Setting up a family trust in Germany

The purpose and function of a family foundation

A family foundation with legal capacity is a foundation under civil law whose primary purpose is to support one or more families or to preserve family assets. Unlike a charitable foundation, it pursues private objectives. It has no shareholders or owners, and the foundation alone is the holder of the assets contributed. The family may derive financial benefit in accordance with the articles of association and is often referred to as the beneficiary or recipient.

What objectives can be pursued through a family foundation?

A family foundation can hold together shareholdings in a business across generations and prevent the fragmentation of voting rights and assets through inheritance. It makes the family business less dependent on the changing life circumstances of individual heirs, separates operational management from the family’s financial provision, and establishes long-term family governance with a cross-generational investment horizon.

For entrepreneurial families, the most important benefit is usually the consolidation of shareholdings. If the foundation holds the stake, the shareholder position remains unchanged even in the event of a beneficiary’s death. There are no foundation shares. At most, personal claims may be inherited, provided the articles of association so stipulate.

Business succession through a family foundation

Transferring a business or a shareholding to a family foundation can help to separate ownership from management: the foundation remains a shareholder, whilst employed or external managers run the day-to-day business. This is particularly useful where several branches of the family are involved, where management roles are to be filled on the basis of professional competence, where a sale against the wishes of individuals is to be prevented, or where the family is to share only in the returns.

The foundation must not be viewed in isolation. The articles of association, shareholders’ agreement and articles of association must be coordinated with one another. Among other things, voting rights and approval requirements, dividend policy and restrictions on disposal, change-of-control clauses and tax group status must be examined. A structure that is too rigid can hamper financing and strategic development: the articles of association should safeguard the company’s continued existence without ruling out any subsequent adjustments or economically necessary disposals.

Asset protection – with important limitations

The concept of asset protection is often misunderstood. Assets that have been effectively transferred generally no longer form part of the founder’s or beneficiaries’ private assets, meaning that personal creditors cannot access the foundation’s assets solely on the basis of a claim against a family member. However, this does not constitute absolute protection.

A transfer of assets may be reviewed under the law governing compulsory shares, insolvency or the right to challenge transactions. Transfers made without consideration are contestable within statutory time limits. Anyone who transfers assets whilst aware of existing creditors or a financial crisis cannot rely on this protection. Nor do statutory share claims disappear: Section 2325 of the German Civil Code (BGB) generally takes into account gifts made within ten years prior to the opening of the succession, with their value diminishing annually. Whether the time limit begins to run depends on whether the founder has definitively relinquished economic control of the assets. A foundation is therefore particularly suitable for long-term, early succession planning, not for warding off claims that are already foreseeable.

The family is the beneficiary, but not the owner

Upon the transfer of assets, the founder ceases to be the owner. This is often underestimated in practice. Grants to family members must be in line with the foundation’s purpose and its articles of association. Typical examples include regular maintenance payments, support for education and studies, and one-off grants in specific life circumstances.

The articles of association should specify who the beneficiaries are, the criteria according to which benefits are granted, and which body makes the decisions. There are two basic models for this.

Fixed entitlements

The articles of association provide for specific entitlements to benefits. This allows beneficiaries to plan ahead, but reduces the foundation’s scope for action and may give rise to liquidity risks.

Discretionary benefits

The competent body decides on grants within defined criteria. This increases flexibility but requires clear governance and transparent decision-making principles.

A combination is often advisable: guaranteed basic provision for specific individuals, and discretionary grants for other purposes.

When a family foundation is not suitable

A foundation is often unsuitable if the founder wishes to reclaim the assets at any time or dispose of them freely, if the family requires large private withdrawals at short notice, or if the assets do not generate sufficient income and liquidity reserves. The same applies if the sale of a business is foreseeable but the articles of association prevent it, or if the structure primarily serves a short-term tax advantage. Alternatives include a family holding company, a family pool, testamentary arrangements, preliminary and reversionary inheritance, or usufruct models – including combinations thereof. The family trust is one of several structures and must be weighed up against these alternatives on a case-by-case basis.

Key Tax Principles and International Comparison

A family trust is subject to several types of tax. A distinction must be made between the endowment of the trust, its ongoing taxation, distributions to beneficiaries and inheritance tax.

1. Transfer of assets to the foundation

If a foundation is endowed during the founder’s lifetime, this generally constitutes a transaction subject to gift tax. Where a foundation is established by testamentary disposition, inheritance tax may arise. Upon initial establishment, the tax bracket is determined by the beneficiary furthest removed from the founder in the line of succession as set out in the foundation’s articles of association. The decisive factor is not who receives benefits immediately, but who may potentially benefit. In 2024, the Federal Fiscal Court confirmed that persons not yet born or who may never actually benefit must also be taken into account. A very broad definition of the group of beneficiaries increases flexibility, but may result in a less favourable tax bracket and a lower tax-free allowance. Furthermore, the same privileges do not automatically apply to subsequent endowments.

