Common Law Trust or Foundation: A Comparison for Asset Protection and Succession

Published on 07.10.2026

Trust or Foundation?

Anyone who wants to organise their wealth across generations, protect it from creditors or structure it internationally regularly comes across two seemingly interchangeable terms: the Anglo-American common law trust and the continental European foundation (Stiftung). Trust or foundation: the question is often put as if it were about two variants of the same instrument. In fact, the two rest on different legal foundations. This is not an academic subtlety: it determines whether an asset protection concept will stand up before a German court or tax office and how high the tax burden will be. What matters most are the German tax consequences on establishment, on ongoing taxation and on distributions.

Two Fundamentally Different Legal Concepts at the Outset

The common law trust is based on a triangular structure: a settlor transfers assets to one or more trustees, who hold them on trust for the benefit of the beneficiaries. The trust itself is not a legal person. It creates a legal relationship between the parties, governed by the trust deed and the law to which the trust is subject. Whether a trust has been validly established depends on that law; this must be examined by an adviser in the state concerned.

A distinction is made between a trust created during the settlor’s lifetime (inter vivos trust) and a testamentary trust, which only takes effect on the settlor’s death, and between a revocable and an irrevocable trust. Only an irrevocable trust brings about a permanent separation of the assets from the settlor.

The German foundation follows a different design principle. It comes into being through a foundation transaction (Stiftungsgeschäft) and recognition by the competent authority of the federal state (Land) as an independent legal person (Sections 80 et seq. of the German Civil Code, Bürgerliches Gesetzbuch, BGB). It can conclude contracts, hold property, sue and be sued in its own right. Once the foundation has been recognised, the assets contributed belong to the foundation itself. There is no trustee; instead, there are governing bodies (a board and, where applicable, a foundation council or advisory board) that dispose of the assets within the framework of the articles.

The Central Difference in Legal Nature: Split Ownership versus Separate Legal Personality

The decisive difference lies in the concept of ownership. The common law recognises a split between legal ownership (held by the trustee) and equitable ownership (held by the beneficiaries), i.e. two parallel levels of ownership in the same asset. The BGB, by contrast, in principle recognises only a single, uniform ownership of a thing.

A related idea is not alien to German tax law: Section 39 (2) no. 1 of the German Fiscal Code (Abgabenordnung, AO) attributes assets to the beneficial owner (wirtschaftlicher Eigentümer) if, as a rule, that person can economically exclude the civil law owner from exercising control over them. This provision is an important point of reference for the tax classification of trusts, but it does not change the fact that the trust concept remains alien to German civil law.

The foundation achieves the separation of assets through genuine legal personality: on recognition, a new legal entity comes into being to which the assets belong as a whole. The founder and the beneficiaries have no proprietary share in them, at most personal (obligatory) claims to benefits in accordance with the articles.

Recognition by German Courts and Authorities

The German foundation is, from the outset, a recognised legal institution anchored in German law. The position is different for the trust; this is where a major weakness of the instrument lies in German cases.

Germany has not ratified the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition. The Convention has only 14 contracting parties; Austria, France, Spain and the Nordic states are not among them either. There is therefore no treaty basis on which German courts would have to recognise a foreign trust as a matter of course. Even the Convention, in Art. 15, leaves unaffected the mandatory provisions of the law designated by the conflict of laws rules of the forum, expressly including the law on compulsory portions (forced heirship, Pflichtteilsrecht). Even in the contracting states, therefore, recognition of a trust does not automatically protect against compulsory portion claims on foreign assets.

From a German perspective, this results in a characterisation problem in private international law:

• For testamentary trusts, the EU Succession Regulation (Europäische Erbrechtsverordnung, EuErbVO) only determines which law governs the transfer of assets upon death: in principle, the law of the last habitual residence (Art. 21 (1) EuErbVO), unless the deceased chose the law of his or her nationality under Art. 22 EuErbVO. The creation, administration and dissolution of the trust itself are excluded under Art. 1 (2) (j) EuErbVO.
• For trusts created during the settlor’s lifetime, the connecting factor is disputed: some apply contract law rules by analogy with the principles of the Rome I Regulation (which itself expressly excludes trusts in Art. 1 (2) (h)) with a choice of law, some apply company law rules, and some apply property law rules via the lex situs under Art. 43 of the Introductory Act to the German Civil Code (EGBGB) for the transfer of individual assets.

