The family company as a way out of the “inheritance tax trap“

Real estate prices are rising and there seems to be no end in sight. This also means that standard land values are rising and as a consequence the inheritance tax burden in the event of a gift or inheritance.

It is therefore not surprising that many real estate owners are considering transferring their properties, or at least part of them, to their children. But how to do this if the children are too young, future development is not foreseeable or a fair transfer does not seem possible in view of differing values and value developments. A gift is often ruled out because the parents want to retain ownership. Likewise, transfer against usufruct reservation is not always sensible, since neither the parents, due to the loss of their ownership, nor the children, due to the usufruct entered in the land register, will be able to dispose of the real estate in the future.

What are the advantages of the family company?

In view of this, the establishment of a family company, also known as a "family pool", is increasingly being chosen. In this case, the real estate is first transferred to a company to be founded and then shares in the company are donated to the children. The legal charm of this solution lies in the fact that the transferor can retain the "say" in the company in the future by skilfully drafting the partnership agreement, but the children still have a share in the company. In addition, compared to a community of heirs, this arrangement offers protection against a (conceivable) partition auction by an heir and, moreover, protection against the destruction of the family assets, for example through claims for equalization of gains and through attachment by third-party creditors.

From a tax point of view, children can participate in the family assets in this way, if necessary in several steps using the inheritance tax allowances, and in this way the increasing inheritance tax burden can be counteracted.

What to consider?

The concrete drafting of the partnership agreement, starting with the question of the correct legal form of the partnership, the power of representation, profit sharing, the exclusion of the transfer of partnership shares to non-family members, the obligation to conclude prenuptial agreements and the question of the appropriate severance payment when a partner leaves, requires careful preparation and consideration in each individual case, taking into account the interests of all family members.

Thus, the family company not only opens up a wonderful opportunity to give the next generation a share in the family assets, step by step if necessary, but at the same time to reduce the inheritance tax burden to a considerable extent.