The limited-term foundation – the smaller sibling of the traditional foundation

Limited-term foundations offer an attractive alternative to perpetual foundations. In a limited-term foundation, the assets are not preserved in perpetuity; they can be spent within a defined period or for a specified purpose. Unlike traditional foundations, use is not restricted to income from the endowment. As a rule, the foundation’s assets themselves may be drawn down to pursue the foundation’s purpose. A minimum term of ten years is generally required for official recognition.

Reasons to choose a limited-term foundation

• Modest endowment capital, such that income alone would not sustainably fund the purpose
• The purpose requires sizable outlays that cannot be financed from income
• The founder wishes to pursue a specific purpose only for a limited period (possibly serving on the board during that time)
• The purpose is tied to a specific, time-limited project

Advantages of a limited-term foundation

Establishing a limited-term foundation offers you several advantages:

This form can be ideal if you plan to endow the foundation with a smaller asset base whose investment income would not adequately support the purpose.

• Greater impact potential because assets are not permanently tied up
• Defined time commitment, which can make recruiting board members easier
• Lower administrative burden and reduced liability exposure because there is no permanent endowment to maintain
• Less complex succession rules for governing bodies (board and advisory board) and typically fewer oversight provisions, as the founder can, ideally, serve on the board for the entire term, potentially obviating additional supervision

Structure and design

There are several design options regarding legal form and the start of the spend-down phase. These should be assessed on a case-by-case basis.
Legal form:

• independent limited-term foundation with legal capacity and
• limited-term foundation established as a fiduciary (non-independent) foundation.

When the spend-down may begin:

• The foundation is established from the outset as a limited-term foundation, or
• The charter of a traditional foundation provides from the outset for a later conversion into a limited-term foundation,

1. either by stipulating when conversion must occur (for example, upon the founder’s death) or
2. by setting conditions under which conversion may take place.

• In exceptional cases, conversion of a perpetual foundation into a limited-term foundation may be possible even if the original charter did not foresee it.

Tax benefits

Limited-term foundations can benefit from tax relief, though to a somewhat lesser extent than perpetual foundations.

• Upon establishment, general donation deductions of up to 20 % of the total amount of income may be claimed under Section 10b German Income Tax Act
• Subsequent donations to the foundation may be deductible within statutory limits
• Exemptions from inheritance and gift tax may be available in certain cases if the transfer occurs within 24 months of the decedent’s death
• If the foundation pursues tax-privileged purposes (Section 51 German Fiscal Code), it may benefit from exemptions from corporation tax and trade tax; real property tax relief may apply under additional conditions

Tax difference compared with a traditional foundation

The increased special deduction for endowments to the permanent endowment of a foundation does not apply to limited-term foundations (Section 10b(1a) Income Tax Act), because they do not use their assets primarily to generate income but to fulfill their purposes directly.

Advantages at a glance

PLANNING CERTAINTY – IMPACT – DEFINED TIME HORIZONS – MINIMIZED LIABILITY FOR GOVERNING BODIES – REDUCED ADMINISTRATIVE BURDEN – FLEXIBILITY

Recommended next steps

You do not need millions to engage in charitable work. A limited-term foundation can be established with a smaller budget. Feel free to contact us. We will work with you to develop a solution tailored to your needs.