Transfer agreement and the "10-year period": Why three deadlines are important

The 10-year period

Anyone wishing to transfer their house or apartment to the next generation during their lifetime will repeatedly encounter the "10-year period." What many don't know is that there isn't just one, but three legally independent ten-year periods that must be observed when transferring property as part of an anticipated inheritance. They serve different purposes, start at different times, and trigger different legal consequences. In practice, it is particularly relevant to know precisely when each period begins and what can prevent it from starting.

This article distinguishes between the three levels – gift tax, compulsory portion supplement and social assistance recourse.

What exactly is a transfer agreement?

A transfer agreement (sometimes also called a transfer contract) governs the transfer of assets (usually real estate) during the lifetime of the transferor (generally a parent) to one or more successors (usually the children), often subject to a reservation of a right of use (usufruct, right of residence) or in exchange for support payments. It is the central instrument of anticipated inheritance.

Level 1: The 10-year period for gift tax purposes (tax-free allowances)

This deadline is the best known because it can be used to reduce the tax burden of future heirs and therefore has the most predictable financial impact:

• Every recipient of a gift is entitled to personal allowances every 10 years (§ 14 para. 1 ErbStG) (e.g. EUR 400,000 per child vis-à-vis each parent, EUR 500,000 for spouses).

• The tax-free allowance is only fully reinstated after 10 years have passed since the last payment.

• Gifts made within this period are added together – those who want to make optimal use of the tax-free allowance often transfer in stages ("chain gifts").

• The time limit begins with the execution of each individual gift (according to the case law of the Federal Fiscal Court, notarization of the transfer agreement should be sufficient here , BFH, judgment of 26-09-1990 - II R 150/88 ) .

  
  

Practical tip: Anyone wishing to transfer larger assets should develop a transfer strategy with staggered gifts early on in order to use tax allowances multiple times.

Level 2: The 10-year period under inheritance law (compulsory portion supplement, § 2325 BGB)

This time limit protects disinherited or overlooked persons entitled to a compulsory share (usually children or spouses) from the testator "giving away" his assets during his lifetime in order to reduce the compulsory share.

• Gifts are added to the estate for the calculation of the compulsory portion supplement claim.

• Since 2010, a tapering model has been in place : The value of the gift to be taken into account decreases by 10% for each full year since the gift was made. After 10 years, the gift is completely "used up" and irrelevant for inheritance tax purposes.

  Example: A gift made 4 years ago will only be considered at 60% of its value.

• According to the case law of the Federal Court of Justice, the time limit begins with the registration in the land register (BGH, judgment of 02.12.1987 - IV a ZR 149/86).

• Important exceptions:

  • In the case of gifts between spouses, the limitation period only begins to run upon dissolution of the marriage, § 2325 para. 3 sentence 2 BGB.

  • Even in cases of reserved usufruct or right of residence, it is debated whether the period even begins to run, since the transferor continues to have economic control over the property (note the so-called enjoyment theory according to BGH case law).

    
    

Practical tip: Anyone wishing to minimize compulsory share claims should transfer assets early and, if possible, refrain from comprehensive reservations of use or structure them cleverly in the contract.

Level 3: The 10-year period under social assistance law (recovery according to § 528 BGB / social assistance recourse)

This deadline applies to cases in which the transferor later becomes dependent on care and has to apply for social assistance (especially assistance with care).

• If the donor becomes needy within 10 years of making the gift (§ 529 para. 1 BGB, § 41 para. 3 SGB XII), they (or the social welfare office by way of assignment of claims) can reclaim the gift due to impoverishment pursuant to § 528 BGB. Alternatively, the social welfare office can demand compensation from the recipient.

• The time limit begins to run upon submission of the application for registration in the land register to the land registry office (Federal Court of Justice, judgment of 19.07.2011 - X ZR 140/10).

• This regulation is independent of the gift tax and compulsory share deadlines – a gift that has been “used up” for tax purposes may still be relevant under social welfare law.

• Reserved rights (usufruct, right of residence) do not interrupt the commencement of the limitation period.

  
  

Practical tip: Especially in the case of older transferors with an uncertain care prognosis, this deadline should be given particular careful consideration in the contract design – for example through appropriate consideration or care obligations in the contract.

The three deadlines at a glance

Why this is crucial for contract drafting

The three deadlines run independently of each other and sometimes at different speeds . A gift may already be eligible for tax benefits, still relevant under inheritance law, and/or still contestable under social welfare law. A well-drafted transfer agreement therefore considers all three levels simultaneously, especially in the following cases:

• Transfers with reservation of usufruct or right of residence

• Transfers between spouses

• Transmission to only one of several children

• Handing over of property with foreseeable care needs

  
  

Conclusion

The "10-year period" in the transfer agreement is not a uniform concept, but rather a collective term for three completely different legal mechanisms. Proactive notarial advice considers tax law, inheritance law, and social security law together.

Are you planning to transfer your property to the next generation? Schedule a consultation. We will review your individual situation and draft a suitable transfer agreement. We would be happy to provide you with a non-binding cost estimate beforehand.