If a trust meets German assets or German parties, it regularly has to be recast into familiar legal institutions, depending on its structure as a fiduciary arrangement (Treuhand), as (long-term) executorship (Dauertestamentsvollstreckung) or as a succession of prior and subsequent heirs (Vor- und Nacherbfolge). Which classification applies is a matter of evaluation and is not handled uniformly. In particular, a trust cannot itself be entered in the land register as owner or be a shareholder in a German company. The questions that arise for real estate are shown in our article on transferring real estate into trusts.

The foundation does not face this recasting problem. It appears as a recognised legal person in the land register and in court; from 1 January 2028, it will also be entered in the register of foundations (Stiftungsregister).

German Taxation Compared

For tax purposes, trusts and foundations differ above all on establishment, in the ongoing attribution of income and on distributions.

Gift Tax on Establishment

Both the endowment of a German family foundation and the establishment of a foreign trust in principle trigger gift tax. Section 7 (1) no. 8 of the German Inheritance and Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz, ErbStG) covers the transfer of assets to a foundation and expressly treats as equivalent the “formation or endowment of a pool of assets under foreign law whose purpose is the tying up of assets”; this also covers trusts. Section 7 (1) no. 9 ErbStG governs acquisitions on dissolution and acquisitions by interim beneficiaries (Zwischenberechtigte). In its judgment of 25 June 2021 (II R 31/19), the Federal Fiscal Court (Bundesfinanzhof, BFH) clarified that only a person who has rights or claims to assets or income irrespective of a specific distribution decision is an interim beneficiary of a foreign pool of assets.

The decisive difference lies in the tax class and thus in the tax-free allowance and the tax rate. For a German family foundation, the tax class is determined under Section 15 (2) sentence 1 ErbStG by the relationship between the founder and the most remotely entitled person under the articles. If the group of beneficiaries is limited to the children, tax class I applies with a child’s allowance of EUR 400,000. If grandchildren can also receive benefits under the articles, their allowance (EUR 200,000) applies. If later generations can also benefit, for example because the articles refer generally to descendants, the great-grandchildren are decisive according to case law, even if they have not yet been born; the allowance then falls to EUR 100,000 (BFH, judgment of 28 February 2024, II R 25/21). As the foundation is the acquirer, this allowance is granted only once, not per child.

According to the wording of the law, this tax class privilege applies only to foundations established essentially in the interest of a family or certain families in Germany. In its judgment of 13 November 2025 (C-142/24), the Court of Justice of the European Union ruled that Germany may restrict this relief to domestic family foundations without infringing the free movement of capital; the case concerned a Liechtenstein family foundation. The endowment of a foreign trust, like that of a foreign family foundation, therefore falls into tax class III: allowance EUR 20,000, tax rate 30 percent up to 6 million euros, 50 percent above that. For a comparable volume, this can increase the gift tax many times over.

Ongoing Taxation: Corporation Tax or Attribution under Section 15 AStG

The German family foundation is itself subject to corporation tax (Section 1 (1) no. 5 of the German Corporation Tax Act, Körperschaftsteuergesetz, KStG); the beneficiaries pay tax on its benefits as investment income (Section 20 (1) no. 9 of the German Income Tax Act, Einkommensteuergesetz, EStG). For foreign family foundations and, via Section 15 (4) of the German Foreign Tax Act (Außensteuergesetz, AStG), for foreign trusts, by contrast, assets and income are attributed under Section 15 (1) AStG to the founder with unlimited tax liability in Germany or to the beneficiaries or remaindermen (Bezugs- oder Anfallsberechtigte) with unlimited tax liability. Section 15 (4) AStG expressly refers to “other special-purpose assets, pools of assets and associations of persons with or without legal capacity”.

For structures with their registered office or place of management in an EU or EEA state, attribution under Section 15 (6) AStG is only excluded if it is proven that the assets have been removed, legally and in fact, from the power of disposal of the founder and his or her relatives, and if information is exchanged between the states. Details are given in our article on the family foundation as asset protection for emigrants.

