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Family foundations: establishment and taxation
The term foundation is generally associated with a charitable purpose. One exception is the so-called Family foundation. It mainly serves to shape taxes and at the same time is intended to "hold together" the family assets. In this article, we will show you what a family foundation is, how it can be structured, how it is taxed, the reasons for establishing it and what alternatives to a family foundation exist.
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What is a family foundation?
A family foundation is an institution with assets that permanently serves the interests of a family. Thus it pursues a private and economic purpose. This violates the non-profit status according to § 51 of the tax code (AO). That's fine as long as the purpose is selfless. That means: A family foundation must not pursue the goal of increasing its assets. That is why the promotion of the financial interests of family members and the safeguarding and preservation of family assets are stated as the foundation's purpose.
How should a family foundation be designed?
An independent foundation is a "legal person", similar to a GmbH or a stock corporation. This means that the family foundation itself has legal capacity and carries rights and obligations. It arises when an asset is brought into a newly established foundation in a legally independent manner, in which the founder can determine the purpose alone with the statutes. There are no members or shareholders, but users, for whom the dedicated assets are intended to be a support. The foundation's assets must be preserved and serve the foundation's purpose. It will not be split as long as the foundation exists.
The foundation is liable with its assets and has unlimited and direct liability. The family members supported by the foundation are not liable for the foundation's debts. The statutes determine which organs the family foundation has, e.g. a board of directors and a board of trustees for supervision.
The amount of assets is not prescribed, but authorities usually require a minimum capital of € 50,000. The assets can be donated to the foundation in the form of cash, securities, shares in companies or material assets, real estate, land, antiques, works of art or other assets and assets. It should be noted that this is a transaction subject to gift or inheritance tax that triggers gift tax. The foundation privilege of Section 15 (2) sentence 1 ErbStG means:
In the case of a family foundation, the tax class is based on the relationship of the beneficiaries most distant according to the foundation deed to the testator or donor (Section 15 (2) ErbStG). In the case of a founder with two children, for example, this means that a fictitious inheritance with transfer from the older generation to the next generation would occur if there were two children. Therefore, the double tax exemption of € 400,000 may be offset against tax in accordance with Section 16 (1) No. 2 ErbStG. The amount of the inheritance tax is based on the tax classes and tariff rates set out in Sections 15 and 19 ErbStG.
The statutes of the family foundation stipulate how the assets are to be invested and for what purpose the income is to be used and how the foundation bodies (usually the board of directors and the board of trustees) should look like. The foundation statutes represent, so to speak, the basic order of the foundation and fundamentally bind the foundation bodies immutable and forever to the will of the founder. The Board of Trustees monitors the activities of the Board of Directors and compliance with the Articles of Association and the purpose specified therein.
In accordance with Section 81 of the German Civil Code, the following minimum requirements must be regulated in the statutes of the family foundation:
- Name of the foundation,
- Headquarters of the foundation,
- Purpose of the foundation,
- Assets of the foundation,
- Formation of the foundation's board of directors.
The focus is particularly on the purpose of the foundation. The founder can determine the purpose worthy of support himself, but this must be precisely defined, as it can (almost) not be changed later. The assets and investments of the foundation must be permanently secured, because the specified purpose is fundamentally only from the income from the property promoted, while the assets themselves remain untouched. In the case of a family foundation, the purpose of the foundation is not charitable, but usually consists of providing for the family.
Establishing a foundation during your lifetime or with a will?
If the founder is still alive, he can coordinate with the foundation authority and the tax office, which is a great advantage. The deed of foundation must be drawn up in writing and signed by the founder himself. He then transfers a freely chosen contribution to the assets of the foundation. He has a say in the matter as long as he lives, sits on the foundation's board of directors and can still direct the trusted people selected. After his death, the foundation's board of directors and the supervisory authority are obliged to continue the will of the founder.
In principle, a founder can also order in a will that a foundation is set up with his estate and that the proceeds from this should flow to the descendants. However, this approach is disadvantageous and is not recommended, as the founder himself can no longer be questioned, so that some foundations can no longer be established because the authorities refuse their approval due to uncertainty.
If you wish to receive a donation only after the death of the founder, it is better to order an endowment to an already existing foundation in the will (but then there will usually be no family foundation).
Why do you set up a family foundation?
One of the main reasons for setting up a family foundation is that the founder wants to secure his inheritance for his descendants without there being an inheritance dispute after his death and that the descendants are financially supported.
The founder can use his beneficiaries, the so-called Beneficiaries the Foundation, choose freely and stipulate these in the statutes. You will then receive the ordered benefits, which can be terminated at any time, for example if the foundation no longer generates any income. Regulations for this should be made in advance.
The Income from a foundation become from their property generated, for example from interest income, rental income or corporate profits. Most foundations hold company shares, their future corporate profits only the corporation tax (according to § 23 KStG this is 15%). In the case of the contribution of entrepreneurial assets, the inheritance tax regulations on the exemption of business assets according to §§ 13a ff. ErbStG apply, so that up to 100% exemption can be granted if necessary.
