07-02-2025 Article

Foundation – really? A little "Foundation 1x1"

Foundation: What is it?

A foundation is a separate legal entity that has no shareholders or members and is not established for a specific period of time, but "for eternity" - with the purpose of using its income for the purposes specified in the articles of association. The foundation is tax-privileged if it pursues exclusively and directly charitable, benevolent or ecclesiastical purposes (so-called charitable foundation). The foundation may only use a small amount of income (maximum 1/3) to provide family members with appropriate care.

Equally, a foundation can also pursue exclusively self-serving purposes, for example the permanent financial provision of family members (so-called self-serving foundation or family foundation). As the family foundation does not pursue any tax-privileged purposes, the tax privileges of the charitable foundation do not apply. Depending on the federal state, supervision by the foundation authorities is limited at best.

In addition to purely charitable or exclusively self-benefiting foundations, mixed forms or structures that combine both purposes are also possible.

From a legal and tax perspective, the foundation form is a highly interesting design option - be it for long-term asset retention, for the realization of charitable goals or for succession planning.

Start-up capital: how much is required?

When a foundation is set up, it is endowed with so-called basic assets, which must be maintained permanently. According to the legal requirements, the permanent and sustainable fulfillment of the foundation's purpose must be ensured (unless it is a consumable foundation, see below). The income from the basic assets is used for the purpose. The amount of the endowment fund is therefore not calculated as a lump sum, but depends on the specific financial requirements for pursuing the purpose in accordance with the articles of association. As a rule, it will not make sense to endow a foundation with basic assets of less than € 250,000; in principle, at least € 500,000 should be available. In addition, the practices of the foundation authorities must be taken into account, whose requirements vary from state to state. Subsequent increases in the basic assets are generally possible.

Foundation bodies: Who has the say?

The functional organization of the foundation is the responsibility of the founder. The founder also determines which bodies the foundation should have as part of the establishment documents. According to the legal requirements, the foundation must have at least a board of directors and may have an advisory board. Details on this, in particular the question of which rights the board of directors is entitled to and to what extent rights are delegated to the advisory board or monitoring tasks are transferred, are regulated by the founder in the foundation charter when the foundation is established. The advisory board is often only established after the founder has left the foundation or, in any case, their rights vis-à-vis the board of directors are strengthened so that the external board of directors can be effectively monitored by the advisory board. The number of board and advisory board members will also depend on how extensive the foundation's activities will be in the future.

In addition, a clear arrangement for succession on the board should be made when the foundation is set up – especially for when the founder leaves this body – in order to ensure the foundation's ability to act in the long term.

Establishing the foundation: when is the right time?

The foundation can be set up during the founder's lifetime, but also by testamentary disposition. There are no special formal requirements for setting up a foundation during your lifetime. The foundation deed and the foundation statutes must be submitted to the responsible foundation authority for establishment. The foundation then comes into existence upon recognition by the foundation authority.

If the foundation is only to be established in the event of the founder's death, the formal requirements for testamentary dispositions must be observed (handwritten or notarized). If the foundation is notarized in the event of death, the fees are based on the value of the assets transferred to the foundation. It is therefore advisable instead to set up a foundation with a smaller amount of basic assets during your lifetime and to stipulate in your will that a further item from your estate is to be donated to the foundation, for example to increase the basic assets. Establishing a foundation during one's lifetime also has the advantage for the founder that, as a board member, he can control and thus shape the foundation's activities, especially at the beginning. This has the positive effect for the later members of the board that they can focus on the founder's will, which has already been lived out, and align their actions accordingly.

Perpetuity: Foundation and no end? The endowment foundation

In principle, a charitable foundation is to be recognized if the foundation business meets the legal requirements and the permanent and sustainable fulfilment of the foundation's purpose appears to be ensured. As an exception to this, it is possible to set up a so-called consumer foundation. This must be recognized if the articles of association provide for a term of at least 10 years. Instead of the basic assets, the foundation assets of an expendable foundation consist only of other assets that are to be used to fulfill the foundation's purpose in accordance with the provisions of the articles of association. In contrast to the "perpetual" foundation, not only the income but the entire foundation assets may be used over a period of ten years for the foundation's purpose in accordance with the provisions of the articles of association.

The foundation can be structured as a consumable foundation when it is set up, or alternatively, the articles of association can optionally provide for conversion into a consumable foundation if certain conditions are met.

There are a number of reasons that may speak in favor of a consumption foundation. In view of the persistently low interest rates, charitable purposes can often not be realized exclusively from the income. In some cases, the foundation authorities even recommend a consumable foundation for planned basic assets of less than 1 million euros. This type of foundation is also suitable for projects or plans that are designed for a specific duration (e.g. a scientific research project or the construction of a hospital) or if a project is to be funded for a specific period with precisely defined amounts. On the other hand, the disadvantage is that the consumer foundation cannot claim the tax benefits of a permanent foundation.

Conclusion

The establishment of a foundation can be considered if free assets of at least €500,000 are available.

If the foundation is to be tax-privileged, it must be a charitable foundation whose purpose is exclusively and directly for the common good.

Establishing a foundation by last will is possible, but only recommended to a limited extent.

The foundation can also be set up as a consumption foundation, with the advantage that the capital contributed can be used as other assets over a period of 10 years for the purposes set out in the articles of association.

The above explanations already show this: Careful planning and individual advice, particularly with regard to the right type of foundation, are essential when setting up a foundation in order to optimally implement personal goals and avoid legal and tax pitfalls.

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