The establishment of a so-called. Family Foundation This is usually done by the so-called founder transferring assets to a foundation, with the founder’s descendants and relatives being the primary beneficiaries in accordance with the foundation’s articles of association.
Family foundations as a tax-efficient planning tool: Although the term ‘foundation’ is often associated with charitable purposes in everyday language, a family foundation is not a charitable foundation. Rather, the focus is on the interests of the founder and their family.
There are many reasons for setting up a family trust. When structured appropriately, trusts can serve to shield the assets transferred into them from access by third parties (for example, in the event of insolvency). It may also be desirable to keep the assets in the family’s possession across generations in the most tax-efficient way possible. Another key advantage of family foundations is that no inheritance tax is payable when the founder dies. This is because, unlike in the case of limited companies or partnerships, for example, there is no transfer of shares.
A family foundation may be established as a domestic or foreign foundation. One disadvantage of domestic family foundations is that a so-called ‘inheritance substitute tax’ is payable every 30 years. Furthermore, the current income is taxable due to the regular absence of charitable activities. These tax disadvantages can be avoided by using foreign family foundations, where neither the registered office nor the place of management is located in Germany. However, there may also be tax disadvantages compared with domestic family foundations when it comes to the transfer of assets, as only the most unfavourable tax class III applies for gift tax purposes when transferring assets to a foreign family foundation.
A tax-efficient establishment of a family foundation can also be achieved through a transfer subject to a right of usufruct. In this case, the founder retains the lifelong right to the income derived from the transferred assets. The tax liability thus created can be reduced or even avoided. When setting up a family trust, the nature of the assets being transferred must also always be taken into account. If, for example, significant shareholdings in limited companies are transferred to a foreign trust, the transfer may be subject to income tax, even though the shares transferred free of charge have not been sold.
For further information, please do not hesitate to contact our specialist tax lawyers and tax advisers.
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