The legal concept of trusts is not known to German law, which does not allow legal ownership on the one hand and beneficial ownership on the other hand to be separated. Germany cannot be trust assets, and a trustee cannot be recorded as the owner of real property in Germany. This creates significant problems when a U.S. based decedent with a traditional estate plan leaves assets in Germany. Pour-over-wills usually provide that the residue of the (probate) estate shall go to the trustee in order to administered and distributed according to the terms of the trust. Moreover, trust agreements between spouses often do not contain specific language that would allow for qualification of the surviving spouse as an heir, or the sole, heir under German standards. It is not uncommon that estate plans drafted by practitioners in the United States fail to address assets and heirs in Germany with these differences in mind. As a result, the settlement of the estate will be significantly delayed and the heirs will incur additional legal fees in order to process the incompatible U.S. estate plan through the German court system. How are cross-border estates taxed? Germany levies an inheritance tax which provides for different exemptions and tax brackets depending on the degree of kinship. Each recipient is taxed individually. Spouses, lineal descendants, and parents are in the most favourable tax class 1 with exemptions of up to 500,000 Euros and tax rates between 7% and 30%. Siblings, nieces, and nephews are in class 2 with an exemption of 20,000 Euros and tax rates from 15% to 43%. All other recipients are in tax class 3 with an exemption of 20,000 and tax rates between 30% and 50%. Estate plans drafted in the U.S. are typically ignorant of German inheritance tax consequences which can create unintended tax consequences, and a significant risk of malpractice for the drafter. If both the decedent and the recipient are non-residents and non-citizens of Germany, or citizens without residence for a number of years, the inheritance tax applies only to German situs property such as real property and business interests. If the decedent is a citizen or permanent resident of the U.S. the value of the German estate will be part of the worldwide estate subject to U.S. estate tax. The provisions of the double taxation agreement between the United States and Germany apply. Even if the value of the overall estate does not exceed the federal estate tax exclusion amount (and also if it does and the decedent is not a citizen or permanent resident of the United States) an interest in an estate in WWW.LAWYER-MONTHLY.COM 19 Holger Siegwart, Esq SIEGWART GERMAN AMERICAN LAW, INC.
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