Trust foundation allows medium-sized companies flexible succession planning

The dual foundation is a smart one for business succession and retirement planning. In this case, the shareholder-managing director of a GmbH transfers a large part of the company shares without voting rights and tax-neutrally to a charitable trust foundation. The remaining GmbH shares, equipped with voting and profit participation rights, are transferred to a family foundation.
According to calculations by the Institut für Mittelstandsforschung, over 300,000 family businesses are facing a change of ownership in the next few years. It is estimated that in about 40% of all cases there is no suitable successor from the family circle or no descendants. For many medium-sized companies, the topic of “foundations” was taboo until a few years ago and was associated with large corporations. However, this has changed since the reform of foundations in 2000 with the “Law on the Further Tax Promotion of Foundations”. Further positive impulses for the foundation system are to be expected from the new “Law for the Further Strengthening of Civic Commitment”. The draft law, which was predominantly positively assessed in a first statement by the Bundesrat in March, provides for the simplification of the non-profit law. In addition, German citizens are to enjoy far-reaching benefits, including significant tax relief for foundation founders. Instead of the current 307,000 euros, the draft allows founders to deduct up to 750,000 euros of start-up capital as special expenses. In the case of married couples assessed jointly, each spouse is then entitled to the increased maximum foundation amount separately. According to the decision of the Federal Cabinet, the regulations will come into force retroactively as of 1 January 2007.
Liquidity boost through trust foundation
The double foundation, which is one of the company-affiliated foundations, can be seen as an intelligent building block for solving the problem of succession and old-age provision. For example, the shareholder-managing director of a GmbH can transfer a large part of the privately held company shares to a charitable trust foundation without voting rights and in a tax-neutral manner. The remaining GmbH shares, which carry voting rights and sufficient profit participation rights, are transferred to a family foundation. The family foundation regulates the provision of the family members and determines the fate of the GmbH even after the death of the founder via the shareholders’ meeting. The management of the company will be transferred to qualified external managers from a certain point in time. The foundation with legal capacity is an independent bearer of rights and obligations. Two processes are necessary to establish the foundation as a legal entity: the foundation transaction and the state approval. With the approval of the competent supervisory authority of the respective federal state, the foundation acquires legal capacity. Thereafter, the foundation with legal capacity is supervised by this authority. In contrast to the foundation with legal capacity, the trust foundation does not need its own organisation. Fiduciary management is carried out by a legal entity, which normally represents the company to the outside world on the basis of a concluded trust agreement and the articles of association.
Trust foundation especially advantageous for medium-sized companies
In contrast to a foundation with legal capacity, a charitable trust foundation only requires an examination of its charitable status by the responsible tax office. In Germany, for example, foundations with legal capacity are supervised by two authorities at once: the tax office and the foundation supervisory authority. The fiduciary foundation, also known as a dependent foundation, is the more flexible form of foundation, especially for medium-sized companies. Trust foundations can be set up fairly quickly. The incorporation can take place within one month, in exceptional cases within a few days. The associated granting of provisional non-profit status depends on the workload of the relevant tax office. If one draws a comparison between a foundation with legal capacity and a fiduciary foundation, the fiduciary foundation is preferred in most cases due to the following advantages: There is no need for lengthy official approval procedures. There is no state supervision of the day-to-day activities of the foundation; instead, there are control mechanisms through the financial authorities and through foundation committees, which the founder can appoint himself. The inflow and outflow of capital can be regulated more flexibly by the founder, depending on the income situation of the founder. There are cost advantages both in the establishment and in the ongoing operation of the foundation. The statutes of a fiduciary foundation, in contrast to a foundation with legal capacity, can be adapted to current circumstances without difficulty. The founder can transfer the entire administration of the foundation to the foundation executor and concentrate on the fulfilment of the foundation’s purpose.
Lack of qualified advisors for trust foundations
Despite the numerous advantages that the trust foundation has over the foundation with legal capacity, there are too few advisors who can present the advantages of this legal form to founders and accompany the regular establishment of trust foundations. Cross-border foundation constructions can only be realised with teams of experts who also have experience in practical implementation. Qualified advice with regard to trust foundations includes interdisciplinary thinking, since in addition to civil law, tax law must be taken into account in a special way. Only those who have actively dealt with both legal forms can judge in which cases the trust foundation appears to be advantageous for the founder. In our example, the total tax savings amount to 348,864 euros over the next five years from 2007 to 2012 (see table below for download). The charitable foundation will be endowed with assets amounting to 863 600 euros, the assets coming from separate property of the couple. All assessable assets can be brought into the foundation. Examples: Shares in limited liability companies, real estate, securities, works of art, fixed-term deposits, savings books or cash. Tax calculation basis: founder, married, 2 children, with tax class III, income tax and solidarity surcharge, no church tax. Calculation prepared using, among other things, the tax calculator of the Federal Ministry of Finance; the 2007 tax table was taken into account. All information in the sample invoice is without guarantee. Different tax and calculation values may result in individual cases.
Dr. Johannes Fiala is a lawyer, banker and business economist (MBA) in Munich; Frank M. Strobelt is Managing Director of Gesellschaft für Stiftungsförderung e.V. (GfS) and Vice President of the European Business and Finance Academy (EWFA).
( (19.09.2007)

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Dr. Johannes Fiala Dr. Johannes Fiala

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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