Capital endowment of approx. 1 million euros is advisable
In our experience, it is advisable to set up a long-term independent family foundation from an initial investment of around 1 million euros. With less capital, family foundations should only be created if correspondingly high returns can be safely (!) generated from the assets of the foundation. Why do we have this 1 million threshold?
Minimum capital of a family foundation: simplified example
A founder has four children whom he would like to support with 500 euros gross (375 euros net) each month from now on. The foundation must therefore generate a monthly income of 2,000 euros net, or 24,000 euros per year. If the foundation’s assets consist of an unencumbered (!) rented property, then this property should generate an annual net rent of 40,000 euros.
Assuming that the return on the property is approx. 5%, the property would have to have a current market value of 800,000 euros in order to generate 40,000 euros net annual rent.
Why 40,000 euros annual net rent, in order to distribute 24,000 euros to the grandchildren? Quite simple: approx. 25% of the annual net rent is to be deducted as operating costs and other costs of the property, e.g.
- property management,
- maintenance costs,
- creation of reserves
- and so on
What remains is 30,000 euros, which are subject to 15% corporate income tax. The foundation will then have about 26,000 – 27,000 Euros left. The costs for the tax consultant have to be deducted from this amount, leaving the foundation in our example with approx. 24,000 Euros at the end.
In addition, it must be considered that the foundation still has to retain withholding tax from this donation, even if it can deduct it from the tax burden in the following year, an amount of 6,000 Euros is required for the time being.
In our example, the foundation would therefore initially have to be funded with a capital of at least 900,000 euros. These amounts do not yet include other administrative costs of the foundation, such as possible expense allowances for the activities of the foundation’s board of directors.
Caution with dubious promises
Yet, there are still too many people in the consulting industry who propagate that it is possible to build up assets with little seed capital when starting a family foundation. However, as our example above shows, a monthly income of 2,000 euros requires a starting capital of at least 900,000 euros.
Those who promise to create a family foundation to build up assets with a starting capital of just a few thousand euros omit certain costs, taxes and expenses. The focus should therefore be less on rapid asset accumulation and more on securing one’s own assets. After all, they are exposed to numerous risks.
Asset allocation must ensure the sustainable fulfillment of the foundation’s purpose
In order to be officially recognized as a foundation, the most elementary prerequisite is that the permanent and sustainable fulfillment of the foundation’s purpose is ensured by sufficient capital resources. In particular
- the type of foundation,
- the financial expenditure associated with the foundation, and
- the existence and earning power of the foundation assets
must be taken into account. There is no statutory “minimum capitalization” as is the case with other legal forms. However, our example shows that the company’s own objectives cannot be met without a certain minimum capital.
Setting up a German foundation with little capital?
Basically, a foundation can also be initially (!) set up with only a small amount of capital. There are often misunderstandings at this point, because the emphasis is on “initially”. Further additions to assets must therefore be made with a high probability. In addition, the capital resources must nevertheless be so extensive that the foundation, from the time of its establishment, is in a position to fulfill the intended purposes to an adequate and not only marginal extent.
Are you interested in establishing a family foundation in Germany? We would be happy to assist you in devising a foundation model.
Taxation on the establishment of a family foundation
Tags: family foundation