In the case of a trust, the question of transparency also arises. If the settlor has reserved extensive powers, such as a right of revocation at any time, the assets are attributed to him or her under general principles, partly via Section 39 (2) no. 1 AO; establishment and revocation remain tax-neutral, and the settlor pays tax directly on current income. A non-transparent, typically irrevocable discretionary trust in which the trustee has its own decision-making authority, on the other hand, is treated as an independent pool of assets: its establishment is subject to gift tax, and in the case of a foreign trust its income is attributed under Section 15 (1) and (4) AStG. For trusts with their place of management in Germany, a separate liability to corporation tax under Section 1 (1) no. 5 KStG may arise.

The Risk of Double Taxation on Distributions from Trusts

If funds from a non-transparent foreign trust are paid out to a beneficiary with unlimited tax liability in Germany, the same increase in wealth may be subject to income tax (through attribution of the trust’s income under Section 15 AStG or as receipts under Section 20 (1) no. 9 EStG) and at the same time, insofar as the recipient is an interim beneficiary within the meaning of Section 7 (1) no. 9 ErbStG, to gift tax.

In its judgments of 25 June 2021 (II R 31/19, II R 32/19), the Federal Fiscal Court stated in a non-binding obiter remark that double taxation with gift tax and income tax (there: attribution taxation under Section 15 AStG) is constitutionally acceptable. Statutory relief exists only on the income tax side: Section 15 (11) AStG exempts distributions from tax to the extent that the underlying income has already been attributed under Section 15 (1) AStG. The law does not provide for a credit against gift tax.

In the case of a German family foundation, the problem does not arise with the same severity. According to the case law of the Federal Fiscal Court (judgment of 3 July 2019, II R 6/16), benefits paid to beneficiaries in accordance with the articles are not subject to gift tax for lack of gratuitousness and are in principle subject only to income tax.

Substitute Inheritance Tax: A Counterpart the Trust Does Not Have

Every 30 years, the German family foundation is subject to substitute inheritance tax (Erbersatzsteuer) under Section 1 (1) no. 4 ErbStG, which simulates the generational transfer that does not otherwise take place. Under Section 2 (1) no. 2 ErbStG, it requires a place of management or registered office in Germany. Foreign trusts and foreign family foundations are therefore not subject to it; it is precisely this difference that the CJEU relied on to justify the tax class rule. However, the absence of substitute inheritance tax may be offset or outweighed by the risk of double taxation and the less favourable tax class on establishment.

Unclear legal position: obtain a binding ruling. Where the tax assessment in Germany is not certain or may foreseeably change, an application for a binding ruling (verbindliche Auskunft) from the tax office (Section 89 (2) AO) should precede implementation. The ruling binds the tax office to the assessment given for a precisely defined set of facts that has not yet been implemented, and a fee is charged for it. If the tax adviser does not recommend this in such a situation, in our view he or she is acting irresponsibly: the client risks having to litigate over the outcome years later, and that costs time and money.

Comparison Table: Common Law Trust, German and Foreign Family Foundation

The overview shows the differences from a German perspective. The relevant foreign trust or foundation law must be examined by an adviser in the state concerned.

← Tabelle nach links wischen, um weitere Spalten zu sehen

Suitability for Asset Protection Compared

Some foreign legal systems contain provisions intended to make it more difficult for foreign creditors or persons entitled to a compulsory portion to access trust or foundation assets; their scope and requirements must be examined by an adviser in the state concerned. From a German perspective, such provisions as a rule only have effect for assets located there. Assets in Germany, such as a property, in principle remain exposed to enforcement under German law.

Neither a trust nor a foundation is a means of defeating existing obligations. Creditors can challenge such transfers of assets under the German Avoidance Act (Anfechtungsgesetz) and, in insolvency, under Sections 129 et seq. of the German Insolvency Code (Insolvenzordnung, InsO). Persons entitled to a compulsory portion can assert a claim to supplement their compulsory portion (Pflichtteilsergänzungsanspruch) for gifts to a trust or foundation within the periods of Section 2325 BGB; the ten-year period is reduced pro rata each year. If the founder in fact retains control, for example because he or she continues to decide on distributions from a formally irrevocable trust, there is also a risk of the structure being treated as a sham. For tax purposes, the assets are then attributed to the founder as beneficial owner (Section 39 (2) no. 1 AO).

As a rule, neither instrument offers anonymity vis-à-vis the authorities. Through the automatic exchange of information under the Common Reporting Standard (CRS), the tax authorities of the states of residence generally learn of accounts held by trusts and foundations, including the controlling persons such as settlors, protectors and beneficiaries. In addition, there are registration obligations in the transparency register (Transparenzregister) under the German Money Laundering Act (Geldwäschegesetz).

