Meet The Members Europe – Successfully securing wealth with foundations in Germany

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Besides large companies, small and medium-sized enterprises still form the backbone of corporate Germany. Among them are numerous outstanding family-owned businesses, that have grown sustainably over decades or even generations. Guided by shared values such as tradition, vision and innovation, as well as a forward-looking leadership culture, many have reached the status of hidden champions in the global market.

But what happens if a successful entrepreneur does not manage a feasible succession plan for the future of his or her business these days?

Right now, the publicly discussed (even notorious, some may say) case of an extremely successful venture, Bavarian Knorr-Bremse Group, with a turnover of roughly €7 billion, serves as an example of how problematic succession and wealth management can go off the rails, if business succession planning has not been thoroughly engaged.

The late entrepreneur, one can understand from various press reports, drew up a will which provided for a foundation to primarily hold the shares of Knorr-Bremse Group. It was planned, that major stakes in Knorr- Bremse and in Vossloh, as well as a block of Lufthansa shares, should be safely wrapped in a foundation, along with other assets. But the last will, unfortunately, remained a work in progress. Consequently, a dispute sparked in the family about the immense inheritance. Because of emotions or even bad advice, the last will did not provide a clear roadmap but left essential points of design to “post-mortem arrangements”. The case is still pending, but could in a worst-case scenario – according to the well-known German paper FAZ – result in taxes of approx. €5 billion – a massive blow even for this outstanding business.

Generalising from that backdrop, the increasing importance of foundations can be vividly illustrated by their statistical development in Germany. While there were only just under 10,000 foundations in 2001, the number has more than doubled to 24,650 foundations within 20 years.

“More and more entrepreneurs are planning to arrange their business succession based on a foundation.”

In 2021 alone (i.e. even in the pandemic), 863 new foundations were established (cf. https://www.stiftungen.org/stiftungen/zahlen-und-daten/ statistiken.html).

No wonder, more and more entrepreneurs are planning to arrange their business succession based on a foundation. The establishment of a foundation is not only something for UHNWI, as in the Knorr-Bremse case. In Germany, § 80 of the German Civil Code (BGB) stipulates the existence of sufficient capital as an essential characteristic of a foundation- however, without specifying the exact amount of this capital cushion. Among experts values between €25,000 and €250,000 are discussed as a minimum threshold. Overall, the equity of about 80 % of the foundations is less than one million €, for about 14 % it’s up to 10 million €, and only about 2.9 % of German foundations have even a more substantial capital buffer. Given current market circumstances, we normally advice on a minimum capital of approx. 800,000 € to 1 million € (cf. https://www.stiftungen.org/fileadmin/ stiftungen_org/Verband/Was_wir_tun/Publikationen/Zahlen-Daten-Faktenzum- deutschen-Stiftungswesen.pdf).

Two types of foundations are relevant in the market: a privately organised family foundation or a non-profit foundation (recognising that there are several kinds of hybrids also available).

“Many entrepreneurs simply start “toying” with their business succession too late.”

The main reason why a foundation solution can be attractive is that it can be a cost- (and sometimes also tax-) efficient vehicle for typical motives in complex situations. Predominantly, such motives may include providing financial security to family members, avoiding asset fragmentation, avoiding inheritance disputes, and maintaining corporate stability in the long term. Using a broad brush here, wealth management and financial security for family members can be reached as goals based on cascades of distributions to specified beneficiaries (whereby these beneficiaries do not receive any enforceable or forfeitable rights). Given that, asset protection can be achieved by such wrapper structures.

But establishing a foundation to secure business succession is not as easy as it may sound at first. For the careful planning of a smooth succession, it is necessary to deal with material questions at an early stage in order to avoid problems such as those that occurred in the Knorr-Bremse case. Many entrepreneurs simply start “toying” with their business succession too late. Often, even an emergency plan, such as a provision in the will, is not properly designed and safeguarded by adequate triggers. The Knorr-Bremse case for example shows that the entrepreneur had been working on his will since 2015. In the end, it was still not enough. Therefore, it is advisable to draw up a will with a contingency plan right at the beginning of setting up a business, should the worst-case scenario occur (ideally, also already with an eye on the reform of German foundation law in July 2023). Professional advisors such as lawyers, tax consultants and chartered accountants should be pulled into the process early on.

Hope for the best, but plan for the worst – that’s the spirit of a true founding father or mother. They do understand the deeper meaning of “semper fidelis”.