Understanding Estate Planning

Written by Katharina Selich for Enrich

If you are located in Germany or are a German resident, it’s important to understand the importance of estate planning. This is especially true if you are planning to retire in Germany, as you should know which inheritance laws apply to your financial situation, and what they might mean for your heirs or for yourself.

In this article we will go over which laws you should pay attention to and how to successfully plan your estate in Germany.

Why Do You Need to Plan Your Estate?

Given the many default inheritance rules in Germany, you need to plan your estate thoroughly. If you do not have a will it is stated in the BGB (Bürgerliches Gesetzbuch) that the husband or wife and the children of the deceased are the first ones to inherit the estate. The risks of legal disputes are lowered tremendously when you plan ahead and have a will in place. This can give you and everyone involved in your estate some peace of mind.

How to Plan Your Estate

  • Assign a power of attorney to someone who you want to make decisions on your behalf if you are unable to

  • Start to give away parts of your estate while you are alive

  • Talk to your family and friends or the people who will be your heirs to make sure your wishes are clear

  • Write your will and continuously update it when necessary

  • Consider hiring a tax adviser to help you with your will and other estate planning needs

The Components of an Estate

Your estate in Germany includes the value of all of your savings, shares, your property and other valuable items. These are all considered active assets. Keep in mind that any debts can also be part of the estate, and are called passive assets. 

If you know you are the heir to an estate, you will likely want to apply for a certificate of inheritance at a German surrogate's court (“Nachlassgericht”). This certificate of inheritance proves that you are the sole heir or one of the heirs of a certain estate. If you can prove this otherwise, you do not need a certificate of inheritance. This might be the case if there is a private or public will and a court opening protocol.

Wills

It is not mandatory to have a will in Germany. However, it is common that financial professionals across Germany will recommend you make one. If there is no will in place, the intestacy rules stated by the German Civil Code will apply and determine what gets willed to your heirs. Then, these heirs will inherit a share of the estate. 

In case there is no will, the inheritance law states who will then become the heir of an abstract share of the estate. For example, after the death of a parent, a child is entitled to 50% of a compulsory share. If there are two children, both will receive 25%. How the individual shares are distributed is up to the heirs. With a will, how the inheritance is distributed and what is given to whom is clearly stated. This lessens the risk of any disputes between heirs. 

Inheritance Law

Inheritance Law in Germany is part of the federal law and is therefore applied in the same way for the whole of Germany. According to inheritance law, the heir is entitled immediately to his rightful share upon the decedent’s death. If claims are made, they can be made only against one or several heirs, not against the inheritance itself.

Inheritance Tax

In Germany, heirs have to pay inheritance tax (Erbschaftssteuer). The percentage of tax you have to pay depends on how much you inherit. Depending on the heir's relationship to the decedent, this can vary between 7% and 50%.

Trusts

Generally, the transfer of assets in Germany to a trust is not allowed. In the case of a will though, the trust can be seen as a subsequent heirship (Vor- und Nacherbschaft), a durable execution of the estate (Dauertestamentsvollstreckung), a life estate (Nießbrauch) or a combination of both.

Special Case: Life Insurances

The inheritance of the money of a life insurance policy is regulated in the contract of the life insurance. The heir of the life insurance is the person whose name is stated as a beneficiary in the contract. This does, however, require that the decedent has stated a beneficiary. If he or she did not, the life insurance will automatically become part of the estate.

Conclusion

If you are a citizen in Germany and especially if you are considering retiring in Germany, you should plan your estate as soon as possible. Not only because the possibility of legal disputes between heirs is lowered if a will is in place but also because you want to make sure that you know how you want your estate to be distributed. Plan and write your will thoroughly (preferably with the help of a tax adviser) to make sure that everything is legal.

Establishing Financial Security After Retirement

Written by Katharina Selich for Enrich

Considering retirement in Germany? Retirement can be a tricky subject, but fortunately we are here to help you learn more about preparing as best you can.  

A key factor to understand is that the pension you receive will greatly differ depending on your employment type. Whether you retire as a self-employed, an employee or a public official, this will impact your pension and subsequently your retirement strategy. For example, as a public official your pension gap will usually be smaller than that of a self-employed or employed person.

With this in mind, let’s take a look at how retirement is structured in Germany, and how you can best prepare yourself based on your current financial situation. 

Retirement in Germany

The pension system in Germany is based on three pillars: the gesetzliche Rentenversicherung, the Betriebliche Altersvorsorge and the private Altersvorsorge. As a regular employee you will typically focus on the first two pillars, but as a public official you receive a pension, which is essentially a combination of the two first pillars. 

