NextGeneration – Usufruct of security assets for life insurance

Christian Ritz - Direktor Vertrieb Deutschsprachige Märkte
October 1, 2018
Usufruct regulations are widely prevalent and sufficiently known due to the transfer of property assets. Few have thus far used the gift / inheritance benefits, however, which provides a gift with the concession of a usufruct retention to security assets in the context of an insurance solution. Although this is also possible in accordance with §§ 1068 ff. of the German Civil Code ("Bürgerliches Gesetzbuch (BGB)").


A usufruct is drawn up as a privately arranged agreement between the Recipient (e.g. the son) and the Usufructuary (e.g. the father) upon transfer of the insurance contract and demonstration thereof to both the insurer and the tax authorities. For the concession of usufruct, the Recipient may deduct a taxable utility value when calculating the gift tax and thereby significantly reduce the gift tax incurred. This reduction to the assessment basis for the gift tax, on the grounds of German Inheritance Tax Law ("Erbschaftsteuergesetz (ErbStG)") and German Valuation Law ("Bewertungsgesetz (BewG)"), shall be primarily determined by the age of the entitled usufructuary. The younger he is, the higher his life expectancy, and the longer he is likely to enjoy the profits from the assets. The tax deductible utility value for the Recipient is thereby increased.

The Usufructuary (father) shall receive the profits during the course of his lifetime. The (new) insurance policy holder following the gift (son) may only terminate, pledge or transfer the insurance agreement with the approval of the father. Thereby, there exists an additional substantial benefit of the structuring, in as much as the gift-giving party "keeps one hand" on the assets in question. Should the Usufructuary decease, the usufruct ends, and the death benefit is paid out directly to the insurance policy holder (son) without income and inheritance tax deductions

Practical example:

A 65-year old father bestows upon his son an insurance policy with a value of EUR 1 million. The deductible utility value for the Recipient in this case is in the amount of EUR 610,000, in accordance with § 14 (1) sentence 4 BewG.

Should the tax exempt amount of EUR 400,000 still be available, then the complete gift is tax-free. With this structure, the Recipient saves EUR 90,000 in gift tax with regard to the allowance. The future profits arising for the Usufructuary are also received at a reduced rate of tax, as only the profit share of the income is subject to flat rate tax.


A usufructuary right to a life insurance policy creates the possibility for an appreciable reduction in gift and inheritance tax payments, and additionally provides the Usufructuary with a significant tax benefit in relation to his profits. At the same time, the gift-giving party still "keeps his hands on the money", and the Recipient does not have the assets at his disposal.