Legally managing the insolvency risks of pension schemes

The basic provisions granted by the legislator as a protective shield for old-age provision are not comprehensive. The approach of professional asset protection starts with the consideration of an early division of assets. By separating the professional risks within the framework of a corporation from the private assets, a liability block is created quite legally.



Involvement of special legal entities

In addition, part of the private assets can be transferred to another legal entity, such as a family foundation, a cooperative, a trust or a life insurance company.

Those who only begin with this when the crisis is looming risk not only being accused of thwarting the execution, but also later challenges by creditors and/or insolvency administrators.

If assets are given away too late, creditors can obtain acquiescence in enforcement via the avoidance law, or insolvency administrators can obtain restitution to the insolvency estate under the Insolvency Code.

The most frequent case is the gifting of assets, which triggers a rescission period of four years in Germany – calculated until the opening of insolvency proceedings or rescission.



Crisis and risk management

As early as 1998, the legislator emphasized the obligation of the management to set up an early risk detection and risk monitoring system in § 91 II of the German Stock Corporation Act (AktG). This requirement is already applicable to medium-sized limited liability companies. Quality management serves as a preliminary stage, the aim of which is to identify weak points and eliminate sources of error. In case of doubt, the ex-management will be taken to court by the insolvency administrator if the calculation or crisis early warning system is missing or not documented.

According to case law, insurance intermediaries and management consultants are not qualified to provide legal advice, for example, on occupational pension schemes. In the absence of its own expertise, the management is obliged to seek advice from an independent “professionally qualified professional”, whose findings must be subjected to a plausibility check, and to take account of identifiable risks at all times. In the event of an imminent company crisis, reorganisation advice, the obligation to waive salaries and the avoidance of an insolvency delay will have to be considered, as the submission of files by the insolvency court to the public prosecutor’s office is obligatory.


Matrimonial property regime swing or modified community of gains

It would appear to be fiscally advantageous to choose community of accrued gains as the matrimonial property regime in the event of death, and to waive accrued gains as a modification only in the event of divorce.

However, it is more sensible to change from the community of gains to the separation of property and, on this occasion, to settle the wife’s claim to equalisation of gains that has arisen up to that point tax-free by transferring assets. This process does not constitute a gift, and can, as it were, be implemented at the last second in a manner that is resistant to contestation. The short-term change back to the community of gains does not constitute an abuse of the system. If however a family home would be given away in such a way to a spouse, and bought back a short time later, in order to repeat this procedure, an organization abuse by family home swing would be present, § 42 AO.


Highly personal rights in the law of succession

During the insolvency proceedings, which last about one year, gifts must be handed over to the insolvency administrator – in contrast, gifts and lottery winnings remain entirely with the insolvency debtor during the so-called good conduct phase. Inheritances, on the other hand, must always be made available in equal shares to the insolvency administrator.

However, there is the option of personally disbursing an inheritance or a legacy – with a bit of luck, those persons who have benefited from the disbursement will show their appreciation by making a gift. No one can be forced not to allow a compulsory portion to become time-barred, i.e. to assert it in such a way that seizure and realisation by creditors or insolvency administrators become possible.


Drafting of wills

The testator can also make provisions, i.e. limit the access of creditors, be it through a non-exempt preliminary inheritance and/or a permanent execution of the will to be expressly ordered. Other things to think about would be a pension that is unattachable in terms of amount, a personal right of residence that can be set up as unattachable, as well as benefits in kind and cost transfers insofar as these would not be offset against social assistance. Arrangements in which an attachable claim to further rights in the estate arises when the over-indebtedness ceases to exist or is conditionally deferred can be problematic.


Protection of the family home

The gift of an owner-occupied family home is tax-free between spouses. This can be linked to the reservation of a lifelong, unseizable, supreme personal right of residence, which should be entered with first priority in the land register. It must be stipulated that even prolonged non-exercise does not cause the right of residence to lapse.

The agreement of a right of recovery is problematic, because this or the expectant right would probably be attachable despite the contractual agreement of a prohibition of assignment and/or a supreme personal power of exercise. It would be more expedient to reserve the right vis-à-vis the spouse to be able to demand the transfer to a third party and, if necessary, to secure this in the land register by priority notice of conveyance. Despite the non-transferable and therefore unseizable right of possession, it is not advisable to structure the property as a loan or lease, because a loan (on the part of the lender) could be regarded as a contestable “permanent gift”, and even a lifelong lease does not protect against the special right of termination of an insolvency administrator (of the lessor) or of the purchaser after a forced sale.

