What's The Score?
Dr Andreas Richter and Dr Maximilian Haag explain how the will trust can be used for Anglo-German estate planning without incurring a hefty tax bill
On 17 August 2015, Regulation (EU) No.650/2012 (the Succession Regulation) will substantially change the conﬂict-of-laws rules applicable to successions by death in all EU member states, except the UK, the Republic of Ireland, and Denmark. Therefore, all assets with a situs in one of the other member states, including Germany, will become subject to uniform conﬂict-of-laws rules. Assets with a situs outside these member states will remain subject to the relevant conﬂict-of-laws rules of the jurisdiction in which they are located, e.g. the UK. At the same time, such assets might be treated differently under the rules of the Succession Regulation if the testator or their heirs have a nexus to one of the member states bound by the Succession Regulation. This could result in complex legal conﬂicts that must be tackled on a case-by-case basis.
This article concentrates on assets with a situs in one of the member states applying the Succession Regulation: Germany. The following example illustrates the issues of legal recognition and inheritance tax liability in Germany surrounding the common-law will trust when used as an instrument of Anglo-German cross-border estate planning. The testator, Thomas, was born in Frankfurt of German parents. The family went to London when Thomas was three years old. Thomas is a citizen of the UK only. Thomas owns a ﬂat in Berlin, which he has rented out, and has a German bank account. He is convinced that a will trust is the only viable instrument for regulating his succession. He wants to leave two-thirds to his wife, Anthea, absolutely; one-third to his daughter, Sophie, for life; and the remainder to his other daughter, Dorothy, and his son, Stuart. Sophie has been living in Hamburg for 20 years, whereas Dorothy and Stuart have spent all their lives in London. Thomas asks how his will trust should be drafted to minimise tax liability in Germany.
A transfer of Thomas' assets out of his will trust to Sophie constitutes a receipt of assets on death. Such a transfer only triggers German inheritance tax liability, however, if somebody is personally liable for tax. That is the case if the deceased at the time of death, or the recipient of the transfer at the time at which tax liability generally arises, has their residence (wohnsitz) or their habitual abode (gewöhnlichen aufenthalt) in Germany.
In Thomas' case, Sophie resides in Germany; any transfer out of the...
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