A family foundation offers numerous tax advantages. One of them is that it allows you to transfer assets without a regular gift tax or inheritance tax. However, after each expiry of thirty years, a substitute inheritance tax on the assets of the foundation must be paid. In fact, it corresponds in many details to the inheritance tax. With a double family foundation, however, this can be prevented.

Because if, among other things, you also want to pass on shares in a corporation to subsequent generations via a family foundation, then you can keep this tax-free. However, in order to transfer other assets also tax-free, one sets up a second family foundation, which receives all other assets except the company shares. After the first family foundation, which contains the shares, has passed the taxation of the substitute inheritance tax after 30 years, the assets between the two family foundations are exchanged. The company shares are now included in the second family foundation, if it is next subject to the inheritance tax. However, it is important in these recurring reciprocal transfers that after each respective successor tax, a seven-year blocking period is observed when exchanging the assets in order to exclude a retroactive successor tax.

In the video we explain how you can avoid the inheritance tax with a double family foundation with shares and other assets.

1st Introductory Explanatory Note on the Double Family Foundation

Many people associate a very positive image with the term foundation. For example, the prize money of the prestigious annual Nobel Prizes is based on a Swedish foundation founded by Alfred Nobel to praise scientific and other services to humanity. But you can also build a foundation for many other legal purposes. In addition to charitable purposes, this is also possible, for example, with the aim of enabling a certain group of people to participate in the economic success of the donated assets.

A family foundation is now just such a foundation in which the family members of the founder are among the beneficiaries. The founder can determine during the establishment that all subsequent generations also participate in the foundation. Thus, the family foundation in the family sense can of course also be regarded as a charitable institution.

2nd Double Family Foundation: The Succession Tax Factor

Apart from the current share of the profit generated by the foundation’s assets annually in order to benefit the beneficiaries, another tax aspect comes to the fore. Because the property is owned by a foundation instead of a natural person, the regular inheritance tax or gift tax is eliminated. However, instead of this, a substitute inheritance tax on the assets of the foundation must be paid every 30 years (§ 9 (1) no. 4 ErbStG). This taxation corresponds to that which a natural person is subject to in the event of inheritance or gift.

The only significant difference between the inheritance tax of a foundation and the inheritance tax of a natural person is therefore the possibility of concrete advance planning. We want to take advantage of this fact in order to organise taxation according to our wishes. We would like to give you an informative example.

So if you want to donate your assets to the welfare of your family members, you also ask, of course, whether you can minimize the inheritance tax or even avoid it altogether. In fact, even the latter option is viable. However, certain prerequisites and conditions are of central importance.

3.1. Double family foundation: donating shares in a GmbH

In order to describe the optimal result that can be achieved with our dual family foundation in the case of inheritance tax, we assume that part of the assets to be donated are in the form of shares in a corporation. Since these are usually GmbH shares, we refer to this. In addition, other assets such as real estate or shares as well as funds can flow into a foundation. And so in our case.

3.2. Delayed establishment of the dual family foundation

The dual family foundation provides for the establishment of two foundations. But instead of doing this at the same time, we choose a time-delayed approach. The first step is to set up a family foundation with the content of the GmbH shares. About ten years later, the establishment of the second family foundation follows. In it all other assets are united.

3.3. example of tax avoidance of a dual family foundation

3.3.1. Starting point for our example on the double family foundation

Mr. Loben is 30 years old, married and has private assets in addition to a share in a GmbH. This includes various properties as well as shares and shares in funds. On the occasion of the birth of his first child, he considers how he should one day transfer his wealth to his descendants and his wife. Therefore, his desire for this to be accompanied by the most favourable taxation possible in the case of a future gift or inheritance is quite understandable. However, due to the size of his assets, even the approach of the allowances and a tax structure through repeated chain donations is of little help in getting closer to this goal. That is why he chooses our approach, namely the establishment of a double family foundation.

3.3.2. Double Family Foundation – Step 1: Delayed establishment of two family foundations

After extensive consultation, Mr. Loben sets up a first family foundation in 2020 with his wife and all descendants as beneficiaries. His GmbH shares represent the foundation assets of the family foundation. Then Mr. Loben waits for a decade to take the next step. So Mr. Loben will donate his remaining assets in 2030, which will flow into a second family foundation.

3.3.3. The first substitute inheritance tax

The first substitute inheritance tax will then come in 2050 on the first founded family foundation. Since only GmbH shares are included here, this can be set by reference to §§ 13a and 13b ErbStG tax-free, but at least as far as possible tax-advantageous. In the case of shareholdings in corporations, the Inheritance Tax Act offers a generous tax exemption, subject to certain conditions. Among other things, this is even possible completely tax-free if the assets consist of at most 20% of administrative assets. But even in other respects, a tax exemption of 85% of assets is a very favourable tax situation.

3.3.4. Double Family Foundation – Step 2: Property Exchange and Second Successor Tax

After 7 more years – Mr. Loben is now 67 years young – let’s get to the next point. Anyone who has diligently counted, knows that the inheritance tax of the second family foundation is only in three years. But now that the year is 2057, we are exchanging the assets of the two family foundations. The first family foundation, to which Mr Loben originally donated his shares in the GmbH, now receives the remaining assets, with which the second family foundation was previously created. Conversely, the younger of the two family foundations is now equipped with the GmbH shares. If the substitute inheritance tax is now incurred for the second family foundation, their assets are also tax-advantaged and thus, if necessary, tax-free.

4th Double Family Foundation – a tax perpetuum mobile

4.1. Exchange of assets every 30 years at the double family foundation

From this point onwards, the assets of the two family foundations can now be exchanged every 30 years in order to avoid the replacement inheritance tax that takes place 3 years later. Although the precondition here is that the legal framework for the taxation of foundations also remains unchanged, this should be viewed positively. After all, legislation that focuses on the taxation of generations is designed for long-term validity.

4.2. Observance of the seven-year blocking period after the transfer of GmbH shares

At this point, however, we point to another, here even decisive point. Because the fact that Mr. Loben in our example sets up the two family foundations with an offset of about 10 years is not an arbitrary coincidence. Rather, this serves to take into account a blocking period of seven years after the substitute inheritance tax. Because if the transfer of the GmbH shares from one family foundation to the second takes place less than seven years after the taxation, then this is still retroactively taxable in the case of the inheritance substitute tax of the family foundation.

5th Concluding Notes on the Double Family Foundation

In addition to the tax exemption for shareholdings of corporations in inheritance tax, the same applies to agricultural and forestry enterprises. That is why our model of double family holding is also very interesting for farmers. So if you want to lead both the tax well-being of your family and the continuity of a farm that has existed for generations into the future, call us. Like many GmbH shareholders, whom we count among our clients, we also offer you the tax-optimal solutions of one of the best tax law firms in Germany.