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In the event that an heir waives their right to the statutory share in the estate and opts to defer claiming compensation, the deferral interest is subject to income tax. That was the verdict of the Bundesfinanzhof, Germany’s Federal Fiscal Court (Az.: VIII R 22/17).
It is not uncommon for claims to the statutory share in an estate to be waived, particularly if the spouses mutually appoint each other as sole heirs in their will in the first place. This often goes hand in hand with an arrangement with the children to forgo the statutory share in the estate, thus ensuring that the surviving partner is financially protected following the death of the other partner and preventing the children who are entitled to inherit from claiming the statutory share. We at the commercial law firm MTR Rechtsanwälte note that this kind of arrangement may provide for compensation.
Such were the circumstances in the case in question that came before the Bundesfinanzhof. Here, the parents – having mutually appointed each other in their will as sole heirs – entered into a notarized agreement with their children in 1994, pursuant to which the latter were to waive their claim to the statutory share in the estate. Each child was to receive a settlement worth around 77,000 euros as compensation. One of the daughters issued a notarized declaration stating that she would initially waive her right to the settlement. The sum – accruing interest at a rate of 5 percent p.a. – was not to be paid out to her until the longest-living parent passed away. The compensation was paid out in 2015, with the daughter receiving around 157,000 euros including interest.
By deferring her entitlement to claim compensation, the daughter received approx. 80,000 euros in interest. However, she had not accounted for the tax office, which sought to tax the interest as income from capital.
The daughter refused to accept this, claiming that the sum was not subject to taxation because it had come from a gift made by her parents while they were still alive. The Finanzgericht granted to action, ruling that no portion of the payment made by the parents was taxable.
The Bundesfinanzhof nevertheless overturned the decision in a judgment from August 6, 2019. The payment of interest for the deferral of compensation was said to have given rise to the accrual of investment income that was subject to taxation.
Tax-optimized arrangements are crucial when it comes to gifts or forgoing the statutory share in an estate. Lawyers with experience in the field of tax law can offer advice.