New tax regulations such as inheritance and gift tax affect the entire middle class. Intelligent solutions are needed. One is the charitable trust, which is supported with substantial tax benefits.
Johannes Fiala and Frank M. Strobelt
Almost completely unnoticed by the public, a fundamental reform of the inheritance and gift tax is imminent in 2007. For example, the tax value for medium-sized companies is to rise sharply in the case of inheritance tax and company succession. Accordingly, business assets are to be divided into “good” and “bad” assets for tax purposes in the future. For “bad assets”, i.e. unproductive assets on the balance sheet, such as cash assets, cash in hand, bank balances or shareholdings in corporations, gift and inheritance tax is then immediately due. After the planned tax reform, the tax burden on the transfer of company assets within the framework of the generation change will then increase almost eightfold. For the unproductive assets, the tax burden is still almost three times higher than the old tax. The new final withholding tax on interest income then does the rest. It is expected to come into force in 2008, will initially be 30 percent and will be reduced to 25 percent in subsequent years. This tax on interest income should then be levied directly at source, i.e. at the banks. This is why intelligent solutions are required which allow the medium-sized entrepreneur in particular legally sound scope for action. For example, with a means that is little known to the public – the charitable foundation, which is also promoted by the federal government in particular with considerable tax concessions. This legal opportunity to combine meaningful action for a charitable purpose with advantageous legal tax privileges has so far been used primarily by large corporations or athletes and celebrities who are advised by top consultants in tax and foundation law.
Transferring company shares to your own trust foundation
The own tax advisor is usually not trained in this special field and also holds back for liability reasons. However, medium-sized companies in particular could benefit enormously from setting up a charitable foundation. Especially for managing partners of medium-sized companies (Gmb-Hs), but also for owners of partnerships as well as for freelancers such as doctors or pharmacists, the charitable trust foundation is to be seen as an optimal solution. Shareholders of limited liability companies can transfer their company shares – such as participations – to their own charitable trust foundation. In doing so, it must be ensured that the shareholdings are allocated to the private assets of the company owner for tax purposes. This is because in the case of so-called business splits or group structures, the company shares are attributed to the business assets. The value of the GmbH shares contributed to the charitable foundation constitutes special expenses in the founder’s income tax return up to certain maximum limits (see box Taxes and Charitable Foundations): Thus, depending on the valuation of the company shares and the income situation, the entrepreneur enjoys considerable tax returns. Of course, in addition to GmbH shares, other assessable assets, such as patents, antiques, art or real estate from private assets, can also be spun off into the foundation with tax effect. The additional liquidity thus gained can be used in a variety of ways. For example, to provide missing pension capital for the GmbH within the framework of a capital contribution. When transferring GmbH shares to a charitable trust foundation, it seems advisable to concentrate the voting rights on a few shares remaining in the private ownership of the entrepreneur or even to transfer them to a separate institution. In this way, the entrepreneur continues to exercise his full voting rights at the shareholders’ meeting of the GmbH and at the same time enjoys the advantages of the tax-privileged asset management of the foundation: the profit distributions of the GmbH accruing to the foundation are tax-free within the foundation. It is also possible to sell the GmbH shares via the trust foundation at any time; the proceeds from the sale are tax-privileged within the charitable foundation. ■
Taxes and charitable foundation
When setting up the charitable trust foundation, the founder can use up to € 307,00 as special expenses to reduce tax in his income tax return. This maximum foundation amount of € 307,000 can be applied immediately in its entirety or spread over a period of up to ten years (§ 10b para. 1 a Income Tax Act). In addition to the maximum foundation amount, a further special expense deduction of up to € 20,450 per year is available to the founder for charitable foundations. It is irrelevant whether the donation is made as a so-called endowment to the basic assets or as a donation. Spouses may claim twice the amount. Prerequisite: They are assessed jointly for income tax: In addition, a further € 40,900 tax deduction is granted – as an “additional maximum deduction amount”. The transfer of assets to a charitable foundation is subject neither to gift tax nor to inheritance tax (13 para. 1 no. 16 b Inheritance Tax Act). Furthermore, donations and endowments of up to five percent of the founder’s total income can reduce his or her taxable income. In the case of scientific, charitable or cultural purposes recognised as particularly worthy of support, this amount is increased to ten percent.
(Financial Business 1/2007, 28)
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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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