Even a transfer of assets in return for a reservation of usufruct does not offer complete protection of assets, because the right to draw fruit or the rents would be subject to seizure.


condition precedent

A transfer of assets to a third party by way of a gift subject to a condition precedent, for example in the event of the initiation of enforcement measures against the donor or the commencement of insolvency proceedings against the donor, would be void, as this would result in the frustration of enforcement, § 134 BGB, § 288 StGB, and would undermine the principle of equal satisfaction of creditors.

According to settled case law, the granting of collateral subject to a condition precedent “in the event of insolvency” is also immoral, but is distributed as a form by financial product distributors (in the case of models for working time accounts and occupational pension schemes, including CTA and trust solutions). The argument of the jurisprudence is that the mass is thereby diminished “at the last second”. Since 1918, the Reichsgericht, as well as later the Bundesarbeitsgericht (Federal Labour Court) and the Bundesgerichtshof (Federal Supreme Court), have “cashed in” such provisions if security was thereby created by contract “in the event of possible bankruptcy proceedings”.

However, it would be conceivable to enter a priority notice of conveyance in the land register in good time so that the beneficiary can effect the transfer of ownership without further ado, section 106 InsO.


contribution of property to a partnership

This model is propagated by some advisors as almost insolvency-proof, because one must be involved in such a (e.g. BGB) company (GbR) only minimally. The contribution of the property regularly triggers gift tax. Furthermore, this often results in a tax disadvantageous business split if the property is (also) used for business purposes. Years of disputes with the pledgee about the effectiveness of settlement clauses are thus pre-programmed, so to speak. Even if the identity of the partners cannot be clarified for the land registry, it must enter the BGB company(ies) in the land register, even if it cannot be ruled out that the partners have changed. This favours the concealment of assets, because the land registry does not require any further proof of the existence, representation and identity of the GbR.


Establishment of a family foundation

Foundations are described as ownerless corporations. An alternative to notarial establishment is the so-called trust foundation. If this is not a straw man or sham transaction, which in particular only benefits the founder instead of the founder’s family, the transfer of assets is to be recognised. After expiry of the relevant time limits of the AnfG and the InsO, avoidance is no longer an option.


As far as the perhaps not yet concrete beneficiaries are not granted an actionable claim right, creditors can hardly seize an expectancy however quite future achievements (precautionary), as far as a seizing protection does not intervene after the ZPO.


Foreign company, life insurance shell company, trust & co.

Real estate located in Germany cannot be transferred to Liechtenstein establishments and foundations, as well as trusts, unless a company recognized in Germany, in particular a European company, is interposed as owner.


Already the proximity to a tax evasion and/or the reservation of rights (for the disposal of assets) at the time of establishment can lead to the non-recognition of the establishment of the foundation – for example in the case of inheritance. The legal consequences are similar to roulette, because whether the assets of the foundation are included in the estate is often just as uncertain as the answer to the question of to whom assets and income are attributed and when. In this case, there is often no safe way around a tax voluntary declaration together with liquidation.


Also unsuitable is usually the attempt to camouflage one’s assets by transferring them to a foreign corporation with bearer shares (e.g. from Belize, Ayman Islands). If the (de facto) administration of a non-EU/EEA company is located with the founder in Germany, then there is no longer any asset protection, because this transforms the foreign legal entity into a sole proprietorship, GbR or OHG according to the domicile theory – with personal liability of the partners and the traders next to each other.


As a rule, the attempt to transfer one’s securities into a “bankruptcy-proof” life insurance shell from Liechtenstein is equally unsuitable. Already § 9 EGVVG often led to the application of the German VVG – today this regularly follows from the fact that the policyholder has his habitual residence in Germany.



by Dr. Johannes Fiala

published in Assets & Taxes, 03.2012

Our office in Munich

You will find our office at Fasolt-Strasse 7 in Munich, very close to Schloss Nymphenburg. Our team consists of highly motivated attorneys who are available for all the needs of our clients. In special cases, our law firm cooperates with selected experts to represent your interests in the best possible way.

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.
»More about Dr. Johannes Fiala

On these pages, Dr. Fiala provides information on current legal and economic topics as well as on current political changes that are of social and/or corporate relevance.

Arrange your personal appointment with us.

Make an appointment / call back service

You are already receiving legal advice and would like a second opinion? In this case please contact Dr. Fiala directly via the following link.

Obtain a second legal opinion

(The first phone call is a free get-to-know-you conversation; without consulting. You will learn what we can do for you & what we need from you in terms of information, documents for a qualified consultation.)