Trust foundation as a solution for medium-sized businesses

Attorney Johannes Fiala and Frank M. Strobelt explain how entrepreneurs can arrange company succession through a charitable foundation.
According to calculations by the Institute for Research on Small and Medium-Sized Businesses, more than 300,000 family businesses are facing a change of ownership in the next few years. It is estimated that in about 40 percent of cases there is no suitable successor from the family circle or no descendants. Furthermore, the liquidity situation is extremely tight due to the associated stricter banking requirements (Basel II) and the associated restrictions on lending. In addition, owners of small and medium-sized businesses often have to contend with a loss of income due, for example, to a downturn in orders or the premature closure of the business for health reasons. For many medium-sized companies, the subject 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, the “Law on the Further Fiscal Promotion of Foundations”. Further positive impulses for the foundation system can be seen in the recently adopted ten-point programme of the Federal Government. With the 400 million euro funding package, Federal Finance Minister Peer Steinbrück also wants to support charitable foundations.
Increase liquidity
The deductibility of donations to charitable foundations from taxable income is now even more attractive for small and medium-sized companies: As a result of 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 amount for married persons thus increases from 307,000 to 614,000 euros. The maximum foundation amount can be deducted from tax as a special expense once in ten years if such a foundation is endowed with corresponding assets within twelve months. Furthermore, the maximum foundation amount, which increases from EUR 20,450 to EUR 40,900 under certain circumstances on the basis of the decree (see calculation), can be claimed. Assets, such as GmbH shares, real estate, securities, works of art or cash, can be donated to the charitable trust foundation.
Solve 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 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 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. According to Andreas M. Bosl, owner of Mittelstands-Beratungs-Dienst (MBD), the charitable trust foundation is an ideal field of activity in the retirement phase of the GmbH managing director. This can be dedicated to charitable activities, such as the promotion of sports, education, culture, worldwide. The publicity measures often associated with this additionally strengthen the reputation and core business of their own company.
New employer and supply instrument
It is possible for owners of medium-sized companies to work for their own charitable trust foundation in a permanent employment relationship from a certain point in time, independently of the double foundation described above, in order to actively fulfil the purpose of the foundation at home and abroad. Unemployed periods in one’s own company can be cleverly bridged in this way, explains Stif Foundation expert Andreas M. Bosl from MBD. This option is also interesting for people who, at a certain point in time, are no longer able to carry out physical activities, for example in the trades, 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 shown in the non-profit sector.
Trust foundation or 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, 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 externally 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, foundations with legal capacity are supervised by two authorities at once: the tax office and the foundation supervisory authority. The fiduciary foundation, also called dependent foundation, is the more flexible and at the same time the older basic form of foundation, especially for medium-sized companies. Trust foundations have a history in Germany spanning more than a thousand years. 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: ◗long-drawn-out official approval procedures are no longer necessary; ◗there is no state supervision of the ongoing foundation activities; instead, there are control mechanisms through the financial authority and through foundation committees which the founder can determine himself; ◗capital inflows and outflows 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 trust foundation can, in contrast to a foundation with legal capacity, be adapted to current circumstances without difficulty; ◗the founder can transfer the entire administration of the foundation to the foundation sponsor and thus concentrate on fulfilling the purpose of the foundation Despite the numerous advantages which the trust foundation has over the foundation with legal capacity, there are few advisers on this subject 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 a special way in addition to civil law. 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. Attorney Johannes Fiala and Frank M. Strobelt will be happy to answer any further questions you may have on this topic. Contact:,
Further information Attorney Johannes Fiala and Frank M. Strobelt will be happy to answer any further questions you may have on this topic. Contact:,
(CP Compact 2/2007, 20)

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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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