The situation is common:
The end of working life is approaching. With current quite respectable income, it has been possible to pay off the owner-occupied home and, in case of doubt, to cover the children’s education costs. In addition, for the above reasons, there is no high level of cash assets or cash assets that are perceived as sufficient for old age.
The remaining working life for building up such liquidity reserves as a nest egg is shrinking, and at the same time there is a growing preoccupation with questions as to how any care services and care costs that may arise in old age can be covered financially.
In this situation, especially if the family home does not need to be inherited, the contribution of the owner-occupied property to a charitable foundation with the simultaneous reservation of a life-long usufructuary right can be an interesting arrangement and building block for one’s own old-age security. A donation to a charitable foundation entitles the founder to claim a corresponding special expense deduction in his income tax return. This reduces his taxable income and the burden of income tax is reduced.
With the Act to Further Strengthen Civic Involvement (Gesetz zur weiteren Stärkung des bürgerlichen Engagements), the legislature has increased the possible maximum special expense amounts for such donations to €1 million per taxpayer since 2007. For married couples, the amount doubles accordingly to €2 million. The amount of the contribution and thus of the special expenses deduction corresponds to the value of the property after deduction of an amount for the reserved usufructuary right.
Property value is usually determined by an expert appraisal. The usufructuary right to be deducted is made by multiplying the notional local annual rent for the property by a factor reflecting the statistical life expectancy of the person entitled to the usufruct. This leads to interesting results, especially in metropolitan areas with high real estate prices and low rental yields.
If, for example, a property in the Munich area has a market value of €1 million, this compares with a customary annual rent in the region of €40,000. The property is valued at 25 times the annual rent. In the case of a 60-year-old woman, for example, a life-long usufructuary right is valued for tax purposes at 12.034 times the annual rent and deducted from the value of the property. After deduction of this burden, a special expenses deduction of 12.966 times the annual rent remains in the example. This amount of the equivalent of € 518 640 results in income tax savings and additional liquidity of € 229 809 at an income tax rate of 44.31 % (42 % ESt plus 5.5 % solidarity surcharge thereon). The prerequisite for this effect is that the taxable income after making the special deduction is at least € 52,160.
The special expenses deduction can be distributed freely over a period of 10 years from the date of the donation. Towards the end of a professional career, the highest incomes are regularly achieved with a corresponding income tax burden. This earned income will be taxed progressively, while capital gains will be taxed at a flat rate of 25% plus a 5.5% solidarity surcharge from 2009 onwards. By skilfully utilising and distributing the special expenses deduction gained over the last few years of work, a considerable amount of liquidity can be created with a corresponding income, which can be invested on it at a low tax rate.
A capital investment of the amount of € 229 809 mentioned in the example over 20 years at an interest rate of 3 % net after final withholding tax results in cash assets of around € 415 000 after 20 years. In the example given, this amount is then available at around the age of 80 to cover any nursing home and care costs that may be incurred in the last phase of life. In the meantime, one has spent one’s twilight years unchanged within one’s own four walls and has not had to accept any restriction of one’s quality of life. If a corresponding agreement is made, income from a rental is also available in the event of a necessary move out of the owner-occupied home.
In the case of foundations, it should be noted that a charitable foundation must fulfil its foundation purpose on an ongoing basis. If only a property with a reserved usufructuary right is transferred, the foundation initially has no liquid funds available for the fulfilment of its purpose. Here there is the possibility to endow the foundation additionally with a smaller cash amount, which however costs parts of the just created own liquidity. Alternatively, however, an endowment and transfer of the property to an already existing foundation can be made, which is equipped in terms of liquidity in such a way that it can fulfil its charitable purpose on an ongoing basis.
Foundations can be established in the form of a foundation with legal capacity or also as so-called trust foundations. The trust foundation is regularly the more suitable form of foundation, as it is more flexible and less bureaucratic in its establishment and handling. A pleasant side effect of transferring the property to a charitable foundation is the certainty of supporting a charitable purpose of one’s own choice and deemed worthy of support in the event of one’s death. After all, there is already the possibility during one’s lifetime to commit oneself to the foundation’s purpose and to find for oneself a fulfilling old-age task oriented towards the common good.
courtesy of
from www.leuze-verlag.de (published in PLUS 10/2008, 2245)
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About the author
Dr. Johannes FialaPhD, 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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