Transfer of business assets

Where a business or shares in a family-owned company are transferred, the tax relief provisions for eligible business assets may apply. Whether standard or optional relief is available depends, amongst other things, on the level of shareholding, administrative assets, wage bills and holding periods. In the case of shares in a limited company, it must be checked whether the required ownership threshold is met or whether a pooling agreement applies. Not all assets within a holding structure qualify for the exemption. The articles of association and the retention requirements must be consistent, as a subsequent sale or restructuring could jeopardise the exemption.

2. Ongoing taxation of the foundation

A family foundation with legal capacity, having its registered office or management in Germany, is generally liable for corporation tax. The rate is 15 per cent plus the solidarity surcharge. Which income is taxable depends on the structure of the assets: Exemptions or additional tax assessments may apply to income from shareholdings, whilst property, capital investments and operational activities are treated differently. Trade tax is payable if the foundation operates a business, not simply by virtue of its existence. Depending on the transaction, turnover tax, land acquisition tax and property tax may also be relevant.

3. Distributions to beneficiaries

Payments made by a non-tax-exempt family foundation to beneficiaries may be taxable as income from capital assets for the recipient, insofar as they correspond economically to profit distributions. In practice, capital gains tax must regularly be withheld and paid. The specific tax liability depends on the nature of the payment, the identity and tax residence of the recipient, and the relevant double taxation agreements. Statutory distributions, loans, remuneration to board members or the use of the foundation’s assets are assessed differently in this context. Payments to foreign beneficiaries may also give rise to withholding tax and reporting obligations.

4. Inheritance substitute tax every 30 years

Domestic family foundations are generally subject to inheritance substitute tax every 30 years. The law treats this as a generational change because the foundation’s assets themselves are not inherited. Special rules apply to the calculation: an increased allowance and a tax scale modified for family foundations are taken into account. The tax liability depends on the value of the assets on the reference date. Inheritance substitute tax must not be considered only shortly before the deadline: In the case of illiquid assets such as shareholdings in companies or property, the foundation requires a long-term financing strategy, such as liquid reserves, a coordinated distribution policy or statutory deferral arrangements. Tax planning must not jeopardise either the foundation’s purpose or the stability of the company.

5. Relocation of the founder or beneficiaries

A subsequent change of residence may have implications for income tax, gift tax, withholding tax and foreign tax law. If the founder holds significant shareholdings in limited companies prior to the transfer, exit tax and its legal structuring may already be relevant. Beneficiaries’ foreign places of residence may also alter the taxation of distributions, particularly as double taxation agreements do not always deal with foundations and their distributions in an unambiguous manner. Planning should take into account the family’s most likely countries of residence.

A German family foundation or a foreign foundation?

A foreign foundation is not automatically advantageous simply because local law appears more flexible or the tax rate lower. Legally, a German family foundation is subject to recognition and supervision under German foundation law as well as to German corporation tax, whereas in the case of a foreign foundation, its legal form and effects must be assessed in accordance with both foreign and German law. From a tax perspective, the decisive factor is that the income of a foreign foundation may be attributed to the founder under Section 15 of the German Foreign Tax Act (AStG), whilst the domestic structure remains transparent.

Governance and actual management are usually the deciding factors: the German foundation is governed by the foundation deed, the articles of association and German rules on governing bodies, whereas for a foreign foundation, actual control and administration in the country of domicile are decisive. Where benefits are paid to beneficiaries, additional withholding tax and double taxation issues arise abroad, and administration frequently involves multiple legal systems as well as additional KYC, transparency and substance requirements. The familiar German structure is often simpler to deal with for banks and authorities.

Under Section 15 of the German Foreign Tax Act (AStG), this attribution may apply to a settlor subject to unlimited tax liability or to persons entitled to receive or inherit benefits, even without a distribution. Exceptions apply in particular to certain foundations in EU or EEA countries where the assets are beyond the control of the beneficiaries and there is an adequate exchange of information. The conditions are strict and must be assessed on the basis of the actual governance and substance in the country where the foundation is established. A foreign structure may be appropriate for a genuinely international family. However, a German family foundation is often clearer from a legal and administrative perspective.

Family foundation, holding company or family pool?

It is worth comparing the different structures before setting one up.

Family foundation: Suitable for the permanent commitment of assets, cross-generational succession and governance independent of individual ownership. The disadvantages are the limited ability to reclaim assets and the long-term commitment.

Family holding company: Consolidates shareholdings under a limited company. However, the shares in the holding company remain inheritable and saleable. It is more flexible, but does not resolve the generational issue on its own.

Family pool or family company: Enables phased transfers, usufruct, the pooling of voting rights and control via the articles of association. The family remains the indirect owner and retains greater flexibility. However, issues relating to inheritance and statutory shares remain relevant.

Testamentary solution: The execution of a will, reversionary succession or legacies tie up assets for a specific period but do not achieve the institutional permanence of a foundation.

A combination is often advisable, such as a family foundation acting as a shareholder in a holding company, or a foundation alongside a more flexible family pool.