Give During Your Lifetime or Leave an Inheritance? Why Earlier Is Not Automatically Better

Passing assets on during your lifetime can make sense. Over the long term, tax allowances may be used more than once, families can organise ownership at an early stage, and the next generation can begin taking responsibility.

A gift, however, changes the donor’s own financial position. Money, securities or a property then belong to someone else. Anyone who focuses only on allowances and deadlines may therefore choose a solution that is tax efficient today but restricts their own financial security years later.

Before making a substantial gift, a different question should come first:

What can I genuinely afford to give away permanently today?

A gift changes the assets you have today

Under the German Civil Code, a gift is a gratuitous transfer through which one person enriches another out of their own assets.

With money, the effect is immediately visible. Anyone who gives away €100,000 has €100,000 less afterwards.

With real estate, the same transaction can feel less final. The parents may continue living in the house. They may look after the garden, pay bills and experience everyday life almost exactly as before. Legally, however, the child may already be the owner.

That has legal and financial consequences. Once ownership has been transferred, the donor can no longer dispose of the property independently as its owner. The rights to use the property, receive income from it or have it transferred back at a later date depend on statutory rules and on the terms of the transfer agreement.

With land and real estate, there is an additional safeguard: an agreement obliging a person to transfer or acquire a property generally requires notarisation. Planning a property gift is therefore an appropriate moment to discuss not only the transfer of ownership with a notary, but also the protection of the donor.

Before a major transfer, it should be established which assets are still needed for the donor’s own living expenses, housing, possible care costs and unexpected expenses. Ongoing income must also be included in this calculation. Anyone transferring a rented property therefore also needs to decide who will receive the rental income in future.

A gift is an anticipated transfer of wealth to the next generation. It is equally a decision about what the donor will be able to live on in ten, twenty or thirty years.

Giving early can offer substantial tax advantages

The tax advantage is real.

Under the rules stated in the article, children with unlimited German tax liability currently have a personal allowance of €400,000 per parent. For spouses and registered civil partners, the allowance is €500,000.

Multiple transfers from the same person to the same recipient are aggregated within a ten year period.

This creates the familiar scope for estate planning.

For example, if a parent transfers assets to a child within the personal allowance and another transfer takes place only after the relevant ten year period has expired, the personal allowance may become available again under the law applicable at that time.

For larger estates, early planning can therefore make a considerable difference. Those who plan over a sufficiently long period can transfer assets in stages and potentially use personal allowances several times.

That is a strong argument for giving early. It does not, however, answer the question of how much wealth someone should actually relinquish.

Anyone considering a transfer primarily to start a tax period should first determine whether they can do without both the assets and the income they generate for the rest of their own lifetime.

What exactly does the ten year period mean?

Few concepts cause as much misunderstanding in connection with gifts as the ten year period.

Tax law, compulsory share law and the right to reclaim a gift because of later financial need each have their own mechanisms. They serve different purposes and can all be relevant to the same gift at the same time.

Tax law: Earlier acquisitions are aggregated

The first period belongs to inheritance and gift tax law.

Multiple financial benefits transferred by the same person to the same recipient are aggregated within ten years.

This rule concerns the tax treatment of multiple acquisitions.

It does not determine either subsequent compulsory share claims or whether a gift may later be reclaimed because the donor has become financially dependent.

Compulsory share law: The relevance of a gift gradually decreases

The second period concerns persons entitled to a compulsory share.

If the future deceased person gave assets away, the gift may be taken into account when calculating a supplementary compulsory share claim. As a general rule, a gift made within the first year before death is taken into account in full. For each further year, the proportion taken into account decreases by one tenth. Once ten years have passed since the relevant transfer, the gift is generally disregarded.

The law contains a special rule for gifts to spouses. In such cases, the period does not begin before the marriage has been dissolved.

Retained rights of use can also affect when the period begins.

Where the donor retains a comprehensive usufruct right, they may remain in such extensive economic control of the transferred asset that the compulsory share period does not begin merely when legal title is transferred.

A retained right of residence requires a more detailed assessment. The German Federal Court of Justice has ruled that, in exceptional circumstances, a retained right of residence may prevent the period from beginning. Whether such an exception exists depends on the specific structure of the arrangement and on the extent to which the donor has genuinely relinquished their previous economic use of the asset.

The statement that “ten years after a gift, compulsory share rights no longer matter” can therefore be incorrect in an individual case.

Another ten year limit concerns the donor’s later financial need

Under certain conditions, the German Civil Code also protects a person who has given assets away and later becomes unable to cover their reasonable maintenance.

