The heirs in turn agreed to sell back the medieval artifact, "Three Angels with the Christ Child", at an undisclosed price to the Bode Museum, which will keep it in its collection.
The agreement meant "righting an injustice", said the head of Berlin's public museums, Michael Eissenhauer, who thanked the heirs for the "grand gesture" that will keep the priceless piece on public display.
The delicately carved 25 centimetre tall sculpture from around 1430 shows three floating angels in the clouds holding a cloth on which lies the sleeping infant Jesus.
It once belonged to the private collection of Ernst Saulmann, a Jewish industrialist, and his wife Agathe, an architect's daughter who was one of the few female pilots of her era.
As Adolf Hitler's thugs stepped up their campaign to terrorize Jews, the couple fled Nazi repression in late 1935, initially for Italy.
The Nazis confiscated their wealth, including their land and business, a mechanized cotton mill, as well as their private library, art collection and Agathe's plane.
The more than 100 artworks were sold off at a Munich auction in 1936.
The exiled Saulmanns in 1938 left fascist Italy for France, which the Nazis invaded two years later.
The couple were interned in France in Camp Gurs, where Ernst Saulmann's health severely deteriorated. He died a year after the war ended, in 1946.
Agathe, having suffered depression after the horrors she endured, committed suicide in 1951.
In recent years, their descendants hired researchers who managed to locate 11 of the art objects, which had ended up in five German museums and three private collections abroad.
"My family was able to reach different agreements with all these institutions and collectors," said one of the heirs, Felix de Marez Oyens, at a press conference.
"However, the Bode Museum is the only institution that conducted independent research and approached us with the results."
On the verge of tears, he added: "I am convinced that Ernst and Agathe Saulmann would have welcomed this agreement".