Family asset pool company as a structuring instrument for estate planning
The use of a family asset management company (abbreviated to ‘family asset pool’) has two key effects. From a tax law perspective - in particular, through the participation of the next generation as it happens in several phases over time - it makes it possible to make optimum use of not only inheritance and gift tax allowances but also those available for income tax. From a civil law perspective, the pool primarily serves to preserve assets as a single entity rather than allowing them to be broken up by gifting individual assets. A company agreement establishes binding, predictable rules on, among other things, voting rights, withdrawals, information rights and the allocation of profits without the older generation losing control. The younger generation can gradually familiarise themselves with the assets in a controlled way.
Definition and scope of application of a family asset pool as a structuring instrument
A family asset pool is defined as a family asset management company in which assets - frequently property, securities accounts and shareholdings in companies - are pooled specifically in order to manage estate planning. In practice, a pool is usually implemented as an (e)GbR ((registered) civil law partnership), or as a KG (limited partnership), or a GmbH & Co. KG (limited partnership with a limited liability company as a general partner) and, more rarely, in the form of a GmbH (limited liability company). (More about the choice of legal form later). The transferor transfers assets to the company and, subsequently, transfers stakes in this company to their descendants. The company becomes the owner of the assets. The transferor themself remains a shareholder. Apart from the transferor, children and/or grandchildren usually become shareholders. For a phased transfer of assets to the next generation, only the changes in the proportions of the shareholdings need to be subsequently taken into account.
Brief example: A mother (aged 40, two under-age children) sets up a family KG. She herself becomes the general partner and the children the limited partners. The mother contributes a multi-family house as well as a securities account and, in the contract, sets out clear rules on withdrawals, vetoes and information rights. Every 10 years, the children receive gifts of shares in tranches, which are tailored to the allowance of €400,000 per child. The mother retains control and a large portion of the ongoing cash flows through a reservation of the managing director / usufruct. Over the next few years, the assets continue to be built up in the KG. The appreciation in their values is thus tax-free and accrues directly to the children. By transferring a little income to the children, their income tax allowances can also be optimally utilised.
The advantages in detail
Implementing a family asset pool company offers many advantages. Here is a short overview of the most important ones.
- Use of personal tax-free allowances - By gradually transferring shares in the company it is possible to make optimum use of the high personal gift tax allowances (€500,000 for spouses, €400,000 for children, €200,000 for grandchildren) and to use them once more every 10 years when they become available again. It is moreover possible for children to make transfers to grandchildren and thus to allow the tax allowances to be used multiple times early on.
- Tax savings through family income splitting - Individually customisable profit participation rights allow income to be allocated specifically to family members with low levels of tax. Assets and income can be separated from each other; income allocations irrespective of the proportions of the shareholdings are possible.
- Simple and fair distribution of assets - A family asset pool allows the next generation(s) to participate in the same way in the holding of shares in the company, even if the assets themselves (e.g., properties) are of varying value or cannot be partitioned. It is thus not necessary to break up the assets in order to transfer them.
- The transferor can retain control - Capital interests can be transferred, while the transferor retains the voting rights and responsibility for the management of the company. Veto rights, pooled voting rights and other provisions in the company agreement then ensure that the transferor has control over the company. Therefore, assets can thus be transferred without having to give up influence.
- Retirement provision is possible through usufruct and reclamation rights - The transferor may reserve income (usufruct) and agree reclamation rights. This protects the own pension provision and, at the same time, reduces the children's taxable acquisition.
- Tax-free asset growth for descendants - If income is retained and assets are transferred, then the growth in assets (through repayments or appreciation in values) accrues directly and tax-free to the children.
- Involving the next generation early on - roper structuring will mean that minors can likewise participate. The contract can limit their voting rights so that they do not have to make any decisions, but are able to experience asset growth early on and gradually assume responsibility.
- Protection against the break-up of assets - In contrast to communities of heirs or joint ownership associations, no shareholder is able to demand the division of the assets. When resigning from the family asset pool, shareholders will only receive a financial settlement that is contractually set below the market value and can be spread out over a longer period of time.
- Asset protection - Creditors of the shareholders are not able to access the company’s assets, but only the entitlement to a financial settlement - which can be set at a low level in the contract. Clauses can also be added to prevent beneficiaries of compulsory portions, children-in-law, or divorcees from accessing the assets.
- Lower implementation costs - While the transfer of individual properties needs to be certified by a notary, the transfer of company shares does not require a certain form (except in the case of a GmbH). This saves administrative and transaction costs in the long term.
Disadvantages and risks
However, before setting up a family asset pool, the aforementioned advantages must be weighed against the following disadvantages.
- Substantial administrative burden - The setting up and day-to-day operation require intense assistance and support with respect to tax and company laws, which can be demanding from an organisational perspective.
- High costs - onsulting, notary, and land registry fees may be incurred. Added to this there will be ongoing tax compliance obligations and, where applicable, commercial law requirements.
- Undetermined potential for disputes - Diverging interests within the family could give rise to conflicts. That is why, in certain situations, a direct individual transfer may be more appropriate.
- Delays in assuming responsibility - If the transferor retains control for a very long time, then this can prevent the next generation from assuming responsibility at the right time.
