Wait with the building application because of the child construction allowance

It would have been easy to exclude this constellation by stipulating that one must not have owned a property for N years according to the land register before the building application (or something similar). Apparently, this was deliberately not done.

Furthermore, the KFW is actively advising here and helps in structuring per applicant.

I find it disconcerting to wield the moral cudgel in such matters.

This is an argument that can also be found with tax evaders. One could have closed the loophole, then one would not have been able to enrich oneself.

However, this is tenuous, because no law, no funding guideline can be so perfect that people under pressure to enrich themselves could not devise a way to obtain benefits.

A jungle of regulations also prevents eligible persons from getting their money due to complexity and makes the procedures legally vulnerable.

Therefore, morally not okay, but that is a subjective feeling.

The gift is not a sham. It must be effective precisely in order to receive the subsidy.

When I give someone something as a gift, I permanently transfer ownership. If I already expect (or even agree) to get the item back at the time of the gift, then it is no longer a gift. One can call that hair-splitting, but legally there is a difference between a "gift" and a "loan," not only regarding the Baukindergeld. The "gift on paper" is used here only to obtain a subsidy fraudulently. Whether that is legally okay, a gray area, or forbidden, I do not know. But my moral compass clearly tells me that it is not okay.

A gift is a gratuitous transfer of ownership. What the recipient does with it is their business. If even the [KfW] is still actively advising, one can probably make no accusation at all, because everything is uncovered. No one has to choose such contract arrangements, but there is certainly nothing shady about it.

Besides the moral aspect and the fundamental question of whether the Baukindergeld was intended for such constructs, the question is whether the effort is worth it. Effectiveness requires a legally valid transfer, which necessitates a notary. And, as I wrote further above, the way back is often subject to gift tax because the way back has gift limits depending on the relationship. And one should not put such a construct in writing beforehand, because that would invalidate the first gift. In any case, I find it inappropriate.

A gift is a gratuitous transfer of ownership. What the recipient does with it is their own business. If even the KfW is still actively advising, one really cannot make any accusation because everything is uncovered. No one has to choose such contractual arrangements, but in any case there is nothing suspicious about it.

That is your opinion. I see it differently.

The "on paper" donation is used here only to fraudulently obtain a subsidy. Whether that is legally okay, a gray area, or prohibited, I don't know. But my moral compass clearly tells me that it is not right.

But it’s not about the personal moral compass. I also didn’t think it was okay back then at the bank when parents used their babies’ checking accounts as overnight deposit accounts because the children’s checking accounts had a 1% interest rate. As soon as Dad smelled a good investment somewhere, the money was either invested again under his name or, if his personal saver’s allowance was already used up, further invested under the child’s name. If the saver’s allowance was used up, a non-assessment certificate was applied for the child and suddenly capital gains up to 8,000 euros per year were tax-free. When Dad then bought a new car, the money was withdrawn again. So the money was only gifted for the purpose of saving taxes and withdrawn again as soon as it was needed. What do I want to say with this? Sometimes there are situations that conflict with one’s own moral views and are therefore rejected. Ultimately, in the above example and in the OP’s case, a loophole in the system was used and thus either taxes were avoided or the granting of transfer payments was enabled. I am not jealous of that but rather happy for anyone who finds such a loophole and uses it for themselves.