Family foundation: what it is and when it pays off

What is a family foundation?

The family foundation is not a separate legal form. It is a foundation with legal capacity under civil law whose purpose is not the public good but the family: providing for it, preserving the family assets or ensuring the continuity of a family business. A foundation has no shareholders, no members and no heirs. It owns itself.

Four parties are involved in a family foundation:

• Founder: contributes the assets and sets out in the act of establishment (Stiftungsgeschäft) and the articles what they are to be used for.
• Board: runs the foundation, manages the assets and decides on benefits. A board is mandatory (Sec. 84 BGB).
• Beneficiaries (Destinatäre): usually the spouse, children and later descendants, who receive benefits under the articles.
• Foundation authority: recognises the foundation and supervises it; for family foundations, supervision is restricted depending on the federal state.

A distinction is made between the private family foundation, which mainly manages money, securities or real estate, and the business-related family foundation, which holds shares in a family business and thus secures succession.

Compared with the charitable foundation, the difference is fundamental: the charitable foundation is tax-exempt, and the founder can deduct contributions as special expenses. The family foundation is fully taxable. You will find a comparison table of both types on the page set up a foundation.

How does a family foundation work?

The process is always the same:

1. The founder establishes the foundation with an act of establishment and articles and dedicates assets to it.
2. The foundation authority of the federal state in which the foundation has its registered office recognises it. Only then does it have legal capacity (Sec. 80 BGB).
3. The founder transfers the assets to the foundation. From now on, they belong to it.
4. The board manages the assets. The income, such as rent, dividends or interest, flows to the beneficiaries according to the rules of the articles.
5. The foundation supervisory authority checks whether the foundation follows its articles.

Important: the endowment capital (Grundstockvermögen) is usually preserved. The income is distributed, not the substance. The founder can make themselves a member of the board and thus retain influence over the management during their lifetime, but not over ownership.

Advantages of the family foundation

The assets stay together. Because there are no shares, no one can sell, terminate or bequeath their share. A business or a real estate portfolio is not divided among heirs.

Succession is regulated. The articles determine who runs the foundation and who receives what, even for generations not yet born. In the case of businesses, the foundation becomes the permanent shareholder.

Protection from the creditors of individual family members. Anyone who holds no share has nothing their creditors could seize. If the articles do not provide for an enforceable claim to distributions, attachment of benefits usually fails as well. The founder's creditors can only challenge the transfer within the periods of the Avoidance Act, in principle 4 years for gratuitous transfers (Sec. 4 (1) AnfG).

Protection on divorce and in inheritance disputes. The assets fall neither into an equalisation of accrued gains of the beneficiaries nor into a community of heirs.

Compulsory portion. The transfer to the foundation can trigger claims to supplement the compulsory portion (Pflichtteil). Under Sec. 2325 (3) BGB, these melt away over 10 years, by one tenth each year. Only a waiver of the compulsory portion by the relatives provides planning certainty.

Tax planning. On establishment, the tax class privilege applies, ongoing income is subject to corporation tax instead of income tax, and the substitute inheritance tax can be planned for. Even so, the family foundation is not a tax-saving model (see the section on taxes).

Disadvantages of the family foundation

The assets are gone for you. After the transfer, they belong to the foundation. There is no provision for transferring them back to the founder; you cannot simply "get out" again.

Substitute inheritance tax every 30 years. The foundation pays even if no one in the family dies. For assets with low income, such as owner-occupied real estate, the liquidity for this must be planned in.

Rigid articles. After recognition, the purpose and basic rules can only be changed under narrow conditions (Sec. 85 BGB), and every amendment to the articles requires the authority's approval (Sec. 85a (1) BGB). What you do not regulate today often cannot be added later.

Hardly possible to dissolve. A foundation is designed to last. It can only be dissolved in the cases of Sec. 87, 87a BGB.

