United States Estate Tax on a German Estate, and the Treaty Reliefs

American estate tax reaches the estate of a non-domiciled, non-citizen decedent on assets situated in the United States. The principal items are American real estate and shares in American corporations, and the list is not the mirror image of the German one: a German bank deposit is not German situs property, while shares in an American company are American situs property wherever the certificate or the account happens to be.

Against that base the domestic law gives a unified credit of 13,000 dollars, equivalent to an exclusion of 60,000 dollars, with a top rate of 40 per cent above it. A citizen or a domiciled decedent has, for 2026, an exclusion of 15,000,000 dollars. The gap between the two figures is the whole subject of this page.

There are two treaties between the United States and Germany and confusing them is a standing source of error. The convention on income and capital was signed on 29 August 1989 and substantially amended by the protocol of 1 June 2006. The convention on estates, inheritances and gifts was signed on 3 December 1980 and amended by the protocol of 14 December 1998. It is the second that matters here. It determines domicile in Article 4, allocates the right to tax particular classes of property in Articles 5 to 8, and supplies the two reliefs in Article 10.

Article 10(5) gives the estate of a person domiciled in Germany a pro rata share of the full American exclusion, in the proportion that the American situs estate bears to the worldwide estate. An estate of 10,000,000 dollars worldwide holding 1,000,000 dollars of American assets therefore claims a tenth of the American exclusion rather than 60,000 dollars. The price is disclosure of the worldwide estate to the Internal Revenue Service, which is a decision with consequences beyond this return.

Article 10(6) gives an additional marital deduction equal to the lesser of the value of the qualifying property and the applicable exclusion amount. It is available where both spouses were domiciled in Germany or the United States and, if both were domiciled in the United States, at least one was a German national. Claiming it requires the executor to waive the domestic marital deduction irrevocably, which means giving up the qualified domestic trust route. The two are alternatives, not a combination.

Germany taxes the same estate under its own statute, on residence and situs, and relieves double taxation through section 21 ErbStG where the treaty does not apply. That credit is narrower than it looks. It operates only on application, only in respect of foreign tax actually paid and not refundable, only against the German tax attributable to assets Germany itself classifies as foreign property, only where the German tax arose within five years of the foreign tax, and separately for each country with no pooling.

The consequence is that foreign tax on assets Germany does not regard as foreign property is simply not creditable. That is the commonest source of genuine, unrelieved double taxation in German-American estates, and it is why the allocation articles of the treaty are worked through before the credit is.

An estate administered in Germany that holds American assets faces an American return on a 60,000 dollar threshold and a 40 per cent rate, against which domestic law offers 13,000 dollars of credit. The treaty offers a pro rata share of a 15,000,000 dollar exclusion and a marital deduction of up to the same figure. Both are claimed, not given, and the marital election is irrevocable.