What is it about?
Not only during Corona times there are entrepreneurial risks: All of a sudden, the entrepreneur (E) is exposed to considerable personal claims for damages or for example tax receivables.
Or, at the end of a profitable professional life, E thinks about how the real estate assets he or she has acquired can be passed on to the children without them having to sell because of the expected tax payments.
What is Asset Protection?
If E comes into financial difficulties, there is the threat of enforcement measures and/or insolvency. Creditors can in general enforce against all assets of the debtor, i.e. accounts, deposits, real estate and company shares. Insolvency administrators have the right to liquidate all these assets. Transactions aimed at preventing this can be contested under the German Act on Contestation with various deadlines:
- if they have the aim of disadvantaging creditors, within ten years;
- if they are free, within four years; or
- if they are arranged with related parties, including companies, against payment, within two years.
Asset protection comprises all measures which prevent access by creditors or the insolvency administrator.
Implementation of Asset Protection With a Family-Owned Company
Any of E’s assets can be contributed to a family-owned company. Then, it can no longer be claimed by the creditor or the insolvency administrator. These can only – in the worst case – seize E’s share in the family-owned company. Under the provisions of the partnership agreement, E has to leave the company in this case. However, the wording of the contract can only specify a small compensation for this, which the creditors or the insolvency administrator can then still access.
The Advantage of the Family-Owned Company
E can secure the following rights in the family-owned company in a way that is completely tax-neutral:
- all income or any portion thereof;
- the right to withdrawals;
- the exclusive right to control acquisitions and sales.
Tax Matters During Establishment
The German gift tax (“Schenkungssteuer”) has to be taken into account. However, it can usually be avoided or optimized by means of structural measures. Every ten years, the tax allowances can be fully claimed by each spouse, and shares can be transferred to children without them having to participate in the income.
The earlier E thinks about the formation of a family-owned company and sets it up, the better! If there are already concrete risks in sight, this makes the measures considerably more difficult. The danger of a contestation by creditors or insolvency administrators is much greater in this case. A security for E in the event of the loss of his/her shares in the family-owned company – after a seizure and confiscation of the partnership share – can be agreed in a marriage contract. In appropriate cases, the establishment of the family-owned company can be combined with (fiscally) interesting arrangements such as a „Güterstandsschaukel“ (procedure of switching from a German community of accrued gain to a separation of property and back) or the transfer of the owner-occupied family home.
The establishment of a family-owned company is particularly interesting for entrepreneurs, but also for all other families with assets. It combines the protection from creditors with the possibility of numerous tax arrangements and an optimized transfer of assets to the next generation – or even the generation after next.