The new capital adequacy guidelines for banks and securities firms, Basel II for short, have been in force since 1 January 2007. For many camping entrepreneurs it is therefore high time to deal with it, because with Basel II creditworthiness and liquidity are becoming more and more important for bank customers.
When it comes to lending, it is increasingly the credit-dependent SME sector that is being hit. Especially small companies with little collateral and low equity capital have to fear for external financing and if they receive it, it will usually be very expensive. That is why Basel II has now become a dirty word among many entrepreneurs, even reputable bank advisors assure us. As always, there are also ways out of targeted advice on alternative liquidity concepts, which are, however, little known, as they are often not pointed out by the banks, even to their own customers, due to ignorance or self-interest. For some years now, one of the most interesting concepts for raising liquidity for medium-sized companies has been the so-called charitable trust foundation. The federal government, in particular Finance Minister Peer Steinbrück (SPD), now wants to expand and strongly promote this commitment with extensive tax relief in 2007. It is to be the biggest reform in six years and make charitable activities more attractive, especially for the well-heeled, the self-employed and freelancers. This is because, in addition to the promotion of charitable objectives, it is also a question of generous tax incentives in order to release corresponding activities and to provide the entrepreneur with additional substantial liquidity from tax reductions in the coming years, thus strengthening the creditworthiness of the companies. The advantage lies in the fact that this can be used without the use of own or borrowed capital, and indeed by any entrepreneur who can contribute a certain assessable asset (GmbH shares, real estate, securities, art, etc.) to his own trust foundation within the framework of the foundation support. This form of foundation is relatively uncomplicated to set up at the private level of the entrepreneur with a recognised professional. What advantages this can now offer the medium-sized entrepreneur is explained by foundation expert Frank M. Strobelt, Managing Director of Gesellschaft für Stiftungsförderung e. V. (GFS), with regard to a charitable trust foundation. Using the example of a privately held property and securities worth 860,000 euros, this promotion is relatively simple to describe. If the value of 860,000 euros is transferred to a separate trust foundation, this leads to an immediate deduction as special expenses in the tax return in the amount of 860,000 euros. In the private sector, this results in a final tax refund of 344,000 euros for married couples with an appropriate tax rate. The tax deduction of these 860,000 euros will be spread over five years. The total tax-deductible annual amount within the framework of foundation funding is thus approximately 172,000 euros per year. The entrepreneur can now freely dispose of the capital from the tax savings in the amount of 344,000 Euros minus the set-up fees and costs for the trust foundation. If, for example, the capital of a total of 300,000 euros (5 x 60,000 euros per year) is invested at an average interest rate of 6.0 % p.a., then after 12 years there is a payout capital of approx. 470,000 euros or a lifelong old-age pension of 35,000 euros per year.
Building up a second pillar of retirement provision
In this way, the entrepreneur has built up a second pillar of old-age provision for himself and his family with real estate, which otherwise often only causes high costs, and securities, which are placed in a charitable foundation. Mind you – without any effort on your part. For this additional old-age provision, a self-employed entrepreneur would have to pay maximum contributions into the statutory pension (Federal Insurance Institution or State Insurance Institution) from his own resources for about 45 years in order to receive an equivalent pension. In addition, the pension from the foundation subsidy is fully inheritable or the entrepreneur chooses a lump-sum withdrawal of around 470,000 euros, which, as is well known, is not possible with the statutory pension. Of course, the amount of 470,000 euros can also be used to repay mortgages on real estate ahead of time. This is an invaluable advantage, as real estate is usually assigned to the banks as security for overdraft or personal loans, and the entrepreneur can then actually no longer freely dispose of his real estate. A further advantage of the contribution of a real estate into the non-profit trust results in the context of the inheritance and gift tax, which as is well known from 2007 onwards will become substantially more expensive for the heirs, since then real estates are inherited with approx. 100% of the market value at the place of the object. If, for example, a property worth 600,000 euros is bequeathed to a spouse, then after deducting the tax allowance of 307,000 euros, 293,000 euros are still subject to inheritance tax. At a tax rate of 15 percent in tax class 1 for spouses, this results in inheritance tax of 43,950 euros, which is immediately due and payable to the tax office in the event of death. If this property is placed in a trust, then the inheritance tax does not apply to the family and they even receive a tax refund of 240,000 euros for setting up their own trust at an appropriate tax rate. This results in a total tax advantage of 283,950 euros, which in turn benefits the entrepreneur and the entire family. The property brought into the foundation is formally legally the property of the foundation, but the entrepreneur as chairman of the board of trustees can continue to dispose of the property and look after it himself on the basis of foundation statutes and other special contractual regulations. Especially for medium-sized companies that operate a corporation as a form of business within the framework of a GmbH (limited liability company), there is an additional interesting component of old-age provision through the foundation subsidy. The capital amounts of approx. 470,000 Euro built up in the private sector from the tax refund can also be used to finance a pension commitment for the GmbH managing director. Why is this so important? The legislator has focused on the financial viability of pension commitments with the latest rulings and BMF letters. In particular, the definition of financial viability was precisely regulated by the current case law of the Federal Fiscal Court (BMF letter of 6. 9. 2005 – IV B 7 – S.2742 – 69/05). In its case law, the Federal Fiscal Court consistently requires that pension commitments to managing directors of GmbHs must be fundable by the GmbH in order for them to be recognised for tax purposes. They cannot be financed if the GmbH would become insolvent if it had to fulfil the commitment. Whether the commitment is fi nanceable has to be checked twice. Firstly, at the time the commitment is made and secondly, over time, if the economic situation of the GmbH deteriorates. This BMF letter resembles a ticking time bomb, since almost all pension commitments are underfunded due to the crash on the stock markets in the years 2000 to 2003. At the same time, new DAV and Heubeck mortality tables 2005 G were created, which mean that there is an even larger gap in the financial viability of pension commitments. In practice, this means that, due to current case law, every pension commitment must actually be re-examined with regard to its financial viability, especially if the reinsurance was structured via your German endowment policy.
