If there are multiple heirs due to statutory or testamentary succession, they form a community of heirs. In principle, the estate is managed jointly by all heirs, and the assets of the estate belong to them jointly. This is known as a joint ownership community. Therefore, an individual heir cannot dispose of their share of specific assets within the community of heirs (real estate, bank account, business shares, etc.).
Who is responsible for filing the tax return and paying the inheritance tax?
Although the estate is jointly administered by an inheritance community, the obligation to file an inheritance tax return and pay the inheritance tax rests not with the community as a whole, but with each individual co-heir. The assets of the estate held by the inheritance community are allocated to each co-heir proportionally according to their share of the inheritance, insofar as this is required from a tax perspective.Section 39 paragraph 2 no. 2 AO)
How is the inheritance tax of each individual co-heir calculated?
The inheritance tax for each co-heir depends first and foremost on the value of the estate allocated to them according to their share. However, the amount of inheritance tax also depends on highly individual circumstances, which can vary for each co-heir. Above all, the co-heir's relationship to the deceased is decisive for the tax bracket and the applicable allowances. Spouses, children, stepchildren, grandchildren, and parents are assigned to tax bracket I; siblings, nephews/nieces, and parents-in-law to tax bracket II; and other third parties, including the deceased's partner, to tax bracket III. Depending on the tax bracket and the value of the inheritance, different tax rates apply. The allowances also depend on the beneficiary's relationship to the deceased. For this reason, the inheritance tax burden must be calculated separately for each co-heir and can therefore differ even if their share of the inheritance is the same.
Can the inheritance tax be paid from the estate?
The obligation to pay inheritance tax rests not with the community as a whole, but with each individual co-heir. Once the tax office has determined the inheritance tax payable by a co-heir through an assessment notice, the question arises whether the co-heir can pay the inheritance tax debt from the estate's assets. The separate determination of inheritance tax for each individual co-heir does not alter the fact that the heirs can, in principle, only dispose of the estate jointly. It is therefore not possible for a co-heir to, for example, instruct the bank that maintains an estate account to pay their personal inheritance tax from the deceased's account. This would require the consent of all co-heirs. The basis for such an instruction from all co-heirs would be a (partial) settlement of the estate. The heirs can, of course, agree during the settlement process that portions of the estate's assets will be distributed among them. It is conceivable that the co-heirs could agree, even before a final settlement, that the inheritance tax liabilities of each co-heir would be paid from the estate account. Typically, a co-heir would then be willing to pay another co-heir's inheritance tax from the estate account if their own inheritance tax liability is also settled by a payment from the estate account. If the inheritance tax liabilities are of different amounts, such a (partial) settlement agreement could, for example, be structured so that the co-heir with the lower inheritance tax liability receives a compensatory payment from the estate.
Does the inheritance tax obligation still exist if the co-heir has not yet received anything from the estate?
Yes, the inheritance tax liability of each individual co-heir arises upon the death of the testator. The dissolution of the community of heirs and the distribution of the estate's assets are not prerequisites for the creation of this liability. If the heirs cannot agree on a distribution, the process can be very lengthy. While the co-heirs could "at least" agree on paying the inheritance tax from the estate, if fundamental differences exist or the co-heirs argue about the proper way to manage the estate, reaching an agreement on paying the inheritance tax from the estate will be difficult. The co-heirs then face the problem of having to pay the inheritance tax from their own funds, even though they have not yet received anything from the estate. In such a case, a co-heir may be able to apply to the tax office for a deferral of the inheritance tax liability.
How does the distribution of the estate affect inheritance tax?
The distribution of the estate takes place within the framework of the settlement of the community of heirs. This distribution is generally irrelevant for the amount of inheritance tax. In principle, it is also irrelevant for the amount of inheritance tax owed if a co-heir receives more or less during the distribution than they would have been entitled to based on their share of the inheritance.
Danger: Even if it is irrelevant for inheritance tax purposes, such an unequal distribution can nevertheless have unintended tax consequences. If one co-heir receives more than their share is due to them according to their quota or the testator's instructions, at the expense of the other co-heirs, the tax office may consider this a taxable gift from one co-heir to another.
Example:
Brother B and sister S are both heirs of their mother, each inheriting half. The estate includes a property valued at €600,000 and a securities portfolio valued at €400,000. Since B is very wealthy, he wishes to leave the property to his sister S and is content with the securities portfolio as part of the inheritance settlement. Although B only receives €400,000 and the tax-free allowance for children is €400,000 (other allowances and tax breaks are disregarded), the tax office assesses inheritance tax against B: The estate has a total value of €1 million. Based on their respective shares of the inheritance, the tax office attributes inheritance tax of €500,000 each to A and B. Even though B only received €400,000.00, he must pay inheritance tax of 7% on €100,000.00. Although his sister S received €600,000.00 due to the unequal distribution, which is €200,000.00 more than the tax-free allowance for children, she—like her brother—only has to pay inheritance tax of 7% on €100,000.00. However, the tax office also classifies this transaction as a gift between B and S. Gifts between siblings are assigned to tax class II and are subject to a tax rate of 15% to 43%, depending on the amount of the gift. In this example, the tax office would assess a gift tax of 15%, i.e. €15,000, against S because of the gift from B to S in the amount of €100,000.00 (greatly simplified).