Transferring wealth: Schenkung vs. Erbschaft

One exception concerns parents and grandparents: the EUR 100,000 allowance in tax class I applies only in the case of inheritance. If they receive a gift during the giver's lifetime, they fall into tax class II with an allowance of just EUR 20,000.

The decisive difference lies not in the size of the allowance but in its repeatability and its timing. With a gift, the same allowance, say the EUR 400,000 per child, can be used again every ten years. In an inheritance it is available only once. In return, the inheritance case carries a set of additional reliefs that a gift does not grant: the Versorgungsfreibetrag (survivor's pension allowance), the tax exemption for the family home, and the tax-free Zugewinnausgleich (equalisation of accrued gains) on the death of a spouse.

Tax comparison: which is cheaper?

Whether giving or bequeathing is cheaper cannot be answered in the abstract. It depends on the wealth itself and on the family relationship.

The genuine advantage of a gift is twofold. First, the Paragraf 16 allowance can be used repeatedly thanks to the ten-year rule, so that over two or three decades considerably more can be transferred tax-free than in a single inheritance. Second, the gift freezes today's value: if the transferred wealth grows later, the increase accrues to the recipient and no longer falls into the estate.

Set against this are reliefs that only the inheritance case grants and that a gift cannot replace:

For spouses, therefore, death can shield more than any gift: on top of the EUR 500,000 allowance come the Versorgungsfreibetrag of up to EUR 256,000, the unlimited exemption of the family home under Paragraf 13 No. 4b ErbStG, and the tax-free Zugewinnausgleich under Paragraf 5 ErbStG. None of these exemptions is granted by a gift in the same form.

For the family home passing to children, the exemption under Paragraf 13 No. 4c ErbStG is confined to the inheritance case and tied to immediate owner-occupation. Whoever gives away the parental home during their lifetime may trigger a tax that death would have spared. The claim that “a gift is always cheaper” is therefore untenable.

The ten-year rule for gifts

The ten-year rule is the heart of gift planning. It works like a clock running backwards: for each new gift the tax office looks back ten years and adds in every transfer from the same person. Gift tax already paid is credited, so no double taxation arises. Whoever transfers early and in stages can draw on the allowance more than once.

This planning carries one condition that is not negotiable: the giver must survive the ten years. If they die sooner, the gifts of the last ten years are aggregated with the estate for inheritance tax. The repetition of the allowance then does not take hold. “Give early” is therefore not a trick but a question of lead time.

Calculating the Schenkungsteuer

If the personal allowance is exceeded, tax falls only on the amount above it, the taxable acquisition. The tax class I rates under Paragraf 19 ErbStG rise with the size of that acquisition:

One important quirk: the applicable rate applies to the entire taxable acquisition, not only to the portion in the higher band. This is therefore not a marginal banded tariff like the income tax, but a full-amount tariff. The Härteausgleich (hardship adjustment) under Paragraf 19 Abs. 3 ErbStG cushions the jumps at the tariff thresholds, so that a narrow overshoot does not lead to a disproportionate rise in tax.

An illustrative case, not a forecast: if a parent gives a child EUR 475,000, then after deducting the allowance of EUR 400,000 exactly EUR 75,000 remains as the taxable acquisition. On this amount, 7 % falls due in tax class I, that is EUR 5,250. The calculation holds only if no further gift from the same giver is added within the preceding ten years.

The Pflichtteil and aggregation

Alongside the tax-side ten-year rule there is a second, entirely separate ten-year period in civil law. Knowing both at once without confusing them is the most common stumbling block in succession planning.

The Pflichtteil (compulsory share) secures close relatives a minimum portion of the estate, even where they have been disinherited. Whoever reduces the estate through lifetime gifts can hollow out the Pflichtteil. The Pflichtteilsergänzung under Paragraf 2325 BGB counters this: for the purpose of calculating the compulsory share, a gift is notionally added back to the estate.

This addition melts away over time. A gift in the final year before death counts in full, that is at 100 %. With each further full year the share taken into account falls by one tenth. After ten years the gift is left out of account for the Pflichtteil. This gradual taper sets the civil-law period clearly apart from the tax one, where a gift falls out abruptly and entirely after ten years.

Two special cases matter:

The second constellation is delicate: a reserved Nießbrauch (usufruct, a retained right of use) does lower the taxable value of the gift, but under the case law of the Bundesgerichtshof it as a rule does not start the Pflichtteil clock. The gift then continues to count for the compulsory share at its full amount, even though it is tax-advantaged.

Structuring strategies

Beyond the bare choice between giving and bequeathing there are recognised structures, which should nonetheless be guided by an expert. They are not self-running and take effect only under particular conditions.

The reserved Nießbrauch allows wealth, often a property, to be given away while the giver retains the use and the income for life. The capitalised value of this right of use is deducted from the taxable value of the gift under Paragraf 10 and Paragraf 14 BewG, which reduces the Schenkungsteuer. The giver hands over ownership but keeps the economic use. Bear in mind the consequence for the Pflichtteil noted in the previous section.

The Kettenschenkung (chained gift) draws on several allowances by passing wealth on through an intermediary, for instance from a parent through their own child to the grandchild, or between spouses and then on to the joint child. The Bundesfinanzhof recognises this structure, but only if the intermediary can dispose freely of what was given and is under no obligation to pass it on. Where such an obligation to pass on exists, the tax office treats the chain as an abuse of structuring under Paragraf 42 AO and taxes it as if the gift had gone directly to the final recipient.

Recommendation: when to give, when to bequeath?

There is no universally valid answer, but there are recurring patterns that can serve as planning anchors and always depend on the individual case.

An early gift tends to pay off when a large estate is to pass to children or grandchildren and there is enough lead time. The Paragraf 16 allowance can then be used repeatedly across several ten-year cycles, and an expected increase in value shifts to the next generation. Both presuppose that the giver survives the respective periods and is not themselves reliant on the transferred wealth.

The inheritance case is often the cheaper solution for spouses and for an owner-occupied family home. The combination of the EUR 500,000 allowance, the Versorgungsfreibetrag of up to EUR 256,000, the family-home exemption and the tax-free Zugewinnausgleich can shield more than a gift could ever achieve. For children who inherit the parental home and move in themselves, the Paragraf 13 No. 4c exemption applies only in the case of death in any event.

In practice it is rarely an either-or. A combination is often sensible: give away liquid or fast-growing wealth early and in stages, and reserve the family home and the spouse-related exemptions for the inheritance case. Which mix holds up in a given case depends on the kind of wealth, age, marital status and life plans.