Pension commitments must be fundable
For example, the present value of old-age pensions, calculated according to the Heubeck 2005 G tables, is no longer up to date due to the considerable decline in returns on the capital markets. German insurers, due to the regulations of the federal supervisory authorities and the guarantees included in the policies, have to invest the majority of their customers’ money in fixed-interest securities; the stock market remains virtually closed to them as an investment market, especially after the stock market crash of 2000 to 2003. Usually only between 10 to 15 percent of the cover pool is invested in the stock market, depending on the credit rating of the insurance company. This, of course, also considerably restricts the potential for returns. This is already evident from the fact that despite the dramatic rise in share prices over the past two years, insurers have nevertheless had to lower the guaranteed interest rate to 2.25 percent.
Old-age pensions are not peanuts
Over the past six years, the payout amounts promised at the time have dropped by nearly 40% for many insurers. With a payout sum of originally 100,000 euros, only approx. 60,000 euros will be paid out at the end of the policy on the basis of current calculation examples of the insurers. Despite the currently favourable capital market situation on the stock market, there is no improvement in sight. However, there are further hurdles to consider when reinsuring pension commitments: Example: In order to be able to finance a retirement pension of 12,000 euros at the age of 65 for a managing director, 118,000 euros of accumulated capital are still sufficient at six percent interest according to the old 1998 Heubeck mortality tables. However, with an interest rate of approx. four percent according to the new DAV mortality tables 2004 R, the required capital amount is already approx. 146,000 euros, but with a calculated interest rate of 2.75 percent per annum this is already 158,000 euros. However, if we assume the amount calculated by German life insurance companies for an annual pension of 12,000 euros with a guaranteed interest rate of 2.75 percent, then a capital sum of 180,000 euros is required to finance the old-age pension. Since 1. 1. 2007 this guaranteed interest rate of German insurers has been lowered again and is currently only 2.25 percent per annum. This of course increases the capital to be saved for a German pension insurance again considerably. What is being projected here is the pure retirement pension without the usual 60 percent widow’s pension and without the cost of disability insurance. The coverage of occupational disability pensions for GmbH managing directors in the context of pension commitments is problematic anyway, since due to recent case law the payment of an occupational disability pension to the GmbH shareholder managing director can be refused by the insurer. In this case, the contributions for the payment of an occupational disability pension are practically paid for nothing and are not paid later when the old-age pension is paid. This is not just peanuts, but 30 percent of the total premium of the reinsurance policy, so that contributions in the double-digit range are quickly lost for the final funding of the commitment.
safeguard assets in the event of insolvency
This results in coverage gaps of 40 to 50 percent for the GmbH and the managing director – at the latest when payment of the old-age pension becomes due, i.e. the old-age pension can only be financed from the existing capital over a period of perhaps a maximum of 7 to 10 years. The heirs are then often left empty-handed as far as the company pension is concerned, since the capital for paying a widow’s pension under the pension commitment is often no longer available or has been used up. However, with the additional liquidity from the tax refund within the scope of the foundation promotion via a trust foundation in the amount of approx. 470,000 Euros, this coverage gap can be closed excellently under certain circumstances. In principle, however, the financial viability of the pension commitment should always be examined using alternative reinsurance concepts, because a net interest rate of two to three percent p.a., which is currently offered by German life insurers within the framework of reinsurance, can never finance the Heubeck values with a return of 6.0 percent p.a., let alone provide the necessary capital amounts for a German pension insurance. The insolvency of the company is then only a question of time at the latest when the pension begins. In this context, it also seems primarily important to think about safeguarding one’s own private assets (real estate, securities, antiques, works of art, etc.). With almost 35,000 mostly medium-sized companies going bankrupt in 2006, the very survival strategy demands that every entrepreneur at least put all his private assets under insolvency protection for himself and his family in the future and thus secure them from the access of creditors. Within the framework of the charitable trust foundation, assets are secured against access by third parties; corresponding legal regulations must be observed here.
Andreas M. Bosl and Dr. Johannes Fiala Kanzlei Fiala de-La-Paz-Straße 17 80639 München Tel.: 089/17909035 Internet: www.fi ala.de
(campingimpulse 2.2007, 36)
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About the author
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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