Life insurance in inheritance law – effects on compulsory portion, compulsory portion supplement and disclaimer
Life insurance plays a major role in estate planning, as well as after the inheritance is complete.
Whereas in recent years life insurance policies were taken out primarily for investment purposes, in times of low interest rates the focus is once again on hedging risks. When selecting and structuring life insurance, there are also things to consider with regard to inheritance laws.
As part of succession planning, you need to think about the design of life insurance policies before you take them out, especially because of any claims to compulsory portions and inheritance and gift taxes.
Particularly in the case of non-marital relationships without children, high compulsory portion and compulsory portion supplement claims by the parents can arise – despite the partner's inheritance – as well as – due to the low allowances – high inheritance tax claims. But also for all other family constellations, life insurance is as much a part of the estate planning as a good last will and testament and a good health care power of attorney.
Lawyer's advice on life insurance in inheritance law
- Advice on structuring the life insurance policy with regard to the right to a supplementary compulsory portion, taxes and later contestability
- Use of (term) life insurance to create liquidity after inheritance, z. B. for the payment of compulsory portion claims
- Responding to challenges to life insurance policies in probate bankruptcy
Important issues related to life insurance in case of inheritance
When does life insurance make sense as a pension?
In estate planning and protection, life insurance can help you achieve the following goals:
- If the family needs to be financially secured, term life insurance makes sense, with which – unlike endowment insurance – nothing is saved up. This only mitigates the risk of one of the family's main earners failing – which is correspondingly much cheaper. Young families in particular, with minor children and no assets, must make provisions for the death of a parent in order to maintain the standard of living and secure the children's education. In the case of unmarried couples, the surviving partner does not receive a widow's pension. Life insurance can then cover the surviving partner.
- If a house or condo was purchased, the survivor often cannot pay the loan payments on their own. Life insurance makes sense for this, too.
- A life insurance policy in favor of the heir can be useful in order to provide the heir with money quickly after death so that he can z. B. Be able to pay for the funeral or other expenses without having to access the deceased's account. If the heir does not have power of attorney over the account, he would first need a certificate of inheritance to do so.
- A life insurance policy provides the heir with liquidity, also with regard to claims for compulsory portions and demands from the tax office for inheritance tax. In particular, if the estate consists of only one difficult-to-sell item, z. B. a house property, the heir's payment difficulties are prevented.
What is life insurance legally?
Normally, life insurance is a contract for the benefit of third parties. The insured event is normally the death of the insured person.
A beneficiary is named in the contract. Upon the death of the insured person, the beneficiary has a claim for payment against the insurance company.
The basis for naming the beneficiary of the life insurance contract is usually a gift from the policyholder to the beneficiary.
The most sensible form, in my view, is term life insurance, which insures only the risk and provides money to dependants in the event of death.
In addition, there are still many long term life insurance policies that also serve the purpose of capital investment. Here risk provisioning and capital investment are mixed, which in my view makes little sense.
Regardless of the form: Life insurance policies should be included in long-term estate planning.
When there is a dispute about life insurance in the estate?
In connection with life insurance, there are several typical constellations of disputes that one must think about when planning for retirement in order to prevent such conflicts:
- Can heirs demand the insurance sum from the beneficiary?
- If there is a claim to a supplement to the compulsory portion, since the sum insured is not part of the estate but was acquired as a gift?
- Is there a risk of contesting life insurance policies in the context of estate insolvency?
- Married couples normally appoint their spouse as beneficiary. In the event of divorce, people sometimes forget to change the beneficiary. Because the subscription right – unlike the statutory right of inheritance or the appointment of the spouse in the will – does not automatically expire as a result of the divorce, the ex-spouse can first demand payment. Dispute then arises over whether insurance proceeds must be released to heirs. According to the BGH, this depends on whether or not the insurance was based on a so-called "spousal benefit".
Is the life insurance amount part of the estate?
The sum insured is usually not included in the estate. Whenever someone is named as the beneficiary and the claims under the insurance policy have not been assigned to third parties (z. B. to a bank to secure a loan), the beneficiary receives the payment – not as an heir, but from the insurance contract. Heirs go away empty-handed (unless they are also beneficiaries).
The beneficiary is the person who is to receive the life insurance sum upon occurrence of the insured event and is named as such in the life insurance policy.
In the event that the beneficiary predeceases the insured, a substitute beneficiary can be named. Otherwise there is no beneficiary. The life insurance sum is then included in the estate.
Sometimes "the heirs" are named as beneficiaries. Then, according to the Insurance Contract Act (VVG § 160 para. 2) in case of doubt the heirs are entitled to receive the policy. But even if these heirs reject the inheritance, they remain beneficiaries and receive the insurance sum.
Can the heir prevent the payment of the insurance sum to the beneficiary?
If the heir finds documents in the estate relating to a life insurance policy that benefits another person, he often wants to prevent the payment to the beneficiary.
Then it can come to a race between beneficiary and heirs.
If the basis of the life insurance policy is a gift to the beneficiary, of which the beneficiary is also unaware, the gift only becomes effective when the life insurance policy informs the beneficiary.
Since the life insurance company does this legally as a messenger of the deceased, the heir can prevent it by exercising the right of cancellation against the insurance company. Then there is no gift. The beneficiary must surrender the life insurance proceeds to the heir.
Is the life insurance sum to be taken into account in the calculation of the compulsory part?
Since the life insurance sum is usually not included in the estate, it does not increase the compulsory portion claim.
However, life insurance triggers claims to supplement the compulsory portion if it is based on a gift, § 2325 BGB (German Civil Code). The question is then how high the value of the life insurance is for the calculation of the claim to the supplementary compulsory portion.
