Wealth Management
The first step is to take stock of the assets to be transferred.
The first step is to determine what types of assets the transferor will transfer and how their value should be distributed among the transferees.
This is followed, in the second step, by an assessment of the existing assets held by the individuals on the acquiring side. In this context, it must be clarified whether assets have already been transferred to the individuals in question in the past—both the type of assets already transferred and the timing of the anticipated transfer may be relevant here.
Furthermore, the coordination of family matters (e.g., through a family office) plays a central role. Care should be taken to ensure that articles of association and testamentary dispositions are aligned with one another.
Through appropriate clauses in the articles of association, a specific individual can be designated in advance as the company successor, or general, objective criteria can be established according to which third parties—such as an executor or estate administrator—can determine the company successor. For example, a so-called “marital property clause” can stipulate the obligation of the donee or potential heirs to enter into a prenuptial agreement before or after acquiring company shares in the event of marriage. The purpose of such a provision is to protect the “company share” as an asset in the event of a shareholder’s divorce; the transfer of shares to persons outside the family, such as former spouses, is to be permanently prevented. Succession can, however, also be secured through conditions and bequests, whereby the testator, as part of his or her will, grants a specific financial benefit by way of a bequest to a person designated by him or her—regardless of whether that person is an heir. Given the numerous ways in which the transfer of assets can be structured and secured, appropriate asset management therefore plays a significant role.
Adequate asset management is particularly important because, in the context of inheritance or gift tax, the exemption provisions of Sections 13a through c of the Inheritance Tax Act (ErbStG) apply to the transfer of business-related assets, and under these provisions, a complete tax exemption for the acquisition is even possible. This applies to the donor’s or decedent’s ownership interests in corporations exceeding 25% or, more generally, to the transfer of interests in partnerships, provided that these partnerships engage in commercial activities or are at least commercially oriented due to the exclusive involvement of a corporation as managing director.
However, the tax exemption is subject to various additional conditions. For example, the share of non-productive administrative assets in the total enterprise value (based on market values) must not exceed 90%. Administrative assets include, for example, real estate leased to third parties for use, shares in corporations with a maximum ownership stake of 25%, securities, and, in principle, financial assets such as demand deposits and cash. If (recently acquired) items of administrative assets have been part of the business assets for less than 2 years, their values are never eligible for tax benefits; in the case of financial resources, the tax authorities take a restrictive view of recently acquired administrative assets even in the context of purely intra-group reallocations within a cash pool.
In addition to keeping the proportion of ineligible administrative assets as low as possible, other conditions must also be met over a period of 5 or 7 years; for example, the acquirer may not sell the acquired stake in the company if they wish to retain the full 85% or 100% tax benefit.
To ensure an optimal position in this regard, early structuring of the assets is both necessary and advisable so that the relevant proportional thresholds can be met. Key levers that can be used to structure the assets include the company’s value as well as the reallocation of liquidity and administrative assets into tax-advantaged business assets.
Financing Tax Liabilities Through Life Insurance
If—despite appropriate asset management—an asset transfer is subject to tax or payments must be made to continue providing for the transferor, financial arrangements must be made early on to set aside the necessary liquid funds.
Thus, as part of the preparation for the asset transfer, the liquid funds needed to finance any potential tax liabilities must be planned for and set aside simultaneously.
In particular, taking out an insurance policy can be a sensible option here. Under such a policy, the asset owner can even simultaneously hold multiple roles as policyholder, premium payer, beneficiary, and, if applicable, the insured person. The asset owner then retains control over the policy, as a payout during his or her lifetime can be authorized only at his or her request. An additional control measure may also be a position on the advisory board or in the management of the GmbH. Upon conclusion of the contract, a GmbH is irrevocably designated as the beneficiary of the insurance policy, and the shares in this GmbH are transferred to the heirs as part of a gift. The advantage of this approach is that the irrevocable designation of the GmbH as the beneficiary constitutes merely a contingent right that becomes tax-relevant only upon the occurrence of the specified condition (in this case, the death risk under the life insurance policy). Furthermore, when premiums are paid—even in the form of assets—the fiction of a tax-related disposition can be avoided.
In this context, professional asset management focuses on entering into a specialized life insurance contract in which individual assets of the company are accounted for separately from the insurance company’s other assets. The company issues the policy in exchange for a one-time premium, which is managed by an external asset manager within the framework of a selected investment and risk profile. Through a potential shareholder position, the asset owner can continue to manage the day-to-day operations of the GmbH. At the end of the policy term, rather than liquidating the assets, they are transferred to the company or to a third party designated by the company. The advantage of this approach is that the special life insurance contract results in the reclassification of non-deductible administrative assets into tax-favored business assets, thereby allowing the company to take advantage of the inheritance tax benefits applicable to business assets. Furthermore, all capital gains are not subject to taxation until the time of payout.
Financing of Settlements
Another purpose of asset financing may be to provide severance payments to other heirs, for example, to induce this group of individuals to renounce the inheritance or bequest, or to waive their entitlement to a statutory share. A settlement paid in connection with a taxable acquisition may generally be deducted by the payer as a deferred liability pursuant to Section 10(5)(3) of the Inheritance Tax Act (ErbStG) and thus reduces the inheritance tax liability. Here, too, proactive planning for raising funds is of essential importance.
In addition, any settlement agreements should be tailored to the assets to be transferred and the financial circumstances of the party making the settlement. This alignment depends, among other things, on the family structure and the resilience of intra-family relationships; the process therefore requires precise planning.
Finally, the so-called “exemption needs test” must be taken into account. If business shares are transferred with a value exceeding the threshold of 26 million EUR, the acquirer may, among other things, “offset” the inheritance tax to be assessed against the business assets, i.e., they must use half of their own personal assets, as well as half of the administrative assets transferred upon the acquisition of the company shares, to pay the tax. Since long periods (over 10 years) are relevant in this regard, a split transfer of business assets followed later by additional personal assets can ensure a tax-optimized situation in the long term.
Conclusion
As the ongoing political debate over a flat-rate tax or even further increases in inheritance tax demonstrates, the current inheritance tax law will continue to be subject to significant changes. The current taxation of business assets—which is still generally favorable for taxpayers—could then be drastically tightened, making a timely transfer of assets to the next generation, particularly in the business sector, urgently advisable at this time. However, due to the legal complexity and the lengthy timeframes that taxpayers must monitor, effective planning measures within the framework of proactive asset management are necessary. Ultimately, a transfer of assets within a family can only succeed if all parties involved strive for a transparent and trust-based process that takes the various interests into account.
