Very wealthy people often face many challenges with their assets. One of them is wealth succession. In Germany, it is subject to inheritance tax or gift tax for the heirs or gifted persons. One way super-rich people can avoid such taxation, but at least save a lot of taxes, is through a family foundation. In particular, a family foundation in Liechtenstein offers itself for various reasons. In addition, with this design you also miss the exit tax, so that you are free to move where you like it best – also tax-wise.

1. How Super Rich Save Taxes With a Family Foundation Introduction

Assets obligated. Previously it was the nobility to whom this statement was applied, but today it is the ever-growing number of very wealthy persons to whom it applies. Because a fortune will one day, sooner or later, get into other hands. Usually it is their own children or grandchildren who should benefit from their own wealth by receiving it by gift or inheritance from us. In the worst case, the state inherits.

If we stay in Germany, and also from a tax point of view, then we must expect at the latest at the time of our death that our heirs will assume our inheritance, perhaps also our legacy, but certainly also the inheritance tax, the father state then demands. Some see the tax positively, but others rather with discomfort. After all, the inheritance is a property that was already subject to taxation when it was established. And now our heirs are basically supposed to pay taxes on it again?

Well, it does not have to be that bad. After all, there is hardly any other tax as many possibilities for design as the inheritance and gift tax. We now introduce you to a particularly attractive variant, namely, how super-rich people can save taxes with a family foundation.

Saving Taxes: This is How We Define Super Rich

Exciting right at the beginning of our considerations is how we want to define the term super-rich that we intend to use in this post. Because the term is generally hardly tangible. Are you counting only a certain category of assets, such as liquid funds? Or does one assume a certain amount in the value of the net worth overall? Perhaps a certain percentage of the population who own the most wealth is the basis for a definition.

Well, let’s make it easy with this definition. For our purposes, we focus on a simple feature, a net worth of at least EUR 26 million. Now you may wonder why it is exactly EUR 26 million. should be, when it would have been just as well with the round number of EUR 25 million to define super-rich? Many would perhaps also rather expect that we only speak of super-rich people from a wealth of EUR 1 billion or more. What is related to the limit of EUR 26 million that we have defined for our purposes super rich, you will see in a moment.

3. How Super Rich Can Build a Family Foundation

3.1. Super-rich set up a family foundation to save taxes

So let’s assume that Dagobert Duktig, a fictional super-rich man who volunteers as an example for our explanations, has a wealth of over EUR 26. millions. His assets are largely, to more than EUR 26. Mio., in his company. This can be either a sole proprietorship, a partnership or a corporation. In addition, his closest family circle includes three grandnephews, Dig, Drig and Drak, who would one day take over the succession as his heirs.

After an initial consultation in our law firm, Dagobert Duktig is now taking action. With a cash balance of EUR 50,000, he sets up a family foundation, either in Germany or in Liechtenstein (there even with only EUR 30,000, CHF 30,000 or USD 30,000 possible). We will come to the differences and similarities in this individual case.

3.2. How Super Rich Save Taxes on Gift to Family Foundation

In the case of the transfer of business assets worth more than EUR 26 million to the family foundation, gift tax is normally incurred. However, if a gift of assets with a value of more than EUR 26 million is made and the recipient can prove that there are no other financial possibilities to pay the tax besides the business assets received, then according to § 28a ErbStG you can submit an application for a relief needs test. Because according to § 28a ErbStG you do not need to pay tax from a property of EUR 26 million if certain conditions are met. This includes, among other things, that the family foundation must now keep the operating assets received for at least seven years. Otherwise, there will be retroactive taxation on the transfer of assets. Of course, it is in the sense of the family foundation to keep the company shares in order to return the profits to the Destinatäre. Thus, the blocking period does not constitute an obstacle either.

What happens now? The family foundation’s assets that can be used to pay a gift tax amount to EUR 50,000. The foundation must therefore spend this to pay the gift tax. The rest of the assets, i.e. the company shares received by way of donation, are protected from taxation. In this way, super-rich people can save taxes on a large scale with a family foundation. Incidentally, Matthias Döpfner also used this design with a slightly different approach to receive a share package with a value of over EUR 1 billion as a tax-free gift.

By the way, if Dagobert Duktig wants to transfer a German GmbH to a family foundation in Liechtenstein, this triggers an exit tax. This can be avoided by positioning a partnership as a holding company via the GmbH. Here, too, one is bound to a seven-year blocking period, but in our case, as I said, this is of no significance, because we transfer the holding company instead of its GmbH.

4. How Super Rich Save Taxes With a Family Foundation

4.1. Taxation of corporate profits by the Family Foundation

If we assume that the company transferred to the family foundation was a sole proprietorship or partnership, then the foundation now pays the income taxes on the company profits. So there is no change in taxation here. Even with a GmbH or a holding company with a GmbH as a subsidiary, everything remains as before with regard to income taxes.

4.2. Taxation of distributions to destinataries

But if the foundation now sends its destinataries disbursements, in Germany they pay 25% capital gains tax plus solidarity surcharge. Here, too, no tax advantage can be seen at first glance.

But who says that the destinataries of the Family Foundation must remain in Germany? Nobody. So let's say they emigrate. Let us assume that in the country where they are taxed from now on, there is no or only a small taxation of capital income, for example in Uruguay. Then the Duktigs can collect the payment of the family foundation there virtually tax-free. Only if the family foundation is located in Germany can a withholding tax apply. In the case of a family foundation in Liechtenstein, however, this is excluded according to the current legal situation. In this way, the super-rich Duktigs save an enormous amount of taxes with a family foundation in Liechtenstein.

4.3. substitute inheritance tax on the assets of family foundations in Germany

But after 30 years, foundations in Germany are subject to the so-called inheritance tax. As the name suggests, it is an equivalent to the regular inheritance tax. But since a foundation cannot have heirs, the substitute inheritance tax has been introduced in order to tax them nevertheless by means of a simulated generational change.

But there are ways to avoid the inheritance tax. Because through § 28a paragraph 7 ErbStG, the foundation can again apply for a spare needs test. If the value of the company's shareholding is still more than EUR 26 million and there is no other property available for the settlement of the substitute inheritance tax, the family foundation of the super-rich Dagobert Duktig will again be spared the tax. And if the family foundation has its headquarters in Liechtenstein, then certainly also because there is no substitute inheritance tax in Liechtenstein. Among other reasons, Liechtenstein is so popular as a place to set up a family foundation.

5th Conclusion on the Design “Saving Taxes with Family Foundation for the Super Rich”

Entrepreneurs with business assets of more than EUR 26 million can thus optimize their wealth structure with a family foundation without risk of gift tax or substitute inheritance tax. Super rich people can save taxes on several levels with a family foundation. Especially when moving abroad, destinataries can work to ensure that they do not have to pay taxes on the payments they receive from the family foundation.

Much more important is the long-term, cross-generational significance of such a design. In addition to the closest relatives, their and all other descendants can also participate in the success of the company in the future. With the correct design, this is even possible in a control-optimized manner. At the same time, you have the opportunity to choose the place in the world as the center of life that you personally find best. This is true freedom. And they cannot be inherited or given away otherwise. So if you want to do something good for the following generations beyond your children, even give something that money can hardly achieve so easily, then set up a family foundation with us.