Lights on Latest Inheritance Tax Decisions: A Breakdown for Givers and Takers
Fresh rulings bring mixed fortunes for the preferred parties
From inheritance disclaimers to deductible funeral costs, recent court rulings have brought some changes to the inheritance tax landscape. Here's a lowdown on these decisions that givers and receivers alike should keep an eye on.
Skip the Disclaim, Grandkids Lose Out?
If a child renounces their legal inheritance share from a parent, the grandchildren can't claim the inheritance tax exemption (€400,000). The Federal Fiscal Court (BFH) made this clear in a recent judgment (Az. II R 13/22). This higher exemption (€400,000 instead of €200,000) is only available when the children have already departed this world. Explanation? The legislature never intended to stretch the higher exemption to the living children of the deceased grandparents.
Say Goodbye to the Funeral Home, Hey to Lower Tax Liability!
Payments from a funeral insurance policy, which the decedent assigned to a funeral home before they passed, boost the assets of the heirs. Concurrently, the heirs can fully deduct these funeral costs as inheritance liabilities, as the BFH ruled in the judgment (Az. II R 31/21). For instance, a niece and nephew recently inherited their aunt's estate. Their aunt had taken out a funeral insurance policy, with the beneficiary rights assigned to a funeral home to cover the funeral expenses. Post her demise, the funeral home asked for €11,654, which was covered by €6,865 through the insurance. The BFH determined that the full funeral cost amount should be factored into the inheritance tax, ultimately reducing the heirs' tax liability.
Tax Deductions for Capital Gains on Dividend Payments? Not So Fast!
Beneficiaries can't knock off capital gains tax incurred on dividend payments as inheritance liabilities, as per the Tax Court of Münster's ruling (Az. 3 K 2755/22). A son, who inherited GmbH shares from his father, had his case dismissed. The shareholders' meeting decided on a dividend distribution that happened after his father's demise. Subsequent payment led to 25% capital gains tax and a 5.5% solidarity surcharge being withheld. The court ruled that these taxes weren't deductible.
More to Unravel About Inheritance
- Disclaimer: Disclaiming an inheritance involves renouncing it within nine months of the death and irrevocably. If part of the inheritance is distributed or control is exercised, the disclaiming option vanishes1.
- Funeral Costs: Typically, funeral expenses can be deducted from the estate, trimming the taxable amount. Up-to-date information on funeral insurance and costs is unavailable in the latest decisions.
- CGT and Dividends: While inheritance itself often sidesteps capital gains tax, beneficiaries may encounter capital gains tax when selling appreciated inherited assets. The recent rulings have no specific updates regarding alterations to dividend payments.
Bonus Reads:
- Inheritance Tax Threatens Bitcoin and Co.
Remember, this guide is meant to provide you with an overview of the latest inheritance tax rulings. For personalized, in-depth advice, consulting a certified attorney or tax expert is strongly recommended, as the legal and financial landscape varies significantly by jurisdiction and individual circumstances.
- With the recent ruling by the Federal Fiscal Court (BFH), it's important for individuals to understand that disclaiming an inheritance share could potentially disqualify grandchildren from claiming a higher inheritance tax exemption, even if the children have not passed away yet. This could have significant implications for personal-finance and business planning.
- The BFH's decision also allows heirs to fully deduct funeral costs paid from a funeral insurance policy as inheritance liabilities. This could potentially result in lower tax liability for the beneficiaries, highlighting the importance of understanding business and finance aspects related to inheritance tax.
