Three practical levers: Succession planning – how wealth changes generations in a tax-smart way

Succession planning is a key issue for wealthy individuals, entrepreneurial families, and family offices. In addition to emotional and family-related issues, tax considerations play a crucial role. Those who plan too late or rely on standard solutions risk not only significant tax payments but also the fragmentation of assets, a lack of control, and protracted disputes between heirs.

Successful succession planning combines tax optimization with long-term family planning. This begins even before the will is written with a single question: What does the family want to achieve over generations – financially, emotionally, and entrepreneurially?

High burden in unstructured asset transfer

The inheritance and gift tax rules apply regardless of whether the assets are business assets, extensive real estate portfolios, or liquid assets. The relevant factor is always the fair market value (Section 9 of the Valuation Act), i.e., the current market value of the assets. For real estate, this means valuation based on market values, which are often significantly higher than the previous standardized values. Company shares or business assets are valued using standardized income approach methods, which can also lead to significant tax burdens.

While there are tax allowances available, such as €500,000 for a married couple and €400,000 per child (Section 16 of the Inheritance and Gift Tax Act, ErbStG), these are hardly sufficient for larger estates. In addition, there are progressive tax rates: In tax bracket I, they range between 7 and 30 percent, and in tax brackets II and III, they can even reach up to 50 percent. Transfers to more distant relatives or unmarried partners are particularly critical, as these are subject to not only lower tax allowances but also higher tax rates.

While tax planning instruments such as the family home privilege (Section 13 (1) Nos. 4b and 4c of the Inheritance Tax Act) or the preferential treatment of business assets (Sections 13a and 13b of the Inheritance Tax Act) offer significant tax relief, they require precise structuring. Failure to plan ahead can result in a significant tax burden, which, in the worst case, can lead to the liquidation of assets.

Those who plan early have significantly more flexibility to transfer assets in a tax-efficient and legally secure manner. In practice, three approaches have proven particularly effective:

First: Anticipated inheritance with reservation of usufruct

Traditionally, parents transfer real estate or corporate bonds to their heirs during their lifetime, combined with a usufruct right. The transferor retains the economic use, particularly the income, while ownership is already passed on to the next generation. For tax purposes, the capital value of the usufruct significantly reduces the assessed value of the gift, allowing for greater utilization of tax allowances. Another advantage: After ten years, they can use the tax allowances again.

Second: Family companies as a structuring instrument

Families pool their assets in the form of real estate, investments, or shareholdings in a single company—such as a GmbH & Co. KG (limited liability company) or a family-owned GbR (family partnership). Articles of association flexibly regulate voting rights, withdrawals, and shareholdings, thus avoiding the fragmentation of assets. At the same time, the gradual transfer of company shares allows for optimal use of tax allowances. This form is particularly attractive for entrepreneurial families because it combines tax efficiency with long-term control.

Third: Tax-optimised transfer of business assets

The Inheritance Tax Act largely exempts business assets and certain company shares. Those who meet the requirements can transfer 85 percent (standard exemption) or even 100 percent (optional exemption) tax-free. These requirements include, among other things, that the business is continued for five to seven years, that the payroll rule is observed, and that administrative assets are limited. The payroll rule in particular poses a significant risk for companies with smaller workforces, as even moderate staff reductions can lead to a (partial) loss of the exemption.

Entrepreneurs must prepare carefully. Even minor formal errors can cost them tax exemption. Complex structures such as business splits or holding companies require a thorough tax review.

Tax liability does not end at the border

The assets of wealthy families are often internationally diversified – whether through real estate in Spain, investments in Luxembourg, or a residence in Switzerland. However, an inheritance or gift is subject to unlimited tax liability in Germany if either the donor/testator or the donee/heir is a resident within the meaning of the German Inheritance Tax Act at the time of the gift or death (Section 2 Paragraph 1 No. 1 of the Inheritance Tax Act). In this case, German inheritance tax is levied on the worldwide assets.

For example, if a German-based entrepreneur transfers shares in his limited liability company (GmbH) to his child living in Zurich, German gift tax is still levied on the entire value. Swiss taxation may also be levied at the same time. This results in double taxation unless a corresponding agreement applies.

Additionally, exit taxation (Section 6 of the Foreign Investment Tax Act) must be observed. If a shareholder with a significant stake (greater than one percent) relocates their residence abroad, any notional capital gain is immediately taxed. This applies even if no sale occurs. This can cause significant liquidity problems, particularly in succession scenarios with international implications.

Anyone wishing to structure their succession internationally should check in good time whether foreign family foundations, trusts or foundation models are viable and recognized for tax purposes.

Emotions, expectations, preservation – the soft factors

The tax aspects alone are not enough. Succession always also means a loss of decision-making authority, a change in roles, and dealing with emotional ties to a life's work. Especially in entrepreneurial families, it is crucial to involve the next generation early on. This can be achieved through working in the company, becoming a partner, or through targeted asset transfers with clear terms and conditions.

Even the best tax planning won't work if it isn't embedded in a shared family strategy. Regular discussions and open communication prevent conflicts and strengthen trust between generations. Lack of communication is one of the most common reasons why well-thought-out succession plans fail.

Family offices, tax advisors, and legal advisors should therefore not only keep an eye on figures and structures, but also actively facilitate intra-family dialogue. In addition, the execution of wills, succession clauses, or the involvement of external mediators can help clarify expectations and ensure long-term family peace.

Design instead of inherit

German tax law offers a wide range of effective and legal options for transferring wealth to the next generation in a structured and tax-optimized manner. However, these opportunities only become effective if they are recognized early and implemented professionally.

Three impulses for decision-makers:

• Make full use of allowances – and reuse them every ten years.
• Combine structuring instruments – such as usufruct, family companies and exemption rules.
• Plan holistically – always consider succession from a tax, family and legal perspective.

Succession planning isn't a project for the final stages of life, but rather an ongoing process that should begin early. Acting early not only preserves tax flexibility but also creates clarity and security for the family.

Especially when it comes to complex asset structures, international interdependence, or the need for intergenerational stability, the following applies: Those who shape things preserve values. Those who hesitate risk unnecessary burdens and conflicts.

About the authors:

Benjamin Cortez is a tax advisor and partner, and Ilka Sussek is a manager at the Schlecht and Partner law firm with offices in Stuttgart, Munich, and Nuremberg. The firm focuses on corporate succession, private asset succession, international tax law, and transaction consulting.