCENTRO!
By the way, you don’t need to worry about the potential for real estate appreciation. The ACCENTRO Residential Property Report for 2021 noted that the residential real estate market has recovered from the effects of the COVID-19 pandemic and is now catching up rapidly: At just under 43 billion euros, total sales in 2021 rose by 19.4 percent compared to the previous year, and with 127,967 transactions, the number of sales in Germany also climbed—by 4.4 percent. Since homeownership remains a scarce commodity—especially when it comes to new construction—and demand continues to be high, prices will only continue to rise—much to the benefit of the associated increase in value.
Wills, Inheritance Law, and Visiting a Notary
Consulting a notary is not always absolutely necessary in the event of an inheritance or a gift. However, a professional can help clarify ambiguities or prevent them from arising in the first place. If a notary is consulted while the will is being drafted, they can help find the right wording and thus ensure that the document is valid as written. Keep in mind: Under German law, a will is valid only if it is handwritten. If it is typed, it is invalid—even if it was signed by the testator. If you find a will left by the deceased, you are required to submit it to the competent probate court.
Visiting 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 or heirs are and the size of each heir’s share. Such a certificate of inheritance may be required if a larger amount than expected is bequeathed or if the order of succession is unclear.
What Costs You Can Expect
When dealing with an inheritance, you not only have to cope with the death of a loved one, but you also incur certain costs—such as for the funeral and the headstone, or later for grave maintenance. You can claim these costs for tax purposes under the inheritance expense allowance. This allowance amounts to 10,300 euros per death and can be deducted on your inheritance tax return. Provided your costs do not exceed 10,300 euros, you do not even need to provide proof. Incidentally, you can claim the inheritance expense allowance even if you did not cover any funeral costs. According to a 2019 court ruling, the only requirement is that you incurred expenses directly related to the settlement or receipt of the estate. It doesn’t matter how small these expenses are; however, you must be able to provide proof of them to the tax office.
Do you have questions? ACCENTRO is here to help with all your concerns!
Have you inherited a large sum and aren’t sure how best to invest it in a condominium? If you’re interested, please feel free to contact us—as experts in real estate for investment or owner-occupancy with concrete investment opportunities, we at ACCENTRO are here to assist you with any questions regarding investing in residential property and help you find the property or properties that best suit your needs.