Until the clarifying ruling of the Federal Court of Justice in 2010, it was always disputed whether the claim to a supplement to the compulsory portion due to a life insurance policy should be calculated from the premiums paid in or on the sum insured paid out.
In the opinion of the Federal Court of Justice (ruling of 28. April 2010 – IV ZR 73/08), neither the premiums paid in nor the sum insured paid out are relevant, but rather the so-called surrender value. This surrender value at the time shortly before the death of the insured person can be requested from the insurance company. Depending on the situation in the individual case, an objectively proven higher disposal value of the life insurance policy can also be used.
What happens to the life insurance policy in the event of inheritance?
If an heir is also the beneficiary of a life insurance policy of the deceased, the question arises in the case of a scarce or overindebted estate what consequences the disclaimer of the estate has on the life insurance sum.
Since the life insurance sum is not part of the estate, the disclaimer of the inheritance has no direct effect on the payment of the money to the disclaiming heir. If the disclaiming heir is the beneficiary, he or she retains the right to claim under the life insurance policy despite disclaiming the overindebted inheritance.
However, it should be borne in mind that the heir who then steps in as a result of the disclaimer can still prevent the gift contract on which the life insurance policy is based by revoking it vis-A-vis the life insurance company. Therefore, at least the acceptance of the life insurance policy should be declared before disclaiming it.
It should also be borne in mind that in the case of an over-indebted estate, the payment of the life insurance sum may be contested by the estate insolvency administrator (see below).
Why contest the life insurance policy in the insolvency of the estate?
A problem for the beneficiary of the life insurance policy is if insolvency proceedings are instituted against the estate.
An estate insolvency can occur, for example, if all heirs reject the overindebted estate and the state as the tax authority becomes the heir. Since the state – as the only legal heir – cannot reject an inheritance, but naturally does not want to be liable for the deceased's debts, it must effect a limitation of liability on the estate. This takes place through an estate insolvency.
In the context of estate insolvency, the insolvency administrator tries to find money for the estate and channel it into the estate. This is what happens:
The life insurance benefit is considered a gratuitous benefit of the deceased. The estate insolvency administrator declares the challenge of the subscription right from the life insurance according to § 134 Insolvency Code (InsO).
Contestability is only possible for gratuitous benefits within the last four years prior to the application for opening of insolvency proceedings.
Therefore, in the case of life insurance, it also depends on when a gratuitous payment is legally deemed to have been made here within the meaning of Section 134 (1) of the German Insolvency Code (InsO). According to its § 140 (1) InsO, the relevant point in time is the time at which the legal effects of a legal act occur.
Here it also depends on whether a revocable or an irrevocable subscription right was given.
According to the ruling of the German Federal Supreme Court (BGH) of 27. September 2012 – IX ZR 15/12, Rz. 28, in the case of an irrevocable beneficiary, the payment of the insurance benefit in the event of death is normally already made with the designation as beneficiary. The insurance sum obtained on the basis of a timely irrevocable designation as a beneficiary is then not subject to the gift contestation according to § 134 para. 1 InsO.
If someone is only granted a revocable subscription right – as is almost always the case – the gift is only valid from the time of death, because the legal effects of the subscription right only come into effect when the insured event occurs (the death of the insured). The challenge is then – because it is a gratuitous benefit – possible within four years.
After the occurrence of the insured event, the rescission claim is directed against the beneficiary for payment of the sum insured owed by the insurer, not only for restitution of the premiums paid by the debtor, BGH, judgment of 23. October 2003 – IX ZR 252/01, para. 34.
If nothing has yet been paid out (or. the gift has not yet been accepted), the insolvency administrator can eliminate the effects of the subscription right by exercising the right of cancellation transferred to him by the policyholder.
Inheritance tax must be paid on the life insurance sum?
If there is no beneficiary, the sum insured is included in the estate and is therefore subject to inheritance tax.
But even if the beneficiary is not an heir or receives the insurance sum not as an heir but as a beneficiary, the entire insurance sum is subject to inheritance tax, § 3 paragraph 1 number 4 ErbStG.
Caution: If unmarried partners appoint each other as beneficiaries of a life insurance policy, this quickly leads to inheritance tax. When it comes to inheritance tax, non-married people only have the small exemption of 20.000 euros. If the life insurance sum is higher, inheritance tax has to be paid. This can be avoided by a different design, such as naming the children.
Crossed life insurance policies" are recommended for married couples. Both partners do not insure their own life in their life insurance contracts, but the life of the other partner.
The insured person is thus the other spouse. In the event of the death of the other spouse, the insurance sum is paid out to the surviving spouse from his or her own contract and thus does not come from the deceased in terms of (income tax) law.
This should also be the right way for unmarried partners – for whom the tax problem is even greater due to the low tax-free amount – to avoid falling into the tax trap.
Example: Anna and Benno are not married. They would like to take out life insurance to cover each other. To avoid inheritance tax, cross-insurance is used. Anna designs a life insurance contract in which she is the policyholder, beneficiary and premium payer at the same time. But the insured person is Benno. If Benno dies, the insurance money will be paid to Anna. But since she is the policyholder receiving her own insurance benefit, that remains tax-free. Benno also concludes a contract in which Anna in turn becomes the insured person. Upon her death, Benno would also receive the benefit from his life insurance policy tax-free.
The disadvantage of crossed life insurance is that the right of subscription of each other cannot be changed, for example in case of divorce or separation.
Conclusion: A (risk) life insurance can also be very useful in estate planning. In order to avoid disputes here and to ensure that the desired benefits of the life insurance policy also accrue to the right people, the construction of the life insurance policy should be well thought out and coordinated with your other succession arrangements. I will be happy to help you, just make an appointment for an initial consultation!