A Guide for Families to the German treatment of a trust: why Germany does not recognise one; the charge on funding under section 7(1) number 8 ErbStG; the charge on distributions under number 9 and the interim beneficiary; the tax class refinement that helps; and the attribution of income under the Foreign Tax Act.
The revocable trust does most of the work of American estate planning. It avoids probate, keeps the arrangement private and, being revocable, has no gift tax consequence during the settlor’s life.
Germany does not recognise it. Germany is not a party to the Hague Trusts Convention, and a German court or tax office confronted with a trust will characterise the arrangement under German categories rather than give effect to the separation of legal and beneficial ownership.
The mistake this page exists to prevent is carrying an American trust into Germany unexamined. An American who moves to Germany holding a revocable trust, or who settles one while resident there, risks a German tax charge on an arrangement that has no American tax consequence at all.
The exposure runs in both directions in time. Funding is taxed on the way in, at class III rates against a 20,000 euro allowance; distributions are taxed in the hands of a German-resident recipient on the way out; and the Foreign Tax Act may attribute the entity’s income to a German-resident settlor or beneficiary whether or not anything is distributed.
(1) Germany does not recognise trusts and is not a party to the Hague Trusts Convention.
(2) Funding a foreign asset-holding vehicle is a taxable transfer under section 7(1) number 8 ErbStG, taxed in class III at 30 or 50 per cent against an allowance of 20,000 euros.
(3) Distributions during the vehicle’s existence and on its dissolution are taxable under section 7(1) number 9 ErbStG in the hands of a German-resident recipient, of capital as well as of income.
(4) Section 15(2) sentence 2 ErbStG classes a distribution by reference to the beneficiary’s relationship to the settlor, so a distribution from an American parent’s trust to a German-resident child falls in class I with a 400,000 euro allowance even though the funding was in class III.
(5) The Federal Fiscal Court held in II R 31/19 of 25 June 2021 that a person is an interim beneficiary if that person has any legal or contractual entitlement, and that the recipient bears the burden of proving the trustees had genuine discretion.
(6) Section 15 of the Foreign Tax Act attributes the income of a foreign family foundation or trust to a German-resident settlor or beneficiaries whether or not anything is distributed.
Part I. Funding, and the charge on the way in
Where the settlor is resident in Germany, transferring assets into a foreign asset-holding vehicle is treated as a gift to that vehicle. The rate is set by class III, which is 30 per cent up to 6,000,000 euros and 50 per cent above it, and the allowance is 20,000 euros. A revocable trust funded with a substantial portfolio therefore produces a German charge measured in hundreds of thousands of euros on a transaction the American system treats as having no tax consequence whatever.
The German family foundation is the instrument Germany does recognise, and it is the answer German law gives to the question an American family would answer with a dynasty trust. Its endowment attracts gift tax, with a look-through to the most remote beneficiary where the foundation is established in Germany and serves the family’s interest, and every thirty years it pays a substitute inheritance tax as though the assets had passed to two children. That substitute charge is the price of recognition, and it is a known price rather than an open question.
Part II. Distributions, and the interim beneficiary
Distributions to a German-resident recipient are taxable under section 7(1) number 9 ErbStG, and the charge extends to distributions of capital, not only of income. A German-resident child receiving a distribution from a trust settled by an American parent is therefore within German gift tax on the receipt.
One refinement materially improves that position. Section 15(2) sentence 2 ErbStG classes the distribution by reference to the recipient’s relationship to the settlor rather than to the vehicle, so the distribution from a parent’s trust falls in class I with a 400,000 euro allowance. The class III treatment of the funding and the class I treatment of the distribution sit side by side in the same statute.
The Federal Fiscal Court has drawn the category of interim beneficiary widely. In II R 31/19 it held that a person is an interim beneficiary if that person has any legal or contractual entitlement in the assets or the income, that a concrete distribution decision is not required, and that the burden lies on the recipient to show that the trustees had genuine discretion. A beneficiary of an American discretionary trust should expect to have to prove the discretion rather than assert it, which makes the drafting of the trust instrument a German tax question as well as an American one.
| Event | German provision | Class and allowance |
|---|---|---|
| Funding by a German-resident settlor | Section 7(1) number 8 ErbStG | Class III, 30 or 50 per cent, allowance 20,000 euros |
| Distribution to a German-resident recipient | Section 7(1) number 9 ErbStG | Classed by relationship to the settlor under section 15(2) sentence 2 ErbStG |
| Distribution from a parent’s trust to a child in Germany | Sections 7(1) number 9 and 15(2) | Class I, allowance 400,000 euros |
| Undistributed income of the vehicle | Section 15 of the Foreign Tax Act | Attributed to the German-resident settlor or beneficiaries |
| German family foundation | Section 1(1) number 4 ErbStG | Substitute inheritance tax every thirty years |
Part III. Income attribution, and what is still moving
Separately from the gift tax analysis, section 15 of the Foreign Tax Act attributes the income of a foreign family foundation or trust to a German-resident settlor or to the beneficiaries whether or not anything has been distributed. The effect is an annual German income tax charge on income the family has not received.
