Challenges in Estate Planning for a U.S. Citizen Residing in Germany with Assets in the USA and Germany
Estate planning for a U.S. citizen residing in Germany with assets in both California (USA) and Germany involves a range of challenges due to the cross-border nature of the estate.
Here’s an outline of key challenges and considerations.
1. Jurisdictional and Legal Complexity
Dual Jurisdiction: The estate must comply with the laws of both the U.S. (California) and Germany, leading to possible conflicts or complications in asset distribution.
U.S. Assets: These are governed by U.S. law (federal and state), including probate rules, guardianship laws, and U.S. estate tax laws.
German Assets: Subject to German inheritance law, including forced heirship laws (Pflichtteil), which dictate that certain heirs (e.g., children) are entitled to a minimum portion of the estate, regardless of the deceased’s wishes.
Dual Wills: Separate wills may be required for assets in the U.S. and Germany. The wills must be drafted carefully to avoid contradictions.
U.S. Will: Typically addresses assets in the U.S. (real estate, stocks, bank accounts, etc.).
German Will: Must address assets located in Germany, and may require compliance with specific rules around guardianship of minor children, inheritance, and forced heirship.
2. Estate and Inheritance Tax Considerations
U.S. Estate Tax:
U.S. estate tax applies to the global estate of a U.S. citizen, meaning assets both in the U.S. and abroad are subject to potential taxation.
There are tax treaties between the U.S. and Germany, which help prevent double taxation, but each country’s tax system must be considered separately.
U.S. estate tax exemptions for 2025:
The estate tax exemption in the U.S. is expected to be $13.99 million for an individual (up from $12.92 million in 2024).
Married couples can combine their exemptions, with a total of $27.98 million.
Amounts above these exemptions are taxed at a rate that can go up to 40%.
German Inheritance Tax:
German inheritance tax applies to assets located in Germany.
The rate depends on the relationship between the deceased and the heir, with rates ranging from 7% to 50%.
Germany also has a gift tax, which is similar to inheritance tax, and must be considered if assets are transferred before death.
Inheritance Tax Exemptions in Germany for 2025:
Spouses and children have significant exemptions. A child’s exemption is €400,000, and a spouse’s exemption is €500,000.
The inheritance tax rate depends on the amount inherited and the relationship to the deceased. For direct descendants (children), the rate typically ranges from 7% to 30%.
3. Forced Heirship Laws in Germany
Forced Heirship (Pflichtteil): Under German inheritance law, children have a right to a portion of the estate, even if the will specifies otherwise. This portion is usually 50% of the legal share.
Example: If a testator wishes to disinherit a child, the child is still entitled to a forced share under German law.
This may complicate estate planning for a U.S. citizen, especially if they intend to leave assets to beneficiaries who are not children or if the heirs are to receive unequal shares.
4. U.S. Estate Tax on Foreign Assets
Global Estate: U.S. citizens are subject to U.S. estate tax on their worldwide assets, including those in Germany. However, Germany’s estate tax and U.S. estate tax may be applied to different assets.
Tax Credits and Treaties: The U.S.-Germany estate tax treaty allows for certain credits to prevent double taxation, but navigating this can be complex, and the testator may need expert tax advice to optimize the estate.
5. Guardianship of Minor Children
U.S. Citizens in Germany: For minor children residing in Germany, a U.S. citizen testator must appoint a guardian in their U.S. will. However, the German courts may override the guardian designation, as they have the final authority in such matters under German law.
This introduces uncertainty, as guardianship arrangements may need to be recognized by both German and U.S. courts.
6. Currency and Valuation Issues
Different Currencies: Assets in Germany (valued in euros) and the U.S. (valued in U.S. dollars) require careful valuation at the time of death.
Exchange rate fluctuations between the euro and the dollar could complicate tax calculations and distribution among heirs.
Appraisal of Assets: Real estate, businesses, and other significant assets may require separate valuations in both jurisdictions, adding to the complexity of the estate administration.
7. Coordination Between U.S. and German Wills
Conflicting Provisions: There must be careful coordination between the German will and the U.S. will to avoid any conflict in asset distribution. A clear "conflict of laws" clause in each will can help ensure the testator’s wishes are respected in both countries.
Probate in Both Jurisdictions: The probate process may need to be initiated in both the U.S. (for U.S. assets) and Germany (for German assets), which can lead to delays and added costs.
8. Trusts and Estate Planning Vehicles
Trusts in the U.S.: While trusts are commonly used in the U.S. to avoid probate and minimize taxes, their application in Germany is limited. Germany does not have the same tax advantages for trusts that the U.S. offers, so establishing a trust for German assets may not be effective or recognized in the same way.
Trusts in Germany: While Germany has family foundations (Familienstiftung), these are not as commonly used as U.S. trusts and may have different tax implications.
Estate Tax Exemptions for 2025:
U.S. Estate Tax Exemption (2025):
Individual exemption: $13.99 million (up from $12.92 million in 2024).
Married couples: $27.98 million.
Estate tax rate: Up to 40% on amounts above the exemption.
German Inheritance Tax Exemptions (2025):
Spouse: €500,000.
Children: €400,000.
Inheritance tax rates: Ranges from 7% to 50%, depending on the relationship between the heir and the decedent.
Conclusion and Recommendations:
Given the complexity of cross-border estate planning, it is critical to consult with legal and tax experts both in the U.S. and Germany to optimize the estate plan.
This includes:
Dual Wills: Separate wills for assets in the U.S. and Germany to ensure both legal systems are respected.
Tax Planning: Coordination of estate tax exemptions and credits between both countries to minimize taxes.
Guardianship: Appointing guardians in both countries with clear instructions to navigate the legal differences.
Trusts: Assessing whether U.S. trusts can be used effectively without triggering unintended tax consequences in Germany.
