German inheritance tax law is based on the idea that inheritance is governed by an heir’s familial relationship to the deceased. Unlike American or English law, much of an inheritance is legally awarded to certain heirs. The maker of a will cannot simply give away all his property. Heirs are divided into three classes. Members of a lower-numbered class inherit completely before any members of a higher class. Inheritance tax is based on the class of the heir. Heirs of lower classes pay taxes at a lower rate than those of a higher class, and command a larger tax-free exemption.
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Class One Heirs
Under German inheritance tax law, Class One heirs include spouses and registered same-sex partners, lineal descendants and direct ancestors. Same-sex partners are treated the same as widows or widowers. Lineal descendants are children, stepchildren and grandchildren of the deceased. Direct ancestors include parents and grandparents of the departed. All children inherit equally, and all children before all grandchildren. If one child dies before the deceased, then the other children divide the inheritance among themselves, minus the proportion legally reserved for the spouse. The surviving spouse’s portion is determined by the matrimonial property regime under which the couple lived. The particular regime is determined by the couple, and varies in accordance with German law. Ancestors inherit only when there are no other heirs in Class One.
Class Two Heirs
German inheritance tax law recognises siblings and their descendants, as well as in-laws and spouses as members of Class Two. Siblings come before nieces and nephews. Step parents inherit next, followed by parents-in-law, and lastly, any former spouses of the deceased. Parents and grandparents occupy an unusual position in the class scheme. If they actually inherit a part of the deceased’s property, they will be considered part of Class One for tax purposes. If they were given a part of the deceased property as a gift while the deceased was still alive, they will pay tax as though they were members of Class Two.
Class Three Heirs
Class Three covers all possible heirs not included in either of the other two classes. A curious feature of German inheritance law is the fact that registered same-sex partners are considered part of Class Three for tax purposes. Their tax exemption, however, is the same as that of a Class One widow or widower. The discrepancy in classification is the result of changes made to German law in 2008. Life partners were formerly full members of Class Three.
Inheritance Tax Exemptions
Before paying any inheritance tax, heirs must determine how much property they can exclude from the payment of tax. According to German inheritance law, Class One heirs are considered as parts of various subclasses. Widows and widowers do not pay taxes on the first 500,000 Euros of the property’s value. Children, stepchildren, and grandchildren whose parents predeceased them can exempt the first 400,000 Euros. Grandchildren who receive their inheritance as a gift exempt the first 200,000 Euros, while parents and grandparents can claim an exemption of only 100,000 Euros. Class Two heirs universally exempt the first 20,000 Euros. Class Three heirs--except same sex life-partners--claim a 20,000 Euro exemption, while life partners are entitled to the spousal 500,000 Euro exemption. However, members of any class who are not German residents can claim as an exception only the sum of 2,000 Euros.
Inheritance Tax Rates
German inheritance taxes consist of a percentage of the inherited property above the exempted amount. Rates vary by class, and in accordance with the value of property inherited. All Class One heirs pay 7% on amounts up to 75,000 Euros, 11% up to £195,000, 15% up to 600,000, 19% to 6 million, 23% up to 13 million, 27% up to 26 million, and 30% for all amounts greater than 26 million Euros. Members of both Class Two and Three pay 30% tax on amounts up to 6 million, and 50% above that amount. Same-sex life partners pay the tax as members of Class Three.
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