Supervision. Depending on the federal state, the foundation supervisory authority checks more or less closely. Amendments to the articles and dissolution always require the authority's approval (Sec. 85a (1), Sec. 87 (3) BGB).

Administrative costs. Bookkeeping, annual financial statements, tax returns, board meetings with minutes: the foundation is a separate legal entity with its own obligations.

Conflicts. Family branches treated unequally, unclear roles on the board or a lack of information can create new disputes. Good articles therefore regulate bodies, information rights and succession on the board.

Aspect	Advantage	Disadvantage	Legal basis
Ownership	assets are pooled, no sale of shares	founder loses ownership permanently	Sec. 80, 82a BGB
Inheritance	no community of heirs, no splitting up	substitute inheritance tax every 30 years	Sec. 1 (1) no. 4 ErbStG
Establishment	tax class privilege based on the most distant beneficiary	gift tax is in principle due	Sec. 15 (2) ErbStG
Ongoing income	corporation tax instead of personal income tax	distributions are taxed again at the recipient	Sec. 23 KStG, Sec. 20 (1) no. 9 EStG
Creditors	protection once the avoidance periods have expired	protection does not take effect immediately	Sec. 4 AnfG
Compulsory portion	supplementary claim melts away over 10 years	claims possible in the first years	Sec. 2325 (3) BGB
Flexibility	the founder's will has effect over generations	amendment of the articles only to a limited extent	Sec. 85 BGB
Termination	permanent existence	dissolution only within narrow limits	Sec. 87, 87a BGB

Taxes: how is a family foundation taxed?

The tax statements in this section are an overview. The calculation for your family belongs in the hands of your tax adviser.

Occasion	Type of tax	Rate or allowance	Legal basis
Establishment and initial endowment	gift or inheritance tax	tax class based on the most distant beneficiary, e.g. class I with a €400,000 allowance if only children are beneficiaries	Sec. 15 (2) sentence 1, 16 ErbStG
Later additional endowment	gift or inheritance tax	tax class privilege may not apply, then class III	Sec. 15 ErbStG
Ongoing income	corporation tax	15 per cent plus solidarity surcharge, allowance €5,000	Sec. 23, 24 KStG
Commercial activity	trade tax	only for a commercial business, not for pure asset management	GewStG
Distribution to beneficiaries	income tax	investment income	Sec. 20 (1) no. 9 EStG
Every 30 years	substitute inheritance tax	allowance €800,000, class I tax rate for half of the assets	Sec. 1 (1) no. 4, Sec. 15 (2) sentence 3 ErbStG

Gift or inheritance tax on establishment

The transfer to the foundation is a gift or an acquisition upon death (Sec. 7 (1) no. 8, Sec. 3 (2) no. 1 ErbStG). Normally, tax class III would apply because the foundation is not related to you. For family foundations, however, the tax class is based on the degree of relationship to the most distant beneficiary under the articles (Sec. 15 (2) sentence 1 ErbStG). If only children are beneficiaries, class I with a €400,000 allowance applies. If grandchildren or future generations are also included, only a significantly lower allowance may apply, down to €100,000.

A pitfall: the privilege applies to the establishment. Anyone who starts small and later tops up by way of an additional endowment (Zustiftung) or by will risks tax class III with an allowance of only €20,000 for the additional endowment.

Ongoing taxation

As a legal entity, the family foundation is subject to corporation tax (Sec. 1 (1) no. 4 KStG). The rate is currently 15 per cent plus the solidarity surcharge; from 2028, it falls by one percentage point a year to 10 per cent from 2032 (Sec. 23 (1) KStG). An allowance of €5,000 a year remains tax-free (Sec. 24 KStG). If the foundation only manages assets, no trade tax is due (Sec. 2 (3) GewStG).

Distributions to the family

Benefits from the foundation to the beneficiaries are investment income for them (Sec. 20 (1) no. 9 EStG). They are generally subject to the flat-rate withholding tax of 25 per cent plus the solidarity surcharge (Sec. 32d (1) EStG). The income is therefore taxed twice: at the foundation and at the recipient.