If, after completing the gift, the donor can no longer cover their reasonable maintenance or certain statutory maintenance obligations, a claim for return of the gift may in principle arise. Subject to the statutory requirements, the recipient may be able to avoid returning the asset by paying the necessary amount.

Section 529 of the German Civil Code limits this claim. Among other things, the claim is excluded if ten years have passed between the transfer of the gifted asset and the point at which the donor becomes financially dependent. The law contains additional exclusions and, under certain circumstances, also protects the recipient’s financial position.

In practice, this right of recovery can also become relevant when social assistance is claimed. If a person receiving benefits has a claim against someone else, the social assistance authority may, subject to Section 93 of Book XII of the German Social Code, cause that claim to pass to it up to the amount of its expenditure.

This gives the question of the donor’s own financial reserves very practical significance.

Transferring a property to children early does not make it permanently unreachable merely because several years have passed. Tax periods and recovery claims arising from later financial need must be assessed separately.

Three different rules can apply to the same gift. Those three rules can produce different results.

Usufruct can preserve use and income

A transfer of ownership does not necessarily mean that the donor must immediately give up every form of economic use.

When transferring real estate, parents can, for example, retain a usufruct right. This allows extensive use of the property. In the case of rented real estate, usufruct can in particular ensure that the rental income continues to belong to the donor.

A right of residence is narrower. It generally secures the right to personally occupy specified rooms or a property.

Such rights can be recorded in the land register. When a property is transferred, their precise structure should form part of the notarised transfer agreement. [10]

Retained rights of use can also influence the taxable value of the gift. Under the statutory valuation rules, the capitalised value of a retained usufruct can reduce the taxable value of the transferred property.

This effect makes usufruct attractive. Its consequences should nevertheless not be assessed solely from the perspective of gift tax. The same retained right that preserves income and housing security and may provide tax benefits can also affect the start of the ten year period for supplementary compulsory share claims.

The arrangement therefore has to satisfy several objectives at once.

Re-transfer rights can provide protection against later crises

A gift is often planned on the basis of circumstances as they exist today. The recipient’s life can subsequently change considerably.

A child may die before the parents. They may become insolvent. A marriage may fail. Creditors may gain access to assets. A property may be sold or encumbered with loans.

For this reason, contractual rights to require a re-transfer can be agreed when gifting real estate. Typical triggering events can include the recipient’s death, insolvency, enforcement proceedings or specified transactions involving the property. The agreement must define which events actually give rise to a right of re-transfer.

Such clauses can limit the loss of control.

They do not, however, reverse the transfer of ownership unless and until the agreed recovery event occurs. A donor should therefore not rely on the assumption that an unfavourable development can somehow be corrected later.

The decisive protective mechanisms belong in the agreement before ownership is transferred.

Gifting and inheriting the family home can have different tax consequences

Particularly with real estate, the timing of a transfer can lead to different tax consequences.

German inheritance tax law contains a special exemption for the lifetime transfer of a self occupied family home between spouses or registered civil partners.

The provision does not contain a corresponding family home exemption for a lifetime gift of the parents’ home to a child.

By contrast, when acquiring the property on death, a child may also qualify for a family home tax exemption under certain conditions. These include, in particular, taking up the property for personal use without undue delay and a limit of 200 square metres on the qualifying living area. As a general rule, personal use must then continue for ten years unless legally recognised compelling reasons prevent this.

Transferring a house to a child today and leaving that same house to the child by inheritance later can therefore produce different tax outcomes.

A blanket recommendation to give real estate away as early as possible does not reflect this legal situation adequately.

There is no fixed figure for the necessary financial reserve

Inheritance tax law cannot determine how much wealth a person should keep.

Someone with a high statutory pension, substantial additional income and several liquid assets may be able to give up a property more easily than someone whose wealth is almost entirely tied up in their own home.

Age alone does not answer the question either.

A personal reserve should account for ongoing living expenses, housing costs, possible alterations to the home, support for a partner, healthcare expenditure, care costs, inflation and substantial unforeseen expenses.

With property, there is also a distinction between ownership and income. A property may have a high market value while providing little readily available liquidity. Conversely, a rented property may provide an important part of retirement income.

Before making a substantial gift, a person therefore needs a financial assessment that looks beyond their current bank balance.

A tax allowance indicates how much an acquisition may remain tax free under certain conditions. It does not indicate how much a person can afford to give away economically.

Giving early can nevertheless be exactly the right decision

These risks are not arguments against gifts.

A lifetime transfer can organise family wealth early, make use of tax allowances and establish clear ownership. Parents can see how their children use the assets. A property can be transferred in good time to the person who wants to live there, invest in it or take responsibility for it.

