Well-intentioned but poorly planned: When financial provisions go wrong
Executive Education / 8 May 2024
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Senior Programme Manager Executive Education
Thomas Kohrs is head of Asset & Wealth Management in Executive Education at Frankfurt School. He is a qualified banker and focuses on the areas of securities and sales. He has more than 25 years of practical experience as a consultant, trainer and lecturer at Frankfurt School.

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In my ongoing consultancy work, I was recently involved in a case that once again demonstrated how problematic well-intentioned but poorly executed financial planning and inheritance arrangements can be. Very often, the necessary decisions are not made in time or are not adapted to developments as expectations, wishes, ideas or – most importantly – family or economic circumstances change.

Macabre but true: the customer is dead. Now what?

My client’s mother passed away after a long period of dementia. Following the early death of her father more than 30 years ago, my client is the only direct descendant. The deceased was not married to her long-term partner. She left a house, money in her bank account and what appeared to be a clear will. In the will, she names her daughter as her sole heir, but gives her “future husband” life interest in the house, overriding the provisions of the German Civil Code (BGB). The usufructuary must pay the taxes, renovations, etc. himself. In this respect, his right of usufruct is not unencumbered.

In addition, the life partner has power of attorney for the accounts and transferred cash to the grandchildren (my client’s adult sons) a few days after the account holder’s death, which the deceased had intended to do some time ago. In this respect, the transaction was in accordance with the wishes of the deceased.

The consequences

First, let us look at the usufruct. In principle, it was a good idea. But the intention was different. Making the daughter the sole heir and granting the life interest to her partner is legally clear and perfectly in order. However, the phrase “to my future husband” brings a problem to light: the right of usufruct must be taxed, just like any other inheritance. However, as the two partners did not marry before the mother’s death, the partner is treated as a “third party” for tax purposes. This means that the partner’s inheritance allowance is only 20,000 euros instead of 500,000 euros for spouses. This amount will not be sufficient for many years of usufruct and a long life of the beneficiary. Then there is also the lower tax rate, which turns the whole thing from an advantage into a disadvantage. Especially if the costs of the property are still to be borne by the beneficiary, i.e. the whole thing is not simply a material advantage.

The transactions after the account holder’s death are completely irrelevant from a tax perspective. The daughter is the sole heir to all the assets and will have to pay tax on them if the exemption thresholds are exceeded.

This could have gone better!

With a little more estate planning, things could have been very different. Unfortunately, this applies to the majority of testamentary dispositions in Germany. Only 20% have an up-to-date will (Proportion of Germans with a will in 2022 | Statista). A small addition would have prevented many problems from arising in the first place. For example, it would have made a lot of sense to get everyone involved together at an early stage and make provisions for the worst-case scenario. The client could have saved money by having a health care proxy, a will, powers of attorney for bank accounts and other requirements in place. Plus, a lot of legwork, costs and aggravation. Even a very short handwritten sentence added to the notarised will can make your will much clearer and save tax. Simply by saying: “In addition to my notarised will dated (date), I leave each of my grandchildren the sum of x euros”. Place, date, signature. That’s it. The grandchildren can then use their own tax allowance. Or make a joint agreement with all the surviving relatives about the right of residence. Talking about it early on really helps! Just putting your wishes in writing often opens up new possibilities.

It’s all about asking: questions, questions, questions!

The most important questions everyone should ask themselves when making arrangements for their estate are: “Who do I want my assets to go to when I die, and for what purpose? All other questions and ways of finding the best solution can be dealt with later.

The fact that the client’s mother had put her money in savings and fixed-term deposit accounts with very low interest rates was not necessarily an advantage either. But that’s another story. However, getting the right advice early on helps a lot here, too.