Substitute inheritance tax every 30 years

Every 30 years, the law assumes a fictitious inheritance (Sec. 1 (1) no. 4 ErbStG), for the first time 30 years after the first transfer of assets to the foundation. A transfer to two children is assumed: the children's allowance is granted twice, i.e. €800,000, and the class I tax rate is based on half of the taxable assets (Sec. 15 (2) sentence 3 ErbStG). On application, the tax can be paid in 30 equal annual instalments that include repayment and interest of 5.5 per cent (Sec. 24 ErbStG). The relief rules apply to privileged business assets (Sec. 13a (11) ErbStG).

Worked example (simplified): after 30 years, the foundation holds €3 million in assets. After deducting the €800,000 allowance, €2.2 million remains taxable. The tax rate for half, i.e. for €1.1 million, is decisive; in tax class I this is 19 per cent. The substitute inheritance tax is therefore €418,000, payable on application in 30 annual instalments including interest.

Can you save tax with a family foundation?

Sometimes, but this is rarely the main reason. The foundation does not enjoy exemptions like a charitable foundation. Advantages tend to arise from the overall structure: a lower corporation tax rate on retained income, the tax class privilege, and a substitute inheritance tax that can be planned for instead of unplanned inheritances. Against this stand gift tax on establishment, the double taxation of distributions and the substitute inheritance tax. Anyone who wants the foundation only for tax reasons should have the calculation done very carefully.

Family foundation and real estate

Real estate is one of the most common assets in family foundations. The reasons:

• The portfolio stays together and is not divided among heirs or sold at a forced auction.
• Rental income of an asset-managing foundation is subject to corporation tax, not trade tax.
• The foundation can let family members use flats if the articles provide for this.

The disadvantages for real estate:

• The transfer requires a notary and a change of entry in the land register, usually plus a valuation report.
• Rented properties generate ongoing income, owner-occupied properties do not. The substitute inheritance tax must still be paid.
• A family flat that the foundation provides free of charge can count as a benefit to beneficiaries for tax purposes.
• If the property is transferred free of charge, this is usually exempt from real estate transfer tax (Sec. 3 no. 2 GrEStG), but if the foundation takes over loans, real estate transfer tax may be due for that part (Sec. 3 no. 2 sentence 2 GrEStG).
• Whether there is a risk of commercial property dealing depends on the number of sales.

How does the family get money from the foundation?

In three ways:

• Distributions under the articles: the articles determine who receives what and when, for example regular payments or benefits for education, illness or starting a business. Whether the beneficiaries have a claim or the board decides at its discretion is an important design question, also for protection from creditors.
• Remuneration for board work: family members on the board can receive reasonable remuneration if the articles provide for this.
• Loans: possible, but only on arm's length terms.

It is not possible to withdraw the endowment capital at will. Anyone who wants to keep open the option of getting assets back later is wrongly advised with a foundation.

From what level of assets does a family foundation pay off?

The law does not name a minimum sum. It only requires that the permanent and sustainable fulfilment of the purpose appears assured (Sec. 82 BGB). The figures given for what the foundation authorities expect in practice vary widely, ranging from around €50,000 to recommendations of over €1 million.

More important than a figure is the calculation behind it:

1. What income do the assets realistically generate a year?
2. What do administration, bookkeeping, tax advice and corporation tax cost?
3. What is left for the family after that?
4. How will the substitute inheritance tax be paid in 30 years?

If hardly anything is left for the purpose after costs, the foundation is too small. A family GmbH, a trust foundation (Treuhandstiftung) or testamentary solutions are then often more suitable.

Self-test: is a family foundation right for you?

If you can tick most of the points, a closer review is worthwhile.

