Dr. Johannes Fiala, lawyer (Munich), MBA Financial Services (Univ.), lecturer (BA-Heidenheim, Univ. of Cooperative Education) (www.fiala.de) and graduate mathematician Peter A. Schramm, actuary DAV (Diethardt), actuarial expert (www.pkv-gutachter.de)
There are things that seem unbelievable to most people who have not studied mathematics. (Archimedes, mathematician, engineer, technical advisor to the tyrants of Syracuse)
The new law, which was discussed by the German Bundestag in its first reading on 11 May 2006 and is intended in particular to secure private old-age provision for the self-employed, came into force on 31 March 2007. For self-employed entrepreneurs, the question arises as to what economic consequences and opportunities are associated with this new regulation.
In the case of occupational pension schemes, among others, numerous entrepreneurs have already noticed that exactly “zero point zero” remains of their supposedly “bankruptcy-proof” pension scheme. In 2005, such a case was dealt with by the Petitions Committee of the Bundestag, as can be read in its report. In addition to managing directors of GmbHs and AGs, freelancers and self-employed persons as well as partners in a partnership are also affected.
View across the border
In some countries there is sustainable asset protection, in particular for privately and/or occupationally concluded insurance products – the interests of creditors are subordinate there to the legal and socio-political goal of almost complete protection of old-age provision. Examples of such schemes can be found in Liechtenstein and Switzerland. A similar scheme is being discussed in Gibraltar. In Germany, there are around 35,000 business insolvencies every year: Potentially, those affected are often candidates for applications for Hartz IV, social benefits or a place under the bridge. However, asset protection for assets abroad in the event of insolvency is usually not achievable if the contract was concluded through a German “intermediary”. In this respect, it is advisable to pay close attention to the rules of the game in international insurance law. So “capital flight” alone does not mean security, because there are international agreements in place so that the insolvency administrator could recover the money transferred abroad in the event of insolvency.
Previous garnishment protection
Monthly 990 euros for a single person and 1360 euros for a married person are currently basically exempt from seizure as income – even in the case of pensions. This also applies in the event of private insolvency. In addition, there are special allowances, including those on application, as well as those in the case of a maintenance obligation, in particular towards children. The new law does not increase these limits – for private life insurance policies that have recently been exempted from seizure, these limits apply equally in the benefit phase.
Domestic innovation for one “layer” only
The expert knows that, from a tax point of view, since 2005 there has been a layer 1 (statutory or similar pension and the private provision known as the “Rürup pension”) a layer 2 (occupational pension and the options known as the “Riester subsidy”), and a layer 3 (practically the remaining private provision). The newly inserted § 851c of the ZPO provides for regulations which are reminiscent of layer 1 in the context of the so-called “Rürup pension”. In terms of amount, the garnishment-protected pension capital is limited according to the age of the beneficiary: thus, according to age groups and further in increasing amounts, one should be able to accumulate assets in a life insurance policy without garnishment. In the seizing protection pensions from tax-subsidized age precaution fortunes are to be included; explain the judicially certified insurance consultant Alfred Jani (www.jani.de) in its information letter 1/2006.
Continuing danger for managing directors and board members
Insurance intermediaries like to describe the provision of managing directors and board members as insolvency-protected: Presumably, however, the vast majority is not in practice of an insolvency of the corporation (GmbH/AG). The new law does not apply to this group of persons, as it does not address layer 2 (occupational pension schemes). In its justification and according to its wording, the law does not focus on the paid-in contributions, but on their result (actuarial reserve or surrender value of a life insurance policy including the surpluses), which is then exempt from seizure! The legislator speaks of a maximum garnishment-free asset i.H.v. altogether and depending upon age up to 238,000 euro, which may be accumulated as result of the saving procedure. These assets, i.e. the accrued actuarial reserves (with all interest and surpluses) are limited by law. These assets themselves are limited on a graduated basis according to age, to a total of 238,000 euros at the final age of 65. In individual cases, a person concerned will not be able to avoid having to calculate exactly how to optimise his contract and his payments in accordance with the new statutory provision.
Domestic legal optimisation has always been possible
However, the new legal regulation disregards cases in which the limit of up to 238,000 euros as an “accumulated total” cannot apply at all. If no surrender value is contractually conceivable at all, the limit of EUR 238,000 is completely irrelevant. The capital of the life insurance or pension insurance can only be seized if there is also a payable surrender value – and not only an accumulated actuarial reserve. In pension insurance, however, there is no legal entitlement to a surrender value at all. If it is not contractually agreed either, the policy is worthless to any creditor – only the attachable portion of any future annuity can then be attached. Such policies without a contractual surrender value are common, for example, even if no death benefit is agreed. There is a legal dispute as to whether an option for a lump-sum settlement at the start of the pension can also be granted without prejudice. If you are worried that the capital you have saved will be lost to your heirs in the event of your death, you can cover this by taking out a separate death insurance policy. In this way – without the need for new legal regulations – an unlimited seizure-proof old-age provision can be built up and possibly even the capital can be disposed of at the start of the pension (sensibly only if the insolvency has been concluded by then).
Is the garnishment protection bill based on erroneous premises?
But that is precisely what the far narrower rules under the new law do not allow – lump-sum compensation. Since repurchase is also excluded, the law offers no advantages over what was already possible. And even its limitation proves to be useless for the creditor, because if he asks in the case of such an annuity insurance what surrender value will be paid out, he will be told: zero – because the right of cancellation and surrender must also be excluded according to the wording of the law. So there’s nothing to garnish from it at all. There is some evidence to suggest that the drafters of the bill mistakenly assumed that the annuities they describe would have a garnishable cash surrender value. However, this is forgivable, because even the German Insurance Association (Gesamtverband der Versicherungswirtschaft) had until recently – immediately judged to be groundless by the Life Committee of the Actuarial Association – still erroneously held the view that there was a statutory surrender value for annuity insurance policies after all. A cover capital is of course available, but this itself is not attachable. Only the right of termination (if not contractually excluded) is attachable, together with the surrender value to be paid out (if – in the absence of statutory regulation – contractually agreed at most). In the case of the annuity insurance policies described in the law, however, cancellation is already excluded – instead and instead of payment of the surrender value, therefore, only conversion into a non-contributory annuity corresponding to the actuarial reserve achieved is possible. The creditor is thus left empty-handed until the start of the pension – not unlike the situation in the past with corresponding arrangements. From the start of the pension, the pensions paid from it can then be seized – with seizure exemption limits. By then, however, the insolvency proceedings will probably have been concluded long ago. However, a recent ruling by the BFH suggests that the right to a lump-sum settlement (not just a chosen lump-sum settlement itself) may also be attachable.
Deciding between garnishment protection and creditworthiness
The self-employed person can also take out a new garnishment-protected old-age provision contract during a garnishment and pay into it in accordance with the annual statutory maximum limits. This increases his garnishment exemption limits by the maximum amounts of the deposits, which are graduated according to age. In this way, an attachment-protected old-age provision can be built up even while the attachment is still in effect – the creditors are left empty-handed in this respect. But this is double-edged for the self-employed person – because it lowers his credit rating for creditors. Unilateral advice to the self-employed with regard to seizure protection can lead to the fact that he may only dispose of his assets to a limited extent and, for example, the “marketability” of pension insurance contracts is no longer given due to the lack of a surrender value. If he later needs collateral to improve his creditworthiness, these insurance contracts are worth nothing to the creditor. Either he doesn’t get the loan he needs then, or he pays higher interest rates. Thus, in extreme cases, worries about garnishment security can lead to insolvency in the first place.
(DMZ 5/2008, 40)
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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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