Your Parent’s Revocable Trust and German Inheritance Tax: Why Speed Matters

If you live in Germany and a parent in the United States leaves you assets through a revocable living trust, German inheritance tax applies to your share. How much tax depends less on what the trust says you receive than on how long the trust keeps holding the assets after your parent’s death.

A trust that pays out promptly is usually taxed once, as an ordinary inheritance from your parent. A trust that lingers for a year or two, still holding the house or paying you in instalments, can be treated in Germany as a separate foreign entity. Each payment out of it may then be taxed as a gift of its own.

This article explains why, what German courts have said, and which drafting points U.S. estate planners can build into the trust today.

While your parent is alive: Germany ignores the trust

As long as the grantor can revoke the trust and take the assets back, German tax law looks straight through it. The assets are treated as the grantor’s own (section 39(2) no. 1 of the German Fiscal Code, Abgabenordnung). Nothing in the trust is taxable in the hands of a German-resident beneficiary at this stage, whatever its value.

German law has no trust of its own. It classifies a foreign trust by asking whether the assets have really left the grantor’s control. A revocable trust with the grantor as trustee or with power to instruct the trustee clearly has not, so for German purposes it is transparent.

One caution applies even now: a distribution the trustee makes to you during your parent’s lifetime is treated as a direct gift from your parent and may be subject to German gift tax.

At death: conduit or separate “pool of assets”?

The moment the grantor dies, the power to revoke disappears and the trust becomes irrevocable by operation of law. Germany then has to decide which of two things it is looking at.

A conduit. If the successor trustee must hand the assets to the beneficiaries promptly, much like an executor, the trust is a pass-through. The German heir is taxed once, as if inheriting directly from the parent. German practitioners who advise on U.S. trusts take this view where the trustee is required to distribute without delay (Frank).

A foreign pool of assets. Since 1999 the German Inheritance Tax Act (Erbschaftsteuergesetz, ErbStG) contains special rules for a Vermögensmasse ausländischen Rechts, deren Zweck auf die Bindung von Vermögen gerichtet ist: a foreign arrangement whose purpose is to tie up assets. They were written with Anglo-American trusts in mind. Where they apply, there are two taxable steps:

1. The transfer into the trust on death (section 3(2) no. 1 sentence 2 ErbStG).
2. Every payment the trust later makes, either to an interim beneficiary while the trust exists or on its final dissolution (section 7(1) no. 9 sentence 2 ErbStG).

The decisive question is therefore whether the trust “ties up” the assets. A trustee who holds property for a meaningful period, with no duty to distribute without delay, points towards a pool of assets. The Federal Fiscal Court (Bundesfinanzhof, BFH) has expressly left open whether a revocable trust creates such a tie at all (BFH, 27 September 2012, II R 45/10). There is no ruling on a revocable trust that converts at death and is wound up quickly. The safest course is to make the trust look, and act, like a conduit.

What this means in practice: an outright distribution of the accounts within weeks and a deed of the house directly to the heir keep the trust short-lived. A sale of the house by the trustee over 18 months, with the proceeds paid out in instalments, gives the German tax office exactly the duration it needs to argue for a separate entity.

Tax class and allowance: the good news and the catch

German inheritance tax depends on the relationship between the heir and the person the property comes from. Children and stepchildren are in the most favourable class.

A trust has no family. Read literally, a payment from a trust would fall into class III. Section 15(2) sentence 2 ErbStG corrects this: for payments from a foreign pool of assets, the person who created or funded the trust is treated as the transferor for the purpose of the tax class. The Munich Fiscal Court accepted this in two U.S. trust cases, where the tax office itself granted the relationship-based allowance on trust distributions (FG München, 3 July 2024, 4 K 2033/16).

The catch: the fiction reaches only the tax class. Legally, the trust remains the transferor (BFH, 30 November 2009, II R 6/07). That has consequences:

• All payments from the same trust within ten years are added together, so the allowance is used up by the first ones (section 14 ErbStG).
• How trust payments interact with assets you inherit directly from the parent, for example through probate, is not settled. Nor is the question whether several trusts from the same grantor each carry their own allowance; the Munich court expressly left that open.
• If the trust is a conduit, none of this arises: you simply inherit from your parent.