Example

Thomas, an entrepreneur resident in Munich, wants to tie up assets for his minor grandchildren and compares an irrevocable foreign discretionary trust with a German family foundation.

With the trust, he would have to reckon with tax class III and an allowance of EUR 20,000. The trust’s current income could be attributed to him or later to the grandchildren under Section 15 AStG, and on payments to the grandchildren both income tax and gift tax may be levied.

With a German family foundation, he can achieve tax class I through articles that benefit only his descendants. The one-off allowance depends on the most distant possible person entitled: EUR 200,000 if the articles are limited to children and grandchildren, only EUR 100,000 if later generations can also benefit. In return, substitute inheritance tax is payable every 30 years, and distributions are less flexible.

A foreign family foundation, on the other hand, would fall into tax class III like the trust. No substitute inheritance tax would be payable, but its current income would be attributed to Thomas under Section 15 AStG unless the requirements of Section 15 (6) AStG are proven.

Trust or Foundation: Which Instrument Suits Whom?

A trust can remain a sensible choice if the settlor or the main beneficiaries are actually resident and taxable in a common law jurisdiction, if a high degree of flexibility is required with changing beneficiaries, or if assets remain permanently outside Germany and no German persons entitled to a compulsory portion or interim beneficiaries are affected.

For persons taxable in Germany whose assets are predominantly connected with Germany, who have relatives in Germany entitled to a compulsory portion, or who want a structure recognised from the outset, the German family foundation is often the more robust choice. A foreign family foundation is recognised under civil law but is treated like a trust for gift tax purposes and is subject to attribution under Section 15 AStG.

Conclusion

Trusts and foundations pursue a similar goal but are based on fundamentally different legal concepts. In Germany, trusts have to be recast under civil law; for tax purposes, there is a risk of tax class III and, on distributions, of income tax and gift tax being levied concurrently. The German family foundation offers more legal certainty and, if limited to the family, tax class I, at the price of less flexibility and substitute inheritance tax every 30 years. A foreign family foundation is treated like a trust for gift tax purposes. Which instrument is suitable depends on the residence of the parties, the type of assets, the desired degree of control and the extent to which German compulsory portion and attribution rules apply in the specific case.

Frequently Asked Questions

Does Germany recognise a foreign trust?

Not as a legal institution in its own right. Germany has not ratified the Hague Trust Convention, so a trust with a German connection is regularly recast, for example as a fiduciary arrangement, long-term executorship or a succession of prior and subsequent heirs. A trust cannot be entered in the land register as owner.

Which gift tax class applies on establishing a trust compared with a family foundation?

The endowment of a foreign trust falls into tax class III with an allowance of EUR 20,000. For a domestic family foundation, the tax class depends on the most distant person entitled, so if limited to children, tax class I with a one-off allowance of EUR 400,000. Following the CJEU judgment of 13 November 2025 (C-142/24), this privilege does not apply to foreign family foundations.

Is trust and foundation income attributed to the German founder or beneficiary?

For foreign trusts and family foundations, in principle yes, under Section 15 (1) and (4) AStG, unless proof under Section 15 (6) AStG succeeds for an EU or EEA structure. The assets and income of a revocable trust are attributed to the settlor under general principles. The German family foundation, by contrast, is itself subject to corporation tax.

Is there a risk of double taxation on distributions from a trust?

That is possible. Distributions to interim beneficiaries may be subject to gift tax, while the income is at the same time subject to income tax. The Federal Fiscal Court considered this constitutionally acceptable in a non-binding obiter remark; Section 15 (11) AStG only provides relief on the income tax side.

Do trusts or foundations protect against creditors and compulsory portion claims?

Only to a limited extent. Creditors can challenge transfers under the German Avoidance Act or in insolvency, and persons entitled to a compulsory portion can claim a supplement to their compulsory portion within the periods of Section 2325 BGB. As a rule, foreign protective provisions only have effect for assets located there.

Attorney Dr. Johannes Fiala and the firm have published extensively on trusts, family foundations and international asset protection and advise clients on the legal and tax classification of trusts and foundations with a German connection. Please get in touch with the firm without obligation to discuss your personal situation in an initial consultation.