Succession planning is one of the greatest challenges for an entrepreneur. While day-to-day business operations often take center stage, arranging one’s estate is frequently neglected. Yet, a missing or inadequate succession plan can pose existential risks to both the business and the family. The entrepreneur’s will is therefore the central instrument to ensure that business succession in the event of the entrepreneur’s death is legally secure and tax-optimized.
Currently, in Germany more than 70 percent have not drawn up a will, and only about one in 100 entrepreneurs has arranged for succession within their business. These are alarming figures, especially since even existing arrangements may not be legally secure, conflict-avoiding, or sensible. For a business and its employees, however, this can have catastrophic consequences, as very few companies can withstand a years-long inheritance dispute among the heirs of the patriarch. Business insolvency is often the result. An entrepreneur’s will must therefore secure the future of the company after the owner’s death, fulfilling the entrepreneur’s responsibility toward the business, employees, and family.
Importance and Objectives of an Entrepreneur’s Will
The entrepreneur’s will differs fundamentally from a conventional personal will. While the latter primarily aims at the fair distribution of private assets, the entrepreneur’s will focuses on securing and continuing the business.
Furthermore, under German inheritance law, if an entrepreneur dies without a testamentary arrangement, their assets – including the business – pass to the statutory heirs according to Sec. 1924 of the German Civil Code (Bürgerliches Gesetzbuch - BGB). This can lead to undesired outcomes, particularly if multiple heirs are involved, as conflicts often arise over who should manage the business. An unfavorable division of assets can also trigger high inheritance taxes that may jeopardize the company’s liquidity.
The primary goals must therefore be to maintain the company’s operational capacity, prevent disputes among heirs, and minimize tax burdens. An entrepreneur’s will should always address the following aspects:
- Ensuring the continuity of the business,
- Preventing fragmentation of corporate assets,
- Complying with corporate governance provisions (e.g., succession clauses),
- Tax optimization (inheritance and gift tax), and
- Providing for the family and securing compulsory portion claims.
Typical Mistakes and Risks
In practice, the following errors frequently endanger business succession:
- Lack of alignment between the will and the company’s articles of association,
- Unclear or contradictory provisions in the will,
- Failure to consider compulsory portion claims,
- Absence of testamentary execution, and
- Inadequate tax planning.
These mistakes can lead to protracted inheritance disputes, company dissolution, or substantial tax burdens.
Key Contents of an Entrepreneur’s Will
An entrepreneur’s will should be tailored to the specific needs of the entrepreneur, the business, and the family circumstances. However, there are some fundamental elements that should not be missing in any entrepreneur’s will:
a) Regulation of Business Succession
A clear succession plan is a key element. The entrepreneur must decide who he wants to take over the business after their death. This can be a family member, a long-standing employee, or an external successor. It is crucial that the successor possesses the necessary qualifications and willingness to assume responsibility. It is advisable to involve the potential successor in company management early to assess their suitability and ensure a smooth transition.
b) Testamentary Provisions and Division of Inheritance
The will should include clear instructions for asset distribution, covering not only the business but also other assets. A clear allocation can prevent disputes among heirs—for example, it could make sense to transfer the business to one heir while providing financial compensation to others.
Another aspect that should be observed is the regular review and updating of the entrepreneur’s will. Changes in personal or business circumstances, as well as new legal regulations, may require adjustments. An outdated will can cause problems in critical situations and jeopardize succession planning.
Corporate Law Considerations
Corporate law provisions are also highly relevant when drafting an entrepreneur’s will. There are different business rules for the inheritance of company shares in the different types of companies. Entrepreneurs should ensure that the will aligns with the articles of association to avoid legal conflicts and invalid succession arrangements.
a) GmbH (Limited Liability Company)
The inheritance of GmbH shares is generally possible. However, succession clauses, approval requirements, or buyout rules in the articles of association may restrict or regulate the transfer of shares upon death. Therefore, it is essential to coordinate the will with the articles of association.
b) Partnerships
For partnerships such as limited partnerships (KG) or general partnerships (oHG), legal succession can be problematic. Without provisions in the partnership agreement, a partner’s share passes to the remaining partners upon death. Continuation or entry clauses in the agreement are essential if inheritance succession is desired.
c) Stock Corporations
Shares are generally inheritable. However, the articles of association may include restrictions (so-called Vinkulierung) limiting transfers to specific persons.
Structuring the Entrepreneur’s Will
The will should be tailored to family and business circumstances, with particular attention to:
a) Appointment of heirs and legacies
It should be clearly defined who inherits the business assets. Appointing a sole heir for the business shares is often recommended to avoid fragmentation. Other family members may receive legacies or compensation payments.
b) Testamentary Execution
Appointing a testamentary executor is particularly important. An executor can secure business continuity, oversee the succession plan’s implementation, and manage compulsory portion claims.
c) Compulsory Portion Claims
Heirs entitled to compulsory portions can create substantial liquidity burdens for the company. Forward-looking planning, such as waiver agreements or settlement provisions, is therefore recommended.
Tax Considerations
Considering the tax implications is another critical aspect, as inheritance taxes can significantly complicate business succession. The provisions of the German Inheritance Tax Act (Erbsteuergesetz - ErbStG) are especially relevant. For example, certain business assets may benefit from tax relief (exemption rules under Sec. 13a, 13b ErbStG) if the business continues and wage sum and retention requirements are met. Timely and careful planning is essential to maximize these benefits, including:
- Identifying eligible assets,
- Structuring succession to meet wage sum requirements, and
- Avoiding detrimental arrangements (e.g., transferring non-eligible administrative assets).
Planning for Incapacity
In addition to succession planning for the event of death, the entrepreneur should also provide for cases where they are unable to manage the business due to illness or accident. This can be achieved through a power of attorney or care directive. A comprehensive power of attorney and a specialized entrepreneur’s authorization ensure that the business can continue even if the owner is temporarily incapacitated.
Conclusion and Recommendations
The entrepreneur’s will is a central instrument for succession planning. It requires careful, individualized design, taking into account corporate, inheritance, and tax law frameworks. Entrepreneurs should regularly review their will to ensure it reflects current circumstances and adjust it if necessary. The following checklist can help:
- Clear appointment of heirs for business shares,
- Regulation of compulsory portion claims,
- Appointment of a testamentary executor,
- Power of attorney and entrepreneur authorization,
- Tax optimization (inheritance tax), and
- Regular review and adjustment.
The entrepreneur’s will is an indispensable tool for any entrepreneur wishing to secure the future of their company and the financial protection of their family and employees. It enables clear succession arrangements, minimizes disputes among heirs, and helps reduce tax burdens. At the same time, it allows the entrepreneur to place their life’s work in the right hands and ensure it continues according to their intentions. Given the far-reaching consequences of a missing or inadequate will, it is essential to address this topic early and seek professional advice. Drafting an entrepreneur’s will is a complex task requiring careful planning and legal expertise. Only then can the company remain successful in difficult times, securing the livelihood of many.
Dr. Thomas Hausbeck, LL.M., is available to assist with any questions regarding an entrepreneur’s will.
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