Many wealthy parents are looking for ways to transfer assets to their minor child. The asset management of underage children is usually more complex than one might assume. After all, parents usually want to ensure that the assets are maintained. To ensure this, further parental control is often required.

With a limited partnership (KG), parents can achieve both goals. On the one hand, the property contributed by the parents and given to the child is regarded as their limited share. On the other hand, the parents are responsible as a general manager and thus the asset management of these parent-child-KG. However, in order to establish such a family partnership, parents must comply with certain formal requirements. So the child must have at the foundation of the KG instead of his parents a supplementary caregiver at his side. This can be, for example, a lawyer or a tax consultant. In addition, this legal transaction requires approval by a family court.

The transfer of property from one person to another is generally known as taxable. Thus, there is a tax on the transferred assets. It does not matter whether this is done by gift or by inheritance. In addition, inheritance tax and gift tax law has no significant exceptions. Even the transfer of assets from parents to their children is affected.

Therefore, wealthy parents face the challenge of transferring their assets to their children as tax-free as possible. However, allowances apply, the recognition of which is linked to a period of ten years. Thus, a child can claim his free allowance of EUR 400,000 for gifts and inheritances from father or mother only within this period. On the other hand, any remaining unused allowance shall expire after 10 years; Adding is excluded.

Therefore, it is understandable that high-net-worth parents strive to pass on their assets to their children as early as possible and consequently as often as possible within the limits of the children's allowances. In principle, however, this entails a loss of control over assets. In order to counter this circumstance, a wealth management of their minor children is necessary.

Therefore, we would like to introduce you to a model that allows parents to elegantly manage the assets of underage children.

Asset management of minor children by means of a limited partnership

One such vehicle is the family partnership. More specifically, the asset management of underage children is carried out by a KG. For this purpose, the parents (individually or jointly) establish a KG together with their minor child. The parents contribute their assets to the KG, while the child holds an initial participation of 0%. Next, parents give their child a share of their participation. In order to keep this tax-free, the value of the transferred property should be at most equal to the child’s available allowance. Until the child is 18 years of age, the parents can give him annually EUR 40,000 tax-free. In this way, hypothetically, a maximum tax-free transfer of EUR 720,000 is possible within this period per parent.

The parents enter the KG in the position of a general partner, while the minor child occupies the position of a limited partner. Since in a limited partnership the management is only due to a general partner and this is thus excluded by the limited partner, the parents retain control over the entire assets. With the KG, the asset management of underage children by their parents is therefore easy to implement.

At first glance, the model presented here of the asset management of minor children by means of a family partnership in the form of a limited partnership seems quite simple. However, parents have to consider two special features when establishing the KG.

3.1. Representation of the minor child by a supplementary care provider

The first requirement is bound to the representation of the minor child. Because if the parents act both as co-partners and as parental representatives of the child at the foundation of the KG, then this is self-contracting. In other words, there is no separation, which is necessary to guarantee the parents' own position as shareholders on the one hand and their position as legal representatives of the minor child on the other hand when concluding the social contract. The legal requirement for this is contained in § 1795 paragraph 2 BGB.

Thus the appointment of a supplementary caregiver takes place, who represents the minor child in this context (§ 1909 BGB). For example, lawyers or tax consultants are suitable as supplementary caregivers. They are also particularly competent to assess whether closing the social contract is beneficial for the child. For legal transactions with minors, it must be ensured for his protection that they only offer him advantages.

3.2. Approval of the social contract by a family court

In order to check whether this protection is guaranteed, a family court is involved. Only with the approval of the social contract by the family court is the contract legally binding.

However, the foundation of the limited partnership is only the first step. So there are other criteria that you have to consider in order to operate the asset management of underage children with this model. Because the tax recognition of this model depends not only on the legally concluded company contract but also on its implementation. Only if the position of the children as co-entrepreneur in the limited partnership actually appears justified, because they bear both co-entrepreneur initiative and co-entrepreneur risk, the financial administration accepts this construct. For example, such a family company is only considered a fully-fledged limited partnership if it appears acceptable to third parties on the basis of the social contractual framework. Consequently, there are a number of criteria that must be avoided in order to maintain this recognition.

4.1. No time limit for the KG

First of all, the social contract must be designed in such a way that the company is to exist without a time limit. On the other hand, a predetermined duration of the company’s existence constitutes a ground for exclusion.

4.2. No revocation of the gift by parents

Furthermore, there must be no cancellation clause regarding the gift by the parents. As a result, minor children lose both their limited partnership contribution and the advantage that this limited partnership was originally supposed to grant them. However, some special exceptional cases may still be allowed, for example in the event that the child dies prematurely.

4.3. No dismissal of children by parents

This is also comparable to a social contract regulation, with which a dismissal of the children from the KG by the parents is possible. However, a contractual severance payment that takes into account the common value of the limited partnership can mitigate the existence of such an exclusion criterion.

4.4. No participation of the child in the common value at the time of his departure

Similarly, the participation in the hidden reserves and in the goodwill in the event of the child leaving the limited partnership must be assessed. If there is no participation in an appropriate amount on the basis of the social contract, a co-entrepreneur status of the child can be excluded.

4.5. No change in the social contract at the expense of the child

Similar is the case if the parents are able by company law with their majority of votes to change the social contract unilaterally to the detriment of the child. This also means that underage children lose their status as fellow entrepreneurs. For a fully-fledged co-partner, such a restriction is unacceptable.

Inheritance & Gift Tax reduced to 0%

5th Asset Management of Minor Children: Business Succession

Finally, we would like to highlight another advantage of the asset management of underage children by establishing a limited partnership with their parents. If there is a parental business that the parents want to transfer to their children over time, then the tax-advantageous transfer of the business via the KG model is predestined for this. The model also benefits from a certain amount of asset protection because, for example, maintenance claims have no effect on this.