Ruling of the Federal Fiscal Court (BFH) of February 28, 2024, File No.: II R 25/21
Family wealth should ideally be passed on to the next generation or generations with minimal tax burdens. Establishing a family foundation can be helpful in protecting assets. However, a recent ruling by the Federal Fiscal Court (BFH) on February 28, 2024, (File No.: II R 25/21) could negatively affect the gift tax for family foundations. The BFH has ruled that when transferring assets to a family foundation, the “most distant beneficiary” who benefits financially from the foundation, such as grandchildren, great-grandchildren, or even unborn children, must be taken into account for determining the tax class and exemption.
Establishing a family foundation can be advisable to preserve family wealth over generations and protect it from dissolution. The foundation can offer various advantages, such as protecting assets from creditors or, under certain conditions, benefits in inheritance tax, according to the law firm MTR Legal Rechtsanwälte, which advises in areas such as tax law and inheritance law.
An Unborn Child Can Be the “Most Distant Beneficiary”
However, the recent decision by the Federal Fiscal Court may lead to disadvantages in gift tax. In its ruling of February 28, 2024, the BFH determined that, in the case of asset transfers to a family foundation, the “most distant beneficiary” to the donor is the person who, according to the foundation’s bylaws, can potentially receive benefits from the foundation. It does not matter whether this beneficiary is already born at the time of the foundation’s establishment, will ever be born, or actually receives financial benefits from the foundation.
Since different tax exemptions apply for gift tax depending on the degree of kinship, the BFH’s ruling should definitely be considered in the foundation’s bylaws, and the bylaws should be amended if necessary, to ensure that assets are transferred to the foundation in a tax-efficient manner and without incurring disadvantages in gift tax.
Couple Establishes Family Foundation
In the case before the BFH, a couple established a family foundation. According to the foundation’s bylaws, the purpose of the foundation is the adequate financial provision for the couple, their daughter, and further descendants, who should only be considered after the passing of the previous generation. The taxable value of the assets transferred to the foundation among those involved amounted to 443,000 euros.
The tax office determined that the further descendants listed in the foundation’s bylaws were the “most distant beneficiaries” for the purposes of assessing gift tax and, accordingly, set a tax exemption of 100,000 euros. This resulted in a gift tax of around 60,000 euros.
Dispute Over Tax Exemption
The wife appealed this decision. She argued that for the purposes of gift tax, the tax exemption for children in the amount of 400,000 euros should apply. It was clear from the bylaws that only she, her husband as the founders, and their daughter were entitled. If their daughter were to have children, they would also be beneficiaries, but only after the death of the daughter. Potential descendants would not be beneficiaries upon their birth but only after the death of the daughter. Therefore, the daughter, as a beneficiary, should be entitled to a tax exemption of 400,000 euros, which should be taken into account when determining the gift tax. This would result in only about 3,000 euros of gift tax.
However, the woman’s appeal was ultimately unsuccessful. The BFH decided that the gift tax should be set according to tax class I for descendants of children and stepchildren. Thus, a tax exemption of 100,000 euros was to be considered.
The tax office and also the Lower Saxony Fiscal Court had rightly determined that, according to the foundation’s bylaws, possible great-grandchildren should be seen as the “most distant beneficiaries” of the founders. It did not matter whether they were already born or ever received financial support from the foundation, according to the BFH.
Foundation’s Bylaws Are Decisive
Who should be considered the “most distant beneficiary” in an individual family foundation must be derived from the formulation in the foundation’s bylaws. Thus, the founder has the option to determine the circle of potential beneficiaries themselves, the BFH emphasized.
The ruling shows that great care should be taken in formulating the bylaws of a family foundation to optimize tax exemptions. Therefore, it is also advisable to regularly review and, if necessary, adjust existing bylaws.
MTR Legal Rechtsanwälte advises on issues related to gift tax and other tax law topics.
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