You read and hear quite a lot about foundations in the media at the moment. For outsiders, it is not comprehensible at first glance that the charitable trust foundation in particular offers attractive benefits and efficient solutions to acute problems for citizens. The state explicitly acknowledges the commitment of donors with generous tax breaks and benefits related to the law of public benefit. Positive effects for the foundation system can be expected from the “Law for the Further Strengthening of Civic Commitment”, which was passed by the Bundestag at the beginning of July. According to the new law, founders will in future be able to deduct 1 million euros in special expenses (2 million euros for married couples) within a period of ten years. The general charitable deduction will be standardized and will increase to 20 percent of annual income. The deduction for corporate donations will also be doubled. The law is expected to pass the Bundesrat (upper house of parliament) at the end of September this year and come into force retroactively as of 1 January 2007. Improving creditworthiness and increasing liquidity The charitable foundation can significantly improve the liquidity situation of wealthy individuals with a corresponding tax burden. The value of the assets contributed to the charitable foundation, e.g. real estate, securities, collections, cash assets, represents special expenses up to certain maximum limits in the founder’s private tax return and can significantly reduce the taxable income (see table). There is also the possibility of entering tax allowances on the income tax card or reducing advance income tax payments. Through their own foundation, citizens are thus given a certain degree of creative freedom and can decide for themselves what should be done with their tax capital. With the tax advantages achieved, many citizens can, for example, expand their private pension provision or use the additional liquidity for other purposes. The founder himself determines the charitable purpose to be supported and decides who, how or what is to be supported. Part of the foundation’s income is used directly or indirectly to fulfil the charitable purpose. Here, the founder can choose whether he wants to fulfill the foundation’s goals himself with his own activities or by passing on financial means to other non-profit organizations. Self-realisation and a new mission in life At the end of their professional lives, many citizens see their own trust foundation as a new mission in life and an opportunity for self-realisation. In this context, the founder is free to determine the objectives of his foundation. New ideas can be put into practice quite quickly via the foundation. The trust foundation enables unbureaucratic help for many areas of life and new meaningful structures for the community. It is therefore not surprising that many donors choose this form of foundation and often associate happiness and joy with their foundation activities. The charitable purposes of the foundation include youth welfare, assistance for the elderly, environmental and landscape protection, monument conservation, development aid and international understanding. Asset management: tax-free investment income The assets within the foundation operate tax-free in tax-privileged asset management; there are no income taxes here. This is an enormous advantage, especially as from 2009 the interest income tax of 25% plus solidarity surcharge will be levied on income from capital assets outside the foundation. The tax-free sale of assets via the charitable trust foundation is also possible; the proceeds of the sale then flow tax-free into the foundation. Foundation as part of retirement provision and new employer If the foundation has sufficient capital resources, it is possible for the founder to be active in the non-profit sector within the framework of a permanent employment relationship and to pursue the foundation’s purpose at home and abroad. However, the founder can also use the legally regulated right to a pension for himself and his relatives against the charitable foundation. According to this, in principle up to one third of the income can be used for the living expenses of the beneficiaries. But also the preservation of the memory of the founder of the foundation as well as the maintenance of the graves can be financed by the foundation. Heirs Can Save Inheritance Tax For many heirs for whom inheritance tax is a significant burden, the charitable trust is invaluable. Up to 24 months after the death of the deceased, heirs can transfer assets from the estate to the charitable foundation free of inheritance tax. No real estate transfer tax is due on the transfer of real estate assets to a charitable trust. In this way the heritage can be preserved undiminished. Charitable Trust as Heiress and Protection of Life’s Work Married couples and singles without heirs or distance from relatives can appoint their own charitable trust as heiress. The inheritance to be transferred to the Foundation in the event of death may be used to promote any charitable purpose. It is advisable to set up the foundation during one’s lifetime and to endow it with a small amount of assets. Furthermore, the foundation should also be seen as a means of protecting the founder’s life’s work. Assets such as collections, works of art, patents can be entrusted to your own foundation. With the established foundation, which can bear the name of the founder, the founder experiences at the same time a piece of immortality: Foundations are basically designed for eternity. They consist of basic capital in the form of special assets that belong to themselves. The charitable purpose is mainly financed by income from the foundation’s assets, which in most cases must be maintained. Trust foundations have a tradition in Germany that goes back more than a thousand years. Many foundations established hundreds of years ago are still operating today.
Source: Law Firm Dr. Johannes Fiala, www.fiala.de, www.stifter.org Frank Strobelt, Society for the Promotion of Foundations, www.stiftungsfoerderung.de
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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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