Johannes Fiala and Frank M. Strobelt
The state continues to recognize the commitment of donors through generous tax breaks and other benefits related to charitable giving. In view of the asset dispositions to be made at the end of the year, the trust offers itself as an alternative commitment. Red.
You read and hear quite a lot about foundations in the media at the moment. For outsiders, it is not comprehensible at first glance that the charitable trust foundation in particular offers attractive benefits and efficient solutions to acute problems for citizens.
Retroactive improvement for 2007 can be made up for
Positive effects for the foundation system can be expected from the “Law for the Further Strengthening of Civic Commitment”, which was passed by the Bundestag at the beginning of July and passed the Bundesrat in September. According to the new law, which comes into force retroactively as of January 1, 2007, founders can now deduct one million euros in special expenses (two million euros for married couples) within ten years. The general charitable deduction will be standardized and will increase to 20 percent of annual income. The deduction for corporate donations will even be doubled.
Better credit rating through more liquidity
The charitable foundation can significantly improve the liquidity situation of wealthy individuals whose income is highly taxed. The value of assets donated to the basic assets of the charitable foundation, such as real estate, securities, collections or cash assets, constitutes special expenses. However, only up to certain maximum limits: the maximum special expenses deduction for endowments is one million euros for single persons and two million euros for married persons (compare, among other things, section 10 b, paragraph 1 a EStG). In the founder’s private tax return, this special expense deduction reduces the taxable income (see table).
Instant deduction and other advantages
Furthermore, the standardisation and increase in the deduction for donations means that an additional 20 percent of the total amount of income can be deducted from tax. It is also possible to enter tax allowances on the income tax card or to reduce advance income tax payments. A side effect of this is that the citizen is given a certain amount of creative freedom through his or her own foundation and can decide for himself or herself what should be done with his or her tax capital. With the tax advantages achieved, many citizens can, for example, expand their private pension provision or use the additional liquidity for other purposes. The founder himself determines the charitable purpose to be supported and decides who, how or what is to be supported. Part of the foundation’s income is used directly or indirectly to fulfil the charitable purpose. Here, the founder can choose whether he wants to fulfill the foundation’s goals himself with his own activities or by passing on financial means to other non-profit organizations. In the meantime, many citizens at the end of their professional life see their own trust foundation as a new task in life and a chance for self-realization. In this context, the founder is free to determine the objectives of his foundation. New ideas can be put into practice quite quickly via the foundation. The trust foundation enables unbureaucratic help for many areas of life and new meaningful structures for the community.
Diverse purpose of the foundation
The charitable purposes of the foundation include youth welfare, assistance for the elderly, environmental and landscape protection, monument conservation, development aid and international understanding. The provisions set out in the Schedule to section 48 para. 2 EStDV (German Income Tax Implementing Regulation) have now been included in the catalogue of section 52 para. 2 of the German Fiscal Code (Abgabenordnung) and supplemented by further purposes, such as the promotion of civic engagement.
No taxes on capital gains
The assets within the foundation work tax-free in the tax-privileged asset management; there are no income taxes here. This is an enormous advantage, especially since from 2009 the interest income tax of 25 percent plus solidarity surcharge will be levied on income from capital assets outside the foundation. The tax-free sale of assets via the charitable trust foundation is also possible; the proceeds of the sale then flow tax-free into the foundation. For many heirs, for whom the inheritance tax is a considerable burden, the charitable trust foundation is invaluable. Heirs may transfer assets from the estate to the charitable foundation free of inheritance tax for up to 24 months after the death of the deceased (cf. Section 29 (1) No. 4 ErbStG). In the case of the transfer of real estate assets to a charitable trust foundation, no real estate transfer tax (compare section 3 no. 2 of the Real Estate Transfer Tax Act – GrEStG) is due. In this way the heritage can be preserved undiminished.
Retirement benefits and life’s work
If the foundation has sufficient capital resources, the founder is able to work in the non-profit sector within the framework of a permanent employment relationship and to pursue the foundation’s purpose at home and abroad. However, the founder can also use the legally regulated right to a pension for himself and his relatives against the charitable foundation. According to this, in principle up to one third of the income can be used for the living expenses of the beneficiaries. But also the preservation of the memory of the founder of the foundation as well as the care of the grave can be financed by the foundation (compare paragraph 58 No. 5 AO). Married couples and singles without heirs or with distance to relatives can appoint their own charitable foundation as heir. The inheritance to be transferred to the Foundation in the event of death may be used to promote any charitable purpose. It is advisable to set up the foundation during one’s lifetime and to endow it with a small amount of assets. Furthermore, the foundation can also be seen as a protection of the founder’s life’s work. Assets such as collections, works of art or patents can be entrusted to one’s own foundation.With the established foundation, which can bear the name of the founder, the founder experiences a piece of immortality at the same time: Foundations are basically designed for eternity. They have a tradition in Germany that is more than a thousand years old. Many foundations established hundreds of years ago are still operating today. Trust foundations consist of a basic capital in the form of special assets that belong to themselves. The charitable purpose is mainly financed by income from the foundation’s assets, which in most cases must be preserved. Here is an example calculation (see below). Result and targets: The total tax savings amount to approximately 359,093 euros over the next five years from 2007 to 2012. The charitable foundation will be endowed with assets amounting to 867 600 euros, the assets coming from separate property of the couple. All assessable assets can be brought into the foundation. (Examples: GmbH shares, real estate, securities, works of art, fixed deposits, savings books, cash et cetera).
(Assets & Taxes 11.2007, 26)
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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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