Trust foundation as a progressive and flexible solution for medium-sized businesses

Johannes Fiala, Frank M. Strobelt
In a nutshell
The medium-sized entrepreneur is currently facing a multitude of problems for which he urgently needs efficient solutions: According to calculations by the Institute for SME Research, more than 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. Furthermore, due to the stricter banking regulations (Basel II) and the associated restrictions on the granting of loans, the liquidity situation of medium-sized companies is often extremely tight. In addition, businesses often have to contend with revenue shortfalls due, for example, to a decline in orders as a result of the economic situation or to customers going bankrupt.
Foundation for the middle class?
For many medium-sized companies, the topic of “foundations” was taboo until a few years ago and was associated with the commitment of large companies such as Bertelsmann, Henkel, Bosch or Hertie. 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 provides for the simplification of the non-profit law. In addition, the German citizen should be able to enjoy far-reaching benefits. In addition to raising the deduction limit for donations to 20 percent of annual income, the bill also provides for significant tax relief for foundation founders. Instead of the current €307,000, the draft allows founders to deduct up to €750,000 in founding capital as special expenses on their private tax returns. In the case of married couples assessed jointly, each spouse is then entitled to the increased maximum foundation amount separately.
Increasing the liquidity of the medium-sized company via a charitable trust foundation
The deductibility of donations to charitable foundations from taxable income is already attractive for medium-sized companies: Based on a ruling by the Federal Fiscal Court in August 2005 and the decree issued by the Bavarian State Tax Office last year, which is valid throughout Germany, spouses who are jointly assessed can claim double the amount for tax purposes for donations to the asset pool of a charitable foundation. The maximum foundation amount for married persons thus increases from € 307,000 to € 614,000 in accordance with the previously applicable provisions. Foundation founders can use the maximum foundation amount as a special tax-reducing expense once every ten years. Furthermore, founders can take advantage of the maximum amount of the foundation based on the remission of € 20,450 increases to € 40,900, as well as the maximum amount of donations. Assets such as GmbH shares, real estate, securities, works of art or cash can be donated to the charitable trust foundation.
Succession regulation via double foundation
The double foundation, which is one of the company-affiliated foundations, is to be seen as a contemporary, intelligent building block for solving the problem of succession as well as old-age provision. For example, the managing director of a GmbH (limited liability company) 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 and sufficient profit participation rights, are transferred to a family foundation in Germany or abroad. 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 charitable trust foundation can be used as an ideal field of activity during the retirement phase of the GmbH managing director. This can be dedicated to charitable activities such as the promotion of sport, education and culture worldwide. The publicity measures often associated with this additionally strengthen the reputation and core business of their own company.
Charitable trust foundation as new employer and pension instrument
For owners of medium-sized companies it is possible, independently of the described double foundation, to work for their own charitable trust foundation in a permanent employment relationship from a certain point in time in order to actively fulfil the purpose of the foundation at home and abroad. Unemployed periods in one’s own company can thus be cleverly bridged. This option is also of interest to people who, at a certain point, are no longer able to perform physically strenuous activities for health reasons. Legally regulated maintenance payments for the founder or his dependents, laid down in the foundation statutes, are an alternative to the employment model in the non-profit sector described above.
Trust foundation vs. foundation with legal capacity
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, legally capable foundations are 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. 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, a foundation with legal capacity is supervised by two authorities at once: the tax office and the foundation supervisory authority. The fiduciary, also called dependent foundation, is the more flexible and at the same time the older basic form of foundation, especially for medium-sized companies. Incidentally, trust foundations have a history in Germany spanning more than a thousand years. Trust foundations can be established quite 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 ongoing activities of the foundation – Instead, there are control mechanisms through the financial authorities and through foundation committees which the founder can determine 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 articles of association of a fiduciary foundation can, the entire administration of the foundation can be transferred by the founder to the foundation sponsor and he can concentrate on the fulfilment of the foundation’s purpose.
Conclusion
Despite the numerous advantages that the trust foundation has over the foundation with legal capacity, there are few advisors in this field who can competently present the advantages of this legal form to founders and accompany the regular establishment of trust foundations at home and abroad. Cross-border foundation constructions can only be realised with teams of experts who also have experience in practical implementation. Qualified advice on trust foundations includes interdisciplinary thinking, since tax law must be taken into account in addition to civil law. Those who have actively dealt with both legal forms can judge in which cases the trust foundation appears to be advantageous for the founder.
Address of the authors
Frank M. Strobelt Managing Director of Gesellschaft für Stiftungsförderung e. V., (GfS) Pilotystr. 4 80538 Munich E-Mail: info@stiftungsfoederung.de www.stifter.org Attorney at Law Dr. Johannes Fiala De-la-Paz-Str.37 80639 Munich E-mail info@fiala.de
(Small Animal Medicine Jan+Feb 2008)
Courtesy ofwww.terra-verlag.de.

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About the author

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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