German Family Foundations
Set up in the interest of the family: Family foundations
While most German foundations are charitable and either conduct their own operative business or run funding projects, private-benefit foundations are organized not for charitable but for private purposes. The most common type of private foundations is the family foundation. It is mainly designed to serve the interests of one or more families. This means that family foundations are foundations whose beneficiaries have family ties with the founder. Around 5 percent of all foundations set up in Germany are private family foundations. Wealthy individuals and entrepreneurs mainly appreciate the tax advantages – even after the last inheritance tax reform – and the flexibility of family foundations. Family foundations allow to develop tailor-made asset succession concepts and to effectively protect assets from third-part access (so-called asset protection).
Business succession by corporate foundations
In many cases, family foundations are established as part of a comprehensive succession solution: Setting up a foundation is usually a perfect way to implement asset successions in respect of both, private assets and companies. As an instrument of company successions, family foundations serve to continue the founder's company or – more often – to hold the shares in the company. In such cases, the foundation is also called a corporate foundation. At the same time, the entrepreneur's family members will be provided for by regular distributions, for example. In this way, the founder's company is maintained beyond his death and the beneficiaries are still financially secure.
In the context of such company successions, it is not unusual to set up several foundations at once, e.g. one family foundation / corporate foundation for every beneficiary (e.g. one foundation per child). In order to avoid an unnecessary additional administrative burden, the bodies of the different foundations may be composed of the same members. One and the same director may, for example, head several foundations.
In addition, mixed foundation models are conceivable. In this case, the family foundation is complemented by one or more charitable foundations which provide additional tax advantages (e.g. in the field of gift tax and inheritance tax). The founder specifies the charitable purposes to be promoted by such foundation. Very often the founder will choose to support research and sciences (e.g. running or funding a research institute), arts and culture (e.g. funding projects for a specific museum), or social purposes.
Family foundations offer succession solutions for private assets
Even the succession of private assets to the next generations, i.e. the transfer of assets not relating to any substantial participations in companies (like stock, funds, other portfolio assets, cash, real property etc.) can be accomplished through family foundation solutions. In such private cases family foundations are attractive because they provide assurance that the property (e.g. the family's real property) is protected from fragmentation in case of succession. Instead, the family foundation allows to lastingly preserve the property as one unit. In addition, there may be tax advantages.
Real estate assets and family foundations
Family foundation solutions are virtually ideally suited for real estate owners. This holds true especially for real property a taxpayer can sell free of taxes after 10 years of ownership. In such cases, the real estate assets may be sold (free of tax) to a family foundation. This allows the founder to increase his liquidity and use it for investments in pension schemes, for example. The foundation, in turn, which will finance the real estate purchase from its own capital or through a bank loan, or a mix of both, can in most cases benefit from higher depreciation and basically pays only 15.825% corporate income tax incl. solidarity surcharge on the rentals received. Rental income received by the founder, on the contrary, would be subject to the founder's personal income tax rate which is often the maximum tax rate (or wealth tax) plus solidarity surcharge (i.e. up to 47.475%).
Besides, real property owned by a family foundation may be sold again free of taxes after a holding period of 10 years. But even an earlier sale causes only a relatively low tax burden of only 15.825% (corporate income tax and solidarity surcharge).
Asset protection by family foundations
Family foundations have neither owners nor shareholders. While shares in a German limited liability company (GmbH) are owned by the shareholders, which means that creditors can execute against the shares, founders own no shares in "their" foundation. As a result, the foundation's assets are protected against any third-party claims – at least if the transfer to the foundation was performed early on and certain contestation periods (4 to 10 years) have expired. Family foundation solutions offer the perfect asset protection to entrepreneurs, who are exposed to financial risks relating to their company and are concerned that one day they might be liable with their private assets.
Taxation on the formation of a family foundation
The transfer of assets to a family foundation is, as such, subject to inheritance tax and/or gift tax. However, the founder can benefit from a wide range of tax advantages, including certain tax allowances. For this purpose, the contract needs to be carefully drafted: If, at the time of the founding act, the founder already undertakes to transfer other assets to the family foundation at a later time, the assets transferred later can also benefit from tax allowances under the inheritance and gift tax law.
In case of large fortunes exceeding the tax allowances, our structuring advice will focus on identifying corporate assets. Under various circumstances, the transfer of corporate assets to family foundations may be tax-exempt (so-called "tax-privileged assets"). In this context, it may be advisable to set up several family foundations at once so as to be able to benefit from the statutory amount of 26 million euros several times.
Current taxation on family foundations
Like other corporations, family foundations are subject to ongoing corporate income tax. In contrast to German limited liability companies, business tax (generally around 15%) will not apply automatically but only if the family foundation actually engages in commercial activities. If, instead, the family foundation only provides asset management, the final tax burden on the family foundation will remain 15.825% (corporate income tax and solidarity surcharge). Compared with other legal structures, this tax rate is extremely attractive.
Besides, the family foundation is subject to a tax that does not apply to other legal structures: the substitute inheritance and gift tax (Erbersatzsteuer). Every 30 years, a succession is assumed to take place with respect of the foundation's assets. However, a clever tax structuring will help reduce the tax burden to a reasonable amount or exclude it altogether.
How to set up a family foundation
You see: If you are interested in setting up a family foundation, premature action is not adequate. A succession solution that is sure to be legally compliant and tax-optimized will always require that we and you together take every care to ensure that your personal family situation and your total assets are given sufficient consideration to develop a tax and legal concept tailored to your specific needs, including the articles of association and the founding act.
Besides, a similar level of care will be required when founding any other of the numerous types of foundations known by the German foundation law (corporate foundation, charitable foundation, public law foundation etc.). No matter what type of foundation you want to set up: We will take the time to get to know you, your goals, intentions and all other circumstances that cause you to set up a foundation. This is the only way for us to give you the right suggestions and recommendations and be able to realize your founding project competently from A to Z. You can rely on our extensive expertise in foundation law and setting up foundations.
Your attorney for family foundations
Do you have any questions on family foundations, on how to set up a family foundation, or on how to set up a foundation in general? You wish to set up a family foundation for protecting your assets (asset protection), increasing your liquidity, for tax-related reasons, or for organizing a structured transfer of all of your assets to the next generations? You have urgent questions in your capacity as a foundation director? Your contacts are Attorney Boris Piekarek and Attorney Susanne Articus.
Please do not hesitate to contact us, we are always here for you. The easiest way to reach us is by e-mail (firstname.lastname@example.org) or by phone (+49 (0)69 76 75 77 80).