GERMANY Trends and Developments Contributed by: Tanja Schienke-Ohletz, Flick Gocke Schaumburg
Compulsory portion claims and supplementary compulsory portion claims If assets are transferred to a foundation by last will and testament and a person entitled to a compulsory portion (eg, descendant, spouse, parent) is thereby excluded from the succession, they can assert a claim for a compulsory portion in cash against the foundation. The amount of the compulsory portion corresponds to half the value of the statutory inherit - ance. The foundation must satisfy this claim in cash; its charitable status is irrelevant in this regard. This may force the foundation to sell assets. The so-called supplementary compulsory portion claim must also be taken into account. This is a claim by the beneficiary of the compulsory portion against the heir for a supplement to their compulsory portion if the testator made gifts to third parties during their lifetime, thereby reducing the estate. This is to prevent the estate from being reduced during the testator’s lifetime in order to circumvent the compulsory por - tion. This also applies to asset transfers to a charitable foundation or family foundation. The beneficiary of the compulsory portion has the right to add gifts made by the testator in the last ten years before their death to the estate in order to calculate their compulsory portion. However, this claim expires ten years after the donation to the foundation and decreases by 1/10 each year. The start of the ten-year period is problem - atic if the testator can still reclaim the assets after the donation or benefits economically from the founda - tion (eg, through usufruct). In such a case, there is a risk that the compulsory portion supplement claim will remain in full and will not diminish. Overall, it is therefore advisable to agree on compul - sory portion waivers before a notary when transfer - ring art to a charitable foundation. However, this must be done voluntarily by those entitled to a compulsory portion. Case study A testator and art collector establishes a charitable foundation and names it as the sole heir to their art collection in their will. The aim is to preserve the col - lection as a complete inventory and make it accessi - ble to the public. The beneficiaries of the compulsory portion, on the other hand, can assert claims to the
compulsory portion. The beneficiaries of the com - pulsory portion are not entitled to the surrender of individual works, but only to a monetary claim. This claim is directed against the heir – ie, against the foun - dation. The amount of the compulsory portion is half of the statutory inheritance share, calculated on the basis of the value of the estate at the time of death. In the case of highly valued art, the compulsory por - tion claim can reach considerable sums. The founda - tion is geared towards the permanent preservation of the collection. The compulsory portion claim requires short-term liquidity. The sale of key works may conflict with the founda - tion’s purpose. Art collections in particular are subject to valuation uncertainty. Beneficiaries of compulsory portions have an interest in the highest possible mar - ket values, as the claim is based on a percentage of the estate value. This often leads to disputes between experts. Transfer of art to a foreign foundation A donation (gift or inheritance) of art to a foreign char - itable foundation is exempt from inheritance or gift tax if, at the time of taxation, the receiving founda - tion would meet the same requirements that would apply to a domestic tax-privileged corporation and the country of residence provides administrative assistance in tax collection. Since the requirements for charitable status vary from jurisdiction to jurisdic - tion and the requirements under German law are very high, it is extremely unlikely that a foreign organisation would meet these requirements. Nevertheless, donations to a foreign charitable insti - tution may be tax-exempt if the donation itself is exclusively dedicated to ecclesiastical, charitable or benevolent purposes. A clear designation of purpose is therefore necessary. In such a case, the institution itself does not have to be charitable; it is sufficient to ensure that the funds are used for the appropriate purposes. This can be reflected in an agreement or mentioned in a will. Special tax exemption for art in the public interest The German Inheritance and Gift Tax Act provides for special tax exemptions for works of art, art col - lections, scientific collections, libraries and archives
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