The situation is common:
The end of working life is approaching. With current, quite respectable income, it has been possible to pay off the owner-occupied home and, in case of doubt, to cover the children’s education costs.
In addition, they do not have a high level of cash assets, or cash assets that are perceived to be sufficient for old age. The remaining working life for building up such liquidity reserves as a nest egg is shrinking, and at the same time there is a growing preoccupation with questions as to how any care services and care costs that may arise in old age can be covered financially.
In this situation, especially if the family home does not need to be inherited, the contribution of the owner-occupied property to a charitable foundation with simultaneous lifelong usufructuary rights can be an interesting building block for one’s own old-age security.
The donation to a charitable foundation entitles the founder to claim a corresponding special expense deduction in his income tax return. This reduces his taxable income and the income tax burden is reduced. Since 2007, the legislator has increased the possible maximum special expense amounts for such donations to one million euros per taxpayer with the Act to Further Strengthen Civic Commitment. In the case of married couples, the amount is doubled accordingly to 2 million. The amount of the gift and thus of the special expenses deduction corresponds to the value of the property after deduction of an amount for the reserved usufructuary right.
The real estate value is determined by an expert opinion. The usufructuary right to be deducted is made by multiplying the notional local annual rent for the property by a factor reflecting the statistical life expectancy of the person entitled to the usufruct.
This leads to interesting results, particularly in conurbations with high property prices and low rental yields. If, for example, a property in the Munich area has a market value of €1 million, this compares with a customary annual rent in the region of €40,000.
The property is valued at 25 times the annual rent. For example, for a 60 year old woman, a life usufruct is valued for tax purposes at 12.034 times the annual rent and deducted from the property value. After deduction of this burden, a special expenses deduction of 12.966 times the annual rent remains in the example.
This amount of the equivalent of € 518 640 results in income tax savings and additional liquidity of Euro 229 809.00 at an income tax rate of 44.31 percent (42 percent income tax plus 5 percent solidarity surcharge).
The prerequisite for this effect is that the taxable income after making the special deduction is at least € 52 160. The special expenses deduction can be distributed freely over a period of ten years from the date of the donation.
Towards the end of the career, the highest incomes are earned with a corresponding income tax burden. This earned income will be taxed progressively, while capital gains will be taxed at a flat rate of 25 percent plus a five percent solidarity surcharge thereon as of 2009.
By skilfully utilising and distributing the special expenses deduction gained over the last few years of work, a considerable amount of liquidity can be created with a corresponding income, which can be invested on it at a low tax rate.
A capital investment of the amount of € 229 809 mentioned in the example over 20 years at an interest rate of 3 percent net after final withholding tax results in cash assets of around € 427 000 after 20 years.
In the above example, this amount is then available at around the age of 80 to cover any nursing home and care costs that may be incurred during the last stage of life. In this way, one can spend one’s twilight years unchanged within one’s own four walls and not have to accept any restriction in one’s quality of life.
If an appropriate agreement is made, income from a rental is available in the event of a necessary move from the owner-occupied home.
In the case of foundations, it should be noted that a charitable foundation must fulfil its purpose on an ongoing basis. If only a property with a reserved usufructuary right is transferred, the foundation initially has no liquid funds available to fulfil its purpose. Here, there is the possibility of additionally providing the foundation with a smaller cash amount, which, however, costs parts of the own liquidity that has just been created.
Alternatively, however, an endowment and transfer of the property to an already existing foundation can be made, which is equipped in terms of liquidity in such a way that it can fulfil its charitable purpose on an ongoing basis. Foundations can be established in the form of a foundation with legal capacity or also as so-called trust foundations. The trust foundation is the more suitable form of foundation, as it is more flexible and less bureaucratic in its establishment and handling.
A pleasant side-effect of transferring the property to a charitable foundation is the certainty of supporting a charitable cause of one’s own choice that is deemed worthy of support in the event of one’s death. After all, there is already the possibility during one’s lifetime to commit oneself to the foundation’s purpose and to find for oneself a fulfilling old-age task oriented towards the common good.
by Dr. Johannes Fiala
by courtesy of
www.neinhaus-verlag.de (published in Landpost, issue 04/2009, page 25)
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About the author
PhD, MBA, MM
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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