Inheritance is becoming more expensive: Trust foundation as a progressive and flexible solution for doctors

Johannes Fiala, Frank M. Strobelt
Medium-sized entrepreneurs – including many doctors, dentists and pharmacists – are currently facing a variety of problems for which they urgently need efficient solutions: According to calculations by the Institute for SME Research, over 300,000 family businesses are facing a change of ownership in the next few years. It is estimated that in about 40 percent of all cases there is no suitable successor from the family circle or no descendants. Furthermore, due to the stricter banking regulations (Basel II) and the associated restrictions on the granting of loans, the liquidity situation of many SMEs is extremely tight. In addition, owners of medical practices and pharmacies are struggling with a loss of income or are thinking of giving up their practice prematurely for health reasons. For many of those affected, the subject of “foundations” was taboo until a few years ago and was associated with the commitment of large companies such as the Otto Bayer Foundation (Bayer AG), the Schering Foundation, the Robert Koch Foundation, the Albert Schweizer Foundation or the Geschwister Boehringer Ingelheim Foundation for the Humanities. This has changed since the reform of foundations in 2000 with the “Law on the Further Fiscal Promotion of Foundations”. Additional positive impulses for the foundation system can be seen in the recently adopted ten-point programme of the Federal Government. With the 400 million euro funding package, the Federal Minister of Finance also intends to support charitable foundations. The deductibility of donations to charitable foundations from taxable income is now even more attractive, especially for medium-sized companies: Due to a ruling of the Federal Fiscal Court in August 2005 and the decree of the Bavarian State Tax Office last year – which is valid throughout Germany – spouses who are jointly assessed can claim double the amount for tax purposes for donations to the asset pool of a charitable foundation. The maximum amount for married persons thus increases from 307,000 euros to 614,000 euros. The maximum foundation amount can be deducted from tax as a special expense once in ten years if such a foundation is endowed with corresponding assets within 12 months. Furthermore, the maximum foundation amount, which may increase from EUR 20 450 to EUR 40 900 on the basis of the decree (see calculation), can be claimed. Assets such as real estate, securities, artwork, cash can be donated to the charitable trust. The double foundation, which is one of the company-affiliated foundations, is to be seen as a contemporary, intelligent building block for solving the problem of succession as well as old-age provision. For example, a pharmacist can transfer a large part of privately owned real estate, securities, works of art or cash to a charitable trust in a tax-neutral manner. The family foundation regulates the provision of the family members and determines the fate of the GmbH even after the death of the founder via the shareholders’ meeting. From a certain point in time, the management of the company is transferred to qualified external managers. The charitable trust is – according to experts – an ideal field of activity in a person’s retirement phase. This can be dedicated to charitable activities worldwide, such as the promotion of sport, education and culture. The publicity measures often associated with this additionally strengthen the reputation and core business of their own company. For owners of medium-sized companies it is possible – independent of the described double foundation – to work for their own charitable trust foundation as of a certain point in time in a permanent employment relationship in order to actively fulfil the purpose of the foundation at home and abroad. Unemployed periods in one’s own company can thus be cleverly bridged. This option is also interesting for people who, at a certain point in time, are no longer able to carry out physical activities, for example in the trades, for health reasons. Legally regulated maintenance payments for the founder or his dependants, laid down in the foundation statutes, are an alternative to the employment model in the non-profit sector described above. The foundation with legal capacity is an independent bearer of rights and obligations. Two processes are necessary to establish the foundation as a legal entity: The foundation transaction and the state approval. With the approval of the competent supervisory authority of the respective federal state, the foundation acquires legal capacity. Thereafter, legally capable foundations are supervised by this authority. In contrast to the foundation with legal capacity, the trust foundation does not need its own organisation. Fiduciary management is carried out by a legal entity which normally represents the company externally on the basis of a concluded trust agreement and the articles of association. In contrast to a foundation with legal capacity, a charitable trust foundation only requires an examination of its charitable status by the responsible tax office. In Germany, for example, a foundation with legal capacity is monitored by two authorities: the tax office and the foundation supervisory authority. The fiduciary, also called dependent foundation, is the more flexible and at the same time the older basic form of foundation, especially for medium-sized companies. Trust foundations have a history in Germany spanning more than a thousand years. Trust foundations can be set up fairly quickly. The incorporation can take place within one month, in exceptional cases within a few days. The associated granting of provisional non-profit status depends on the workload of the relevant tax office. If a comparison is made between a foundation with legal capacity and a fiduciary foundation, then in most cases the fiduciary foundation is preferred due to the following advantages: There is no need for lengthy official approval procedures, _ There is no state supervision of the ongoing activities of the foundation; instead, there are control mechanisms by the financial authorities and by foundation committees which the founder himself can determine, _ the inflow and outflow of capital can be regulated more flexibly by the founder, depending on the income situation of the founder, _ there are cost advantages both in the establishment and in the ongoing operation of the foundation, _ the articles of a fiduciary foundation, in contrast to a foundation with legal capacity, can be adapted to current circumstances without difficulty, _ the founder can transfer the entire administration of the foundation to the foundation executor and concentrate on fulfilling the purpose of the foundation. Despite the numerous advantages that the trust foundation has over the foundation with legal capacity, there are few advisors who can competently present the advantages of this legal form to founders and accompany the regular establishment of trust foundations in Germany and abroad. Cross-border foundation constructions can only be realised with teams of experts who also have experience in practical implementation. Among other things, qualified advice requires interdisciplinary thinking, since tax law must be taken into account in addition to civil law. Only those who have actively dealt with both legal forms can judge in which cases the trust foundation actually offers advantages for the founder.
Dr. jur. Johannes Fiala De-La-Paz-Strasse 37 80639 München eMail: weiler@fiala.de Frank M. Strobelt Managing Director of Gesellschaft für Stiftungsförderung e.V. (GfS), Berlin
(CHAZ 3/2007, 124)
Courtesy ofwww.kaden-verlag.de.

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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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