Some families deliberately want to spread wealth succession over many years. That can make sense both for tax purposes and for the family itself.

The quality of the decision depends on the purpose of the transfer.

If a child is to take over a property today because they want to live there and invest in it, an early gift may be well justified. If the primary objective is simply to start a tax period as quickly as possible while the parents remain economically dependent on the assets and their income, the same step carries a different level of risk.

Before making a major transfer, at least the following questions should therefore be answered:

1. Which assets and income will I personally need over the long term?

2. Which rights of use, income and control do I want to retain?

3. What should happen if the recipient dies before me, becomes insolvent or their circumstances change fundamentally?

4. What consequences could the transfer have for compulsory share claims?

5. Which contractual re-transfer rights should be included?

6. What are the consequences of retaining usufruct or a right of residence?

7. What specific advantage does the gift offer compared with a later inheritance?

8. Is that advantage substantial enough to justify the loss of ownership and flexibility?

For substantial financial assets, these questions should be examined together with a law firm specialising in the relevant field and a tax adviser. As soon as land is transferred, complex rights of use are agreed or re-transfer clauses are drafted, a notary must be involved in the process.

Giving early can make wealth succession considerably easier. The right time, however, does not automatically arise simply because a tax allowance is available. It arises when the transfer has a clear and understandable purpose and the person who built up the wealth remains financially secure and capable of acting independently afterwards.

This article provides general guidance on German inheritance law and inheritance and gift tax law. It does not replace individual legal or tax advice. Legal position as of 25 August 2026.

The German Federal Constitutional Court has scheduled an oral hearing for 12 October 2026 concerning provisions on the valuation of real estate, personal tax allowances and tax rates. A hearing concerning relief for business assets is scheduled for 13 October 2026. As of the legal position stated in this article, no decisions have yet been issued. The currently applicable statutory rules remain authoritative until they are amended.

Sources

1. Federal Ministry of Justice and Consumer Protection and Federal Office of Justice, 2026, German Civil Code, Section 516, Definition of a Gift
   https://www.gesetze-im-internet.de/bgb/__516.html

2. Federal Ministry of Justice and Consumer Protection and Federal Office of Justice, 2026, German Civil Code, Section 311b, Contracts concerning land, assets and estates
   https://www.gesetze-im-internet.de/bgb/__311b.html

3. Federal Ministry of Justice and Consumer Protection and Federal Office of Justice, 2026, Inheritance and Gift Tax Act, Section 16, Tax Allowances
   https://www.gesetze-im-internet.de/erbstg_1974/__16.html

4. Federal Ministry of Justice and Consumer Protection and Federal Office of Justice, 2026, Inheritance and Gift Tax Act, Section 14, Consideration of Previous Acquisitions
   https://www.gesetze-im-internet.de/erbstg_1974/__14.html

5. Federal Ministry of Justice and Consumer Protection and Federal Office of Justice, 2026, German Civil Code, Section 2325, Supplementary Compulsory Share Claim in the Case of Gifts
   https://www.gesetze-im-internet.de/bgb/__2325.html

6. German Federal Court of Justice, 2016, Judgment of 29 June 2016, IV ZR 474/15, Supplementary compulsory share claim where a right of residence has been retained
   Link: Decision of the German Federal Court of Justice IV ZR 474/15

7. Federal Ministry of Justice and Consumer Protection and Federal Office of Justice, 2026, German Civil Code, Section 528, Recovery due to the Donor’s Impoverishment
   https://www.gesetze-im-internet.de/bgb/__528.html

8. Federal Ministry of Justice and Consumer Protection and Federal Office of Justice, 2026, German Civil Code, Section 529, Exclusion of the Recovery Claim
   https://www.gesetze-im-internet.de/bgb/__529.html

9. Federal Ministry of Justice and Consumer Protection and Federal Office of Justice, 2026, German Social Code, Book XII, Section 93, Transfer of Claims
   https://www.gesetze-im-internet.de/sgb_12/__93.html

10. Media Network of the German Chambers of Notaries, 2020, Gift: all or only a little?
    https://www.notar.de/aktuelles/details/schenkung-ganz-oder-nur-ein-bisschen

11. Federal Ministry of Justice and Consumer Protection and Federal Office of Justice, 2026, Inheritance and Gift Tax Act, Section 13, Tax Exemptions
    https://www.gesetze-im-internet.de/erbstg_1974/__13.html

12. German Federal Constitutional Court, 2026, Oral hearings on inheritance tax on 12 and 13 October 2026
    Link: Oral hearing on 12 October 2026 and oral hearing on 13 October 2026

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