The Entrepreneur and His Succession
Let’s consider the following real-life case, which serves as a classic example: The client runs a successful, medium-sized company (GmbH) in the software logistics sector. The company has over 200 employees and generates an annual net income of approximately EUR 5 million. The client has a wife and two sons, one of whom works at the company. He is concerned about what will happen to the business after he steps down or passes away. However, he also wants his other son and his wife to be financially secure through the company. At the same time, he would prefer that his sons’ respective spouses not hold a stake in the company; rather, he would like the company to be continued, if possible, through the direct line of descent.
More Problems Than Solutions
The problem was that, at first glance, there were more pitfalls than viable options: providing for the wife and the son who does not work for the company through the GmbH would have constituted hidden profit distributions in each case. Therefore, the client would first have to transfer the profits to his personal assets (incurring an approximate 26% tax burden due to the distribution being subject to the flat-rate withholding tax) and then gift them, which would deplete tax-exempt allowances and even result in gift tax liability. Should the son working in the company decide to move abroad in the future—for example, for personal or professional reasons—the move would trigger so-called exit taxation—that is, approximately 30% of the tax value of about EUR 70 million (13.75 × annual profit). This is a value that could not be realized on the market—and no funds would be available to pay the exit tax.
The Family Foundation as a New Family Member
However, the family foundation offered a solution. What does that mean? A family foundation is not a nonprofit; rather, it serves the family. It can be structured to become the new holding company for the family business, which can be transferred into it tax-free. The foundation then becomes the family member that makes decisions within the company. How the foundation makes decisions is determined by the family through the family council, which can be structured flexibly and individually. For example, it is conceivable to separate operational and private matters.
Furthermore, a foundation has no shareholders; rather, it belongs to itself. So if a family member moves abroad, dies, gets married, or gets divorced—the family foundation is not affected by these events. It is a new, independent family member. Wills, prenuptial agreements, and the difficult conversations with family members that come with them become obsolete. If the company generates profits, they flow into the foundation. The same applies if the company is sold, which is taxed at only about 0.75%. And then the assets are supposed to be “locked up” in the foundation forever? No, that applies only to so-called perpetual foundations, but not to the innovative type known as a “hybrid foundation,” in which the family can easily withdraw not only the income but also the entire contributed assets at any time. When establishing the foundation, the founder decides who should be included in the circle of beneficiaries and who should not.
Whether, when, and in what amount family members receive a payout is decided by the foundation’s governing bodies at their sole discretion. The family foundation thus allows for the creation of support packages for the benefit of family members—even if they are not actively involved in the foundation’s operations. Regardless of who receives distributions from the foundation, a 25% flat-rate withholding tax applies. Tax-exempt allowances remain unaffected.
Conclusion
And suddenly, the client was filled with enthusiasm. A simple solution to all his concerns. Above all, he found it much more appealing to discuss the establishment of a family foundation with his family than to talk about wills, inheritance agreements, and prenuptial agreements on Christmas morning. The family foundation represents a special type of holding company, particularly in the context of generational succession.
Authors: Marc Hauser & Pawl Blusz, Ritterhaus Attorneys at Law
The Family Foundation: A Special Form of Holding Company
Articles of incorporation, shareholder agreements, wills, inheritance contracts, and taxes—it often feels like a client is dealing with nothing else when they want to transfer their business to the next generation. Succession planning should cover everything, yet still be straightforward.