The third pillar, or the private Altersvorsorge, is the private pension option, and is entirely up to you. Many across Germany will recommend establishing some sort of private pension option, especially if you are not a public official, in order to secure your financial security in retirement. Let’s take a closer look at each of these three pillars.

The 3 Pillars of the German Pension System

Gesetzliche Rentenversicherung 

The gesetzliche Rentenversicherung is based on the so called Umlagenprinzip, or the “pay as you go principle.” This principle essentially means that you and other working people “pay” for the current retirees while you are employed. When you retire your pension will then be “paid” by the current employees. It is a generational contract. Note that if you are self-employed, depending on your profession, the payment into the gesetzliche Rentenversicherung might be optional.

Because people in Germany tend to get older and older, and the amount of working people gets smaller, it is said that by 2030 this pension could only make up around 40 % of your last salary. At the moment, it is around 48 % in Germany. As you can see, this is not enough to live a worry-free retired life. Therefore, you’ll want to explore investment options in other plans as well.

Betriebliche Altersvorsorge

As an employee you can opt for the betriebliche Altersvorsorge, though it is not compulsory. This option is basically a company-run pension plan, though it is an expensive option. For many, contributing to this plan really only makes sense if your employer pays 50% and you pay 50% into the plan.

Vermögenswirksame Leistungen

You and your employer can decide to pay into your Vermögenswirksame Leistungen, or your “capital accumulation benefits.” These extra payments have to be invested into some kind of plan like a payment of a home saving contract, mortgage payment, or other investment. 

Pension Options for Public Officials 

For civil servants, there is a separate provision, known as civil service provision, which replaces statutory pension insurance and company pension schemes for this professional group.

Depending on your Besoldungsgruppe, or your pay grade, and the length of years you have worked, the pension you receive will increase. The highest pension a public official can receive is 71 % of their last gross salary, after at least 40 years as a public official.

Your financial security in retirement is pretty well-established when you work as a public official. Still, many will still choose to invest in some sort of private Altersvorsorge, or the private pension plan. 

Private Altersvorsorge 

Whether you are employed, self-employed or a public official, it makes sense to supplement your retirement savings with additional sources of income. In this case, you’ll want to look into investing in the private Altersvorsorge, otherwise known as the “private pension scheme.”

It is not based on the Umlagenprinzip but on the Kapitaldeckungsverfahren, or the ‘funded procedure’. Private pension plans can be divided into ones which are supported by the state, and the ones that are not.

State Supported Retirement Options

Riester

The Riester pension is a state-subsidized but privately managed retirement provision, which means less flexibility but also less planning from the employee’s perspective. It is meant for standard employees.

Rürup

This is mainly meant for self-employed people, if they do not otherwise pay into other pension plans. 

With both the Rürup and the Riester, you can save a lot of taxes when making contributions, but you will have to pay taxes as soon as you start receiving the pension. 

ETF Bound Life Insurance

You can get a high return out of an ETF bound life insurance, but management and installment costs tend to be very high.

Retirement Options Not Supported By the State

Funds

Instead of investing directly into one share, many Germans feel it is safer to make contributions to a greater fund. Funds mean that your savings are invested in a broad manner. For the most part, the risk is lower and the return is higher, though be sure to thoroughly research any funds you may invest in.

ETF Savings Plan

An ETF, or  Exchanged Traded Funds, Savings Plan is a flexible yet safe way to invest money for retirement. When it comes to ETF Savings, many will choose to invest for at least 10-15 years so that you will have a high return. 

The downside is that you will have to manage your ETF after retirement to make sure you are extracting money in a clever way. The ETF Saving Plan is flexible and you can always use the money for any unforeseen expenses before retiring, which is a big bonus.

Property

Maybe you already have a property, or you’re interested in buying one, especially while you’re thinking about retirement ahead. A property can be a good way to invest your money in a secure way. You can live in it after retirement, or you can earn money by renting it out. A property should not be the only private pension scheme you have, but it can be a good foundation. 

Private Rentenversicherung

The good thing about a private Rentenversicherung, or private pension insurance, is that it includes insurance. It covers the risk of living long, as you will get a safe amount of money no matter how long you live. The contracts are flexible, but the pension is liable to tax. 

Your Next Steps

Take an inventory of your current retirement situation and make a checklist of what actions you’ll need to take. Learn more about your options as an employee, a self-employed person, or a public official, and discover which pillars your money already flows into. Then, adjust according to your desired pension in retirement by establishing a private finance plan that suits your needs and situation. 

Learning more about retirement options in Germany and comparing plans and insurance companies can help you establish financial security when you do finally retire. Also, starting as early as possible with a private pension plan can be a huge help to your retirement planning. Your investment grows, and the earlier you start, the more money you will have available in retirement.