Limited Term Trusts in Germany (Verbrauchsstiftung) | Legal Advice

Limited Term Trusts in Germany

Advice on establishment, special expense deductions and taxes

A foundation is designed to last forever. There are therefore foundations that are already many hundreds of years old. The purposes of a foundation are typically realized solely from the income from the foundation's assets.

However, German foundation law has also opened up to so-called limited term trusts (Verbrauchsstiftung). These are foundations that not only operate from their income, but also use up their own capital over the years. The result: after a certain lifespan, a limited term trust is dissolved due to a lack of assets.

Limited Term Trusts in Germany

What forms of limited term trusts are there?

The limited term trust is characterized by the fact that, unlike the “normal” foundation, it uses all of its assets. In other words, it may use and distribute its assets. There are generally two types of limited term trusts:

  • Time-limited foundation: This foundation is only set up for a certain period of time, during which it must use all of its assets for the foundation's purpose (temporary foundation).
  • Foundation with a limited purpose: This foundation ends when it becomes impossible to fulfill its purpose.

Both forms must use up their assets within their lifetime. Both should also have a lifespan of at least ten years.

How does a limited term trust use its funds?

A limited term trust must specify in its statutes how it uses its funds. This can be done either by specifying the exact date by which the funds must be used up (e.g. 01.01.2027). In this case, the consumption can be varied annually. Alternatively, it can also be specified that a certain amount or percentage of the funds must be used for the purposes of the foundation each year.

How does a limited term trust end?

As a rule, a limited term trust does not end “by itself”. A foundation can only be dissolved by the passage of time if the foundation supervisory authority notes this accordingly in the certificate of recognition. Otherwise, the dissolution of the foundation must be applied for with the foundation supervisory authority. The foundation's bodies (usually the Board of Directors) must provide the supervisory authority with all the necessary information.

No special expense deduction for limited term trusts

There are also differences to “normal” foundations from a tax perspective in Germany. This is because the increased special expenses deduction, which is granted for endowments to the asset pool of a foundation, is denied in the case of a limited term trust.

This is also logical, as the provision in the German Income Tax Act only applies to endowments that flow into the foundation's basic assets, which must be maintained undiminished. However, this does not exist in the case of the limited term trust. This is because the limited term trust does not use its assets as a source of income, but uses them to directly fulfill its purpose.

For whom is a limited term trust a good choice?

A limited term trust is suitable, for example, for someone who wants to pursue a specific purpose for a limited period of time. This could be a charitable purpose, for example.

On the other hand, the limited term trust is also suitable in the context of succession planning. The consumption foundation can be particularly interesting for family foundations, as in this case the so-called inheritance substitute tax, which is due every 30 years, can be avoided and an independent distribution of generated (earned or inherited) assets can be achieved.

Whether such a limited term trust is desired, in which federal state this type of foundation should have its registered office and what tax consequences arise for the foundation and the founder is a question of the individual case. Our lawyers for German foundation law will be happy to advise you in detail on the possibilities of the limited term trust.

Your attorney for limited term trusts in Germany

You can contact our foundation law experts easily by e-mail (info@winheller.com) or by phone (+49 69 76 75 77 85 24). Feel free to contact us at any time!

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