Foundation supervision by federal state

Since 1 July 2023, the civil law on foundations has been regulated uniformly at federal level in the BGB. How strict supervision is, however, is still governed by the state foundation acts. Many federal states exempt foundations serving private purposes wholly or partly from supervision. Examples:

Federal state	Scope of supervision over family foundations	Legal basis
Bavaria	no supervision for family foundations	Art. 10 (1) Bavarian Foundations Act
Berlin	limited to the composition of the foundation's bodies	Berlin Foundations Act
Hamburg	only ensuring that existence and activity do not run counter to the public interest	Hamburg Foundations Act
Hesse	only ensuring that existence and activity do not run counter to the public interest	Hesse Foundations Act
North Rhine-Westphalia	limited to safeguarding public interests protected by law	Foundations Act of North Rhine-Westphalia

Recognition itself remains mandatory even where ongoing supervision does not apply. The foundation's registered office determines which authority is competent.

Alternatives: family GmbH, holding company, executorship

A family foundation is not the only way to keep assets together.

Criterion	Family foundation	Family GmbH or holding company	Will with long-term executorship
Control	board under the articles, founder can be on the board	shareholders and managing director	executor
Ownership	foundation, no one holds shares	family members hold shares	heirs, with restricted power of disposal
Ongoing taxes	corporation tax, distributions taxed at the recipient	corporation tax and trade tax, distributions taxed at the shareholder	income tax of the heirs
Taxes on inheritance	substitute inheritance tax every 30 years	inheritance tax on each inheritance from a shareholder	inheritance tax on each inheritance
Set-up costs	articles, recognition, notary if applicable	formation with notary and commercial register	will, notary if applicable
Flexibility	low	high, partnership agreement can be amended	low, but limited in time
Protection against splitting up	high	medium, shares can be inherited and sold, the agreement can restrict this	high for the duration of the executorship
Dissolution	only within narrow limits	by shareholder resolution	ends after 30 years at the latest, with exceptions

The family GmbH offers more flexibility and can be dissolved, but protects less against splitting up because shares can be inherited and sold. A holding company is suitable above all if existing shareholdings are to be pooled. You can form it at Recht 24/7 as a holding company for €599 net or as a GmbH for €319 net, each plus VAT, notary fees, court fees, IHK and trade registration costs. Whether your will fits your succession planning is checked by a lawyer as part of will review for €169 incl. VAT.

Family foundations abroad: Liechtenstein and Austria

Family foundations in Liechtenstein or Austria are often mentioned because of less supervision and greater flexibility. For founders and beneficiaries resident in Germany, this rarely brings advantages: the income of a foreign family foundation can be attributed directly to them under the Foreign Tax Act (Sec. 15 AStG), and the transfer is subject to German gift tax. There is an exception for foundations in the EU or EEA if the assets are legally and actually removed from the family (Sec. 15 (6) AStG). Anyone considering a foreign foundation needs advice in the individual case, including on foreign law.

Can a family foundation be dissolved?

Only in exceptional cases. The board is to dissolve the foundation if it can definitively no longer fulfil its purpose permanently and sustainably; the articles can designate another body for this, and dissolution requires the authority's approval (Sec. 87 BGB). The authority is to terminate the foundation if the competent body does not decide in time (Sec. 87a (1) BGB). The remaining assets go to the persons entitled to them under the articles (Anfallberechtigte), and if there is no such provision, to the treasury of the federal state (Sec. 87c (1) BGB).

Dissolution also costs tax: the transfer of the assets to those entitled is deemed a gift (Sec. 7 (1) no. 9 ErbStG). Anyone who does not want to rule out a later dissolution must provide for it in the articles from the outset.

Setting up a family foundation in brief

To set one up, you need a written act of establishment, articles with purpose, name, registered office and rules on forming the board, the dedication of assets (Sec. 81 (1) BGB) and recognition by the foundation authority of your federal state. A notary is only needed if real estate or company shares are contributed. The guide setting up a family foundation explains the process, documents, costs and duration in detail.