Two further risks: the burden of proof and income tax

The burden of proof is on the heir. A beneficiary is an “interim beneficiary” if, under the governing trust law, he or she has an enforceable right to payments regardless of any trustee decision. Where the tax office raises the point, it is the recipient who must show that no such right existed (BFH, 25 June 2021, II R 31/19). German courts determine U.S. trust law on their own motion, but the heir must supply the material. Clear wording in the trust instrument, written now, is the best evidence available years later.

Income tax can come on top. German courts have applied the income tax rules for distributions from foreign entities (section 20(1) no. 9 of the Income Tax Act) to U.S. trusts as well, and held that gift tax and income tax can both apply to the same distribution (FG Münster, 23 March 2023, 1 K 2478/21 E). For a revocable trust wound up within months, with little growth in value, the exposure is usually small. It grows with every month the trust stays open.

EU law will not help. Arguments based on the free movement of capital have so far failed in this area, both before the Munich Fiscal Court and, for the related question of foreign family foundations, before the European Court of Justice (CJEU, 13 November 2025, C-142/24).

Six drafting points to discuss with your U.S. estate planner

None of these changes who receives what. They change how fast, and in what form, the German heir receives it.

1. A firm wind-up deadline. Require the trustee to make all distributions and terminate the trust promptly, and in any event within twelve months of death. Allow only an ordinary reserve for debts, expenses and taxes, released once settled.
2. Distribute in kind, do not sell. Real estate the heir is meant to receive should be deeded to the heir, not sold by the trustee. The heir can then sell at his or her own pace, after the German taxable event rather than during it.
3. No staged or discretionary payments to the German heir. Exhibits and specific gifts should also be paid outright, in kind and within the same deadline, so they do not reintroduce what the main articles exclude.
4. Keep management out of Germany. If the successor trustee lives in Germany, the trust may be treated as managed from Germany and become subject to German corporate income tax, with a filing duty on the trustee. A short administration keeps this a formality.
5. Foreign taxes are the heir’s own. German inheritance tax is owed by the heir, not by the estate. If the trust pays it, the payment is itself an additional taxable benefit and is not deductible (section 10(8) ErbStG). The tax-apportionment clause should say so.
6. A clear lifetime recital. State that before the grantor’s death no beneficiary has any vested, contingent or enforceable interest, and that the grantor may revoke at any time. It does not bind a German court, but it is contemporaneous evidence of the position.

What good drafting can and cannot do

Good drafting makes the favourable outcome considerably more likely; it cannot guarantee it. German law on foreign pools of assets is unsettled, the tax office may take its own view, and the courts have so far shown little sympathy for taxpayers in this field. Some facts also lie outside anyone’s control: how long the administration really takes, and in which order two spouses die.

The time to act is while the grantor is alive and the trust can still be amended. After death, the instrument is fixed and only the speed of administration remains in the family’s hands.

Next step: if a parent or relative in the U.S. has a revocable trust and you, or another beneficiary, live in Germany, have the trust reviewed from the German side before it becomes irrevocable. We work alongside the family’s U.S. attorney and CPA and provide wording they can adopt directly. Schedule a free 15-minute call or, if you are the family’s U.S. attorney or CPA, see our trust review for U.S. attorneys and CPAs.

Disclaimer: Nicola S. Casper-Hoesl is a German attorney (Rechtsanwältin) and a Foreign Legal Consultant licensed in Colorado. This article addresses German law only and does not constitute advice on U.S. federal or state law, which should be obtained from a U.S. attorney or CPA. It is general information, not legal advice for any specific case.

Sources

• FG München, 3 July 2024, 4 K 2033/16
• FG München, 15 May 2019, 4 K 2033/16
• BFH, 25 June 2021, II R 31/19
• BFH, 27 September 2012, II R 45/10
• BFH, 30 November 2009, II R 6/07
• FG Münster, 23 March 2023, 1 K 2478/21 E
• CJEU, 13 November 2025, C-142/24
• Frank, Taxation of Trusts under the German Inheritance and Gift Tax Act