In more detail

The case that the German Federal Fiscal Court had to decide concerned the donation of a house by a father to his daughter, who in turn donated half of the house to her husband. As a result, finally each of the spouses owned half of the house. The tax authorities argued that the donation of the father must be taxed as if he donated half of the house directly to his son-in-law. In contrast to the daughter, the son-in-law would only qualify for a personal allowance of EUR 20,000 and the tax rate according to the less beneficial tax class II for such donation from his father-in-law, while for a gift from his wife he qualifies for a personal allowance of EUR 500,000 and the most beneficial tax rate of tax class I.

According to the German Federal Fiscal Court, in cases where an asset is transferred to a person by way of a gift (Sec. 7 Para. 1 No. 1 of the German Inheritance and Gift Tax Act) and the asset is transferred shortly thereafter to another person, the determination of the respective donor and the respective beneficiary is based on whether the person passing on the asset has an independent decision-making power regarding the disposal of the gifted asset. Whether a donee can freely dispose of a donated asset or is obligated to pass it on to a third party must be decided based on the specific circumstances of the relevant case, considering the respective contracts, their consistency in relation to the contents and the objectives of the parties that were evidently intended upon entering into the specific contractual arrangements.

The German Federal Fiscal Court thus clarified that, a valid consecutive gift structure requires:

• At least two successive gifts which are legally effective.
• The intermediary donee must obtain the right to fully dispose of the gifted assets, i.e., the gift may not be made on the condition that all or part of the gift is transferred to another person.

Recommendation

Consecutive gifting is a popular and effective structure for cases in which a direct gift would lead to an increased gift tax burden. In order to achieve the intended tax benefits, the requirements established by case law must be considered upon the implementation of a consecutive gifting structure. Otherwise, it may lead to a gift of assets subject to a condition and thus a direct gift of the first donor to the final beneficiary with the tax consequences that should be avoided. Therefore, if the intermediary donee intends to pass on the gift to another person, close attention must be paid to the implementation of consecutive gift arrangements. In any case, the contractual agreements must clearly emphasize the power of disposition of the first donee and all provisions must be avoided that could result in an obligation of the first donee to transfer all or part of the gift to another person.