Works a 2-property tax
"In the case of wealth tax or a one-off wealth tax, the exemption is of little use"
Many asset owners want to keep their capital together and at the same time prevent third parties from accessing it to an undesirable extent: family members, children-in-law - but also the tax authorities. Helmut Quast, Managing Partner of HQ Trust, about possible solution ideas.
Mr. Quast, what is the most important topic for the wealthy at the moment?
The corona pandemic and its consequences, of course. It is as much about personal issues as it is about the effects of the crisis on the company or assets.
On the fortune? The share prices have long since risen again.
It's about another aspect: With its Corona aid, the state produces a huge tax debt that needs to be refinanced. There are many wealthy people who expect that, in addition to the usual taxes, a larger, one-off fee could be part of the solution to pay off this mountain of debt.
But surely there will be tax exemptions with such a wealth tax?
There is certainly a certain amount of allowance - and it is of course not known whether it will end up being 500,000 euros, one million or even five million euros. But if I am the owner of a medium-sized company that is worth 100 million euros, the tax exemption is of little use to me. Incidentally, this also applies to wealthy people who own a commercial property in a good location.
An illiquid asset ...
The challenge can be particularly great for such investors: Anyone who has a very high proportion of illiquid assets, such as real estate or investments, can run into liquidity bottlenecks in such a situation if the tax authorities demand a seven-digit amount. In some cases, it takes luck to find a bank that will give you a loan. As a rule, banks are reluctant to finance tax payments. In the worst case scenario, illiquid assets have to be disposed of in a hurry.
Could such a tax be introduced retrospectively?
No, but it can still happen relatively quickly. If the subject is discussed in Parliament today, this could already be the deadline on which it will be determined: the assets available on that date are subject to a one-off levy.
What do you advise your customers?
The wealthy should plan such decisions well in advance and address them in good time. Short-term solutions to save taxes do not make sense in any case. Regardless of the current situation, asset owners are therefore well advised to think about two topics. On the one hand, many entrepreneurs want to keep their assets together and need professional asset management for the benefit of all subsequent generations.
What's the other topic?
On the other hand, it is a matter of preventing third parties from accessing these assets or exerting influence in an undesired manner. This could include children-in-law, members of one's own family, but also the tax authorities.
This means that if someone is planning to protect their assets anyway, does they have the additional advantage that the state, which is also a third party, cannot access it?
Exactly. With such an asset protection solution, it is usually a question of either using legally permissible, preventive measures to ensure that the substance of the assets is preserved or of transforming assets into legal structures in such a way that they become assets that are “worthy of protection” from the point of view of the state . Nevertheless, the income should end up with those who should receive them even with full ownership of the assets.
How can something like this be ensured?
One possible idea is, for example, a family foundation with which the legal ownership of the assets and the income from them are separated. A major advantage of this solution is that unrelated third parties cannot access the assets. If the money has been in the newly established foundation for ten years, it is withdrawn from external claims. If this foundation is also located outside the scope of the German tax legislation, for example in Liechtenstein or Austria, the state is not doing anything.
A foundation in Liechtenstein?
I know what you are referring to. Today, however, Liechtenstein is at least as transparent as Germany. If you take a closer look, the regulations are even a little stricter than in Germany, because Liechtenstein reacted to the allegations of being the “home of tax refugees”. It's about using a legally secure location that is also easy to reach. Another advantage is that Liechtenstein has no inheritance tax and is also very advantageous from this perspective. The trick is to bring the assets into a newly established foundation in a manner that is as tax-friendly as possible. This is relatively easy for business assets, and a bit more difficult for financial or real estate assets.
What are the disadvantages of this solution?
The problem that some asset owners struggle with is a psychological one: whoever opts for such a foundation is no longer the owner of the asset. That is now in the foundation. Some wealthy people fear that a problem will arise and they will be powerless because others will decide. This is a hurdle that not everyone wants to jump over. After all, the solution is largely irreversible and cannot be easily changed.
Is there an alternative?
Other solutions can result in combination constructs in which, for example, a foundation and a limited partnership (KG) are combined - i.e. a foundation & Co KG. This approach is less static as there is only the general partner in the foundation who is irreversible. He only holds parts of the assets, the larger parts are in the KG. Since the general partner makes the essential decisions in the KG, it is trapped in this corporate structure. If you combine this with a suitable donation agreement and the right design of the foundation statutes, you can bring the most diverse goals of a family under one roof. It can be guaranteed that third parties have very difficult access to the property and that the property is also withdrawn from the tax authorities with regard to property taxes or a property levy.
How expensive are such structures?
If I can find a solution like this, it will cost money. For the establishment of the company as well as for the ongoing kills. That is why such ideas only make sense if they have a significant double-digit million amount.
Which of the two solutions is usually the better?
Which solution is the best in each case can only be clarified in detailed and comprehensive discussions with the help of specialized tax advisors and lawyers. This includes a complete inventory of the assets, goals and desires of all parties involved. The ultimate goal should always be that in the end everyone involved is satisfied with the solution found. Only then will it last in the long term.
To the author
Helmut Quast is Managing Partner and has been working for the Multi Family Office HQ Trust in Düsseldorf since 2015. He is responsible for the support and comprehensive advice of entrepreneurial families with complex assets. Helmut Quast's focus is on strategic asset and succession planning, the development of asset strategies and asset controlling.
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