bAV: Risk multiplication through leverage with the reinsurance of pension commitments

by Florian Nolte, Assessor iur. (nolte-florian@web.de) and Johannes Fiala, Attorney at Law (Munich), M.B.A. (Univ.Wales), M.M. (Univ.), Certified Financial and Investment Advisor (A.F.A.), EC Expert (C.I.F.E.), Banker (www.fiala.de )
Preface This case, dear reader, is not real: similarities with (still?) living persons and GmbH�s, also of the contemporary history, are purely coincidental and not intended. This includes intermediaries, hedge fund providers and insurers.
Anamnesis GGF Müller is approached every month by an agent about his pension commitment ? it had once been set up: For some years he was happy about his tax saving (or rather tax shifting) model with the words ‘I have a great tax advisor ? for years I have not paid a penny to the tax authorities’. The reinsurance reached, as in the work ?future market bAV? (Verlag C.F.Müller), the reinsurance reached a national average of 33% of the Heubeck liability values. Recently the insurance company informed the GGF that unfortunately the surrender value would not be sufficient in the future to finance the commitment. However, Mr. Müller did not want to spend new money.
1st Diagnosis Then GGF Müller got to know a particularly clever mediator: His approach to solving the problem reads impressively and simply. The GGF borrows 80% of his (in any case much too low) reinsurance and takes out another loan in order to invest an additional 200,000 euros. Genius, actually. What pays off here is the commission from the deal. Otherwise, unfortunately, the model only pays off later for the lawyer.
1st therapy What the GGF buys is an allegedly ?safe? business. The shell of a Liechtenstein life insurance policy serves as the capital investment. In it one can accommodate risk-free hedge funds as well as entire real estates. The concept of the mediator aimed at the investment of the lent surrender value of the reinsurance of the PZ in an investment, which is not certified with the BaFin. In order to circumvent the approval, this investment is “wrapped” with a Liechtenstein policy wrapper. This so-called insurance wrapping is widespread in private banking in Switzerland; however, a custody account is usually wrapped with existing securities there. The solution does not always have to be in Switzerland ?
Theinvestment risk Part of the essence of leverage is that the interest on the loan is certain ? the return for the customer does not. Naturally GGF Mueller was not cleared up over the numerous risks; the BGH already by judgement of 09.07.1998 (Az. III ZR 158/97) a savings bank the soup versalzen (seehttp://www.finanztip.de/recht/bank/sofortrente-bankkredit-sparplan.htm ) and it as mediator to the back completion condemned. What the intermediary has left behind with GGF Müller is the proverbial scorched earth ? especially since the sad development of the hedge fund within the Liechtenstein policy since 2003.
2nd diagnosis And now to risks and side effects of the 1st therapy: The concept says
– GGF waives the declaration of pledge, GmbH assigns the LV to Liechtenstein? -> This is great (cf.www.frontal.de ), because this means that the GGF does not have any minimum protection with regard to his claims to occupational disability or death benefits; now the concept should be able to adapt to the needs of the company. Therefore, the GmbH is faced with a choice in the design of the new plant:
– GmbH is VN + VP in all areas and uses this form of financing within the balance sheet, …? -> A remarkable information, because do you know an insurer who insures the (often much too early) death of a GmbH as VP ? But even if there were such a possibility: The commitment is not fully financed despite (or because of) the construction. If the GGF dies prematurely, only 20% of the surrender value is still available in the reinsurance policy, the loan has to be repaid and the rest of the lent surrender value was used for the agent’s commission and the interest on the loan.
– The GmbH reduces the existing commitment to the extent of the possible payout from the existing pension plan and spreads the conversion over several years. -> The tax authorities will certainly be pleased about this, because the GmbH then pays tax on the “reduction” as a waiver and the GGF as a hidden contribution. This is really fun. Tax is due twice ? but no money flows to the taxpayers (GmbH and GGF personally).
– The GmbH cedes the life assurance to the GGF, who allows the life assurance and the borrowed capital to operate separately? -> This means that the remainder of the reinsurance would also flow economically to the GGF. The question of tax liability in accordance with §§ 19, 34 EStG is affected here.
Therapy The intermediary presumably used to work for a building society, otherwise how else can the impression of ?advice in the ground? be explained. The tax result resembles a complete cancellation of the pension commitment by the tax authorities. Whether this mediation is to be valued as instigation to the tax evasion, is times to be left undecided.
Advertising Liability The lawyer will first pounce on the product provider: The model is presented with its logo and without any reference to possible investment risks. Thus the advertising liability can intervene in the sense of an as it were assured characteristic after the new BGB (effective since 01.01.2002). Also the mediator, even if he may feel only as an agent, has little rosy prospects, because here the adhesion can intervene from ?immoral damage? and similarly cruel legal reasons.
Suicide of the Entrepreneur If you are an entrepreneur, let the scenario roll off your tongue. The agent found a pension provision according to the tax balance sheet, let’s say with 300 TEUR, discounted according to Heubeck with 6% (tax balance sheet). In the commercial balance sheet, the real values of the capital market would have to be applied, i.e. at approx. 3% over 600 TEUR. Then, according to § 19 InsO, it would have to be topped up further (lifelong pension, with biometric risk and current guaranteed interest of the insurer, but after deduction of the “Zillmerung”) ? this could be about three times the balance sheet value.
The tax consultant is perhaps in the guarantor liability according to § 13 StGB ? and then this wonderful solution ? the insolvency is certain at the latest then?
Whether GFF Müller now finds it difficult to find the right litigation financier? Even more so when an EU directive provides insurance cover for the intermediary?
Conclusion: A modified old German proverb also applies here: Ignorance does not protect against damage. Not even if one writes “This list does not constitute legal advice or tax recommendation”.

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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