Since the beneficiaries do not own any shares in the foundation, their creditors can neither attach the assets nor the distributions. A beneficiary is only liable within the framework of organ liability, i.e. only if he is also active as an organ (e.g. as a board of directors) of the foundation. This can be an advantage if the family foundation itself becomes insolvent, as the beneficiaries are then not liable with their private assets.
Because the family foundation no non-profit foundation is, one also escapes the regulation that only a maximum of one third of the foundation income may be used for family security. Furthermore, some structuring constellations lead to inheritance tax peculiarities for family foundations and so to one Reduction in inheritance tax.
In general, one should consult a lawyer regarding the taxation of deposits and income.
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Taxation of family foundations
According to § 1 KStG, the family foundation is subject to unlimited corporation tax and has to pay tax on its income at 15% (§ 23 KStG). However, there is an allowance of € 5,000 (Section 24 KStG), which also applies to trade tax.
25% capital gains tax is paid from the distributions from foundations to the beneficiaries (Sections 43 and 43a of the Income Tax Act). In principle, the tax burden for a family foundation is 16.35% plus the applicable trade tax.
With the withholding of the capital gains tax, the tax liability of the beneficiary is fully settled (there is also no income tax!). One therefore also speaks of the “final withholding tax”. Social security contributions do not have to be paid for the distributions. For more detailed information on how the deposits and transfers to the foundation are taxed, it is best to contact a lawyer.
According to Section 1 (1) No. 4 ErbStG, all domestic family foundations must be taxed “at intervals of 30 years from the time of the first transfer of assets to the foundation” (Section 9 (1) No. 4 ErbStG). The net assets are taxed without deduction of the amounts to be used by the family foundation for the beneficiaries (Section 10 (7) ErbStG). This so-called Inheritance tax is very controversial in terms of both tax law and constitutional law. Nevertheless, it is usually cheaper than the direct inheritance of the assets or the inheritance tax that is then incurred (see above on the tax exemptions).
Alternatives to family foundations
Establishment of a non-profit foundation
A non-profit foundation also basically follows the founding guidelines described above. The following are constitutive for the establishment of a foundation:
- Foundation purpose with non-profit determination,
- Foundation assets,
- Foundation organization.
It must be approved by the supervisory authority in order to be recognized and legally competent. What does that mean - also in contrast to the family foundation?
Charitable foundations are tax-privileged if they pursue charitable, charitable and / or church purposes. You can accept donations and issue donation receipts. Before that, however, they must be recognized as tax-privileged by the tax authorities. Section 52 (2) AO regulates which purposes are to be regarded as non-profit in the sense of the tax code. This is a final catalog.
The majority of all foundations in Germany are tax-privileged (approx. 95%), the family foundations (share approx. 5%) are taxed as described above. If you want to dedicate your assets to a good cause on a permanent basis, this form can be chosen, in which the charitable status is in the foreground.
A non-profit foundation can also support the founder and his family, but only to a limited extent. According to §58 No. 6 of the Tax Code, the charitable status and thus the tax advantage are not lost if "a foundation uses part, but not more than one third of its income to support the founder and his immediate family in an appropriate manner, to look after their graves and to honor their memory". In this case, the foundation's income is not taxed and there is no inheritance tax. However, the family members have to pay tax on the distributions paid to them.
Dependent foundations or "endowment"
In the case of dependent foundations, assets (e.g. including real estate) are transferred to an existing legal or natural person, be it during their lifetime or by will, in order to achieve a purpose determined by the founder. From a legal point of view, there is a trust agreement or a donation subject to conditions. This is why the dependent foundation is also called a fiduciary or fiduciary foundation.
It is not necessary to set up the foundation itself, which simplifies a lot: There is no official approval procedure and there is no state supervision, only that of the foundation bodies themselves. The dedicated assets become the property of the foundation sponsor. In practice, this form is of great importance because of its flexibility.
Establishment of a "family pool"
If you don't want to set up a foundation and keep the assets in your hands until the end, there is another option for bringing in (tied) assets for the benefit of the next generation in founding one Family pools. The seniors bring their wealth into one Family company a (so-called family pool) and determine the rules according to which society should function for their descendants in a social contract. Then they involve their children / grandchildren etc. (level of Property, goes over). The provisions on voting rights (level of decision, stays with the handover if necessary) and on the uses (level of Income, the handover reserves the right) the conditions can be shaped according to the wishes of the bringing in generation.
A tax-favorable constellation can be achieved by further transfers of company shares during one's lifetime, because the tax exemptions can be re-exhausted every 10 years. With the contribution of business assets, a considerable tax advantage can also be achieved. This constellation is also of great importance in practice because of its flexibility.
Do you want to make your legacy meaningful? Free initial assessment by a lawyer
Sources: Tax Code (AO), Corporate Income Tax Act (KStG), Inheritance Tax and Gift Tax Act (ErbStG), Income Tax Act (EStG).
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