That provision is under revision. The Federal Fiscal Court held on 3 December 2024, in IX R 32/22, that the escape clause, which on its face is confined to European entities, must be extended to third countries where information exchange exists. A draft ministerial revision of the provision was published on 18 November 2025 and has not been enacted. Anyone relying on the escape clause for an American trust should treat the position as subject to change and should not assume that the draft will be enacted in its published form.
The American side of the same arrangement imposes reporting rather than tax on a German-resident American: Form 3520 for creation, transfers, distributions and loans, and Form 3520-A as the annual return of a foreign trust with an American owner. A German family foundation, and in some circumstances a German partnership arrangement, can be a foreign trust for that purpose, so the reporting obligation can run in the direction families do not expect.
Part IV. Practical steps
- Establish the German position before anyone becomes resident there. Funding while resident in Germany is a class III gift. Funding before residence changes is not.
- Read the trust instrument as a German tax document. Whether a beneficiary has an entitlement, and whether the trustees have genuine discretion, decides the interim beneficiary question, and the beneficiary bears the burden of proof.
- Claim the class I treatment on a distribution from a parent’s trust. Section 15(2) sentence 2 ErbStG classes by relationship to the settlor, and the difference between 20,000 and 400,000 euros of allowance is not given automatically.
- Consider the German family foundation where the purpose is long term. Germany recognises it, and its thirty-year substitute charge is a known cost rather than an open characterisation question.
- File the American forms on their own timetable. Form 3520 and Form 3520-A penalties are measured against amounts rather than against tax, and a German entity can be a foreign trust for this purpose.
Conclusion
A trust that is unremarkable in the United States becomes a German tax event on funding, on distribution and, through the Foreign Tax Act, on income nobody has received. The statute offers one material concession, the class I treatment of a distribution measured by the relationship to the settlor, and one recognised alternative, the German family foundation. Both are decided before residence changes rather than after.
Sections 1(1) number 4, 7(1) numbers 8 and 9, 15(2) sentence 1 and sentence 2, 16 and 19 of the Inheritance and Gift Tax Act (ErbStG); section 15 of the Foreign Tax Act (AStG); Bundesfinanzhof, judgment of 25 June 2021, II R 31/19; Bundesfinanzhof, judgment of 3 December 2024, IX R 32/22; draft ministerial revision of section 15 AStG published 18 November 2025, not enacted; Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition, to which Germany is not a party; sections 671 to 679, 6039F and 6677 of the Internal Revenue Code, Form 3520 and Form 3520-A. Figures and statuses are stated as of September 2026.
- 13 October 2026: page created.
- Trusts
- Living trust
- Zwischenberechtigter, the interim beneficiary
- Familienstiftung, the German family foundation
- Außensteuergesetz, the Foreign Tax Act
- Form 3520 and Form 3520-A
- Steuerklassen, the German tax classes
- Generation-skipping transfer tax
- German inheritance and gift tax for American families
- Gift planning across the German-American border
- Choosing the law that governs the succession
Contact
An American trust meeting German law produces charges the American plan never contemplated. Ashford International Law PC advises families and their advisers on the German characterisation and taxation of an existing American trust; pre-residence restructuring before a settlor or beneficiary moves to Germany; the interim beneficiary question and the evidence of trustee discretion; the German family foundation as a recognised alternative; Form 3520 and Form 3520-A reporting for German and American entities, alongside the family’s existing advisers or leading the United States side end to end.
The firm is led by attorney Caroline Esche Ashford, PhD, JD. A graduate of Columbia University Law School, her practice focuses on international estate planning and the cross-border taxation and administration of estates and trusts, including American trusts confronted with German law. Dr. Ashford is also licensed to practice law in Germany. She advises in French and German as well as English.
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This guide is intended for general educational purposes and does not constitute legal or tax advice, nor does it create an attorney-client relationship. The matters described, the German treatment of trusts under sections 7(1) numbers 8 and 9 and 15(2) ErbStG, the interim beneficiary decision in II R 31/19 and the attribution of income under section 15 AStG, depend on the specific facts, assets, countries and states concerned and on the law in effect at the relevant time, and they change. Statuses and figures are stated as of September 2026 and must be confirmed before any decision. Nothing here is advice on any particular estate or transaction. A family in this situation should obtain advice from qualified counsel in each relevant country promptly, and before a settlor or beneficiary becomes resident in Germany.
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