Family Foundations in Germany

Family foundations in Germany: what they are and why families use them

Family foundations (Familienstiftungen) are foundations established mainly in the interest of one or more families, typically to hold and preserve a family business or family wealth across generations. Under German civil law, a foundation is a legal entity without members, endowed with assets to pursue a purpose set by the founder permanently and sustainably (§ 80(1) of the Civil Code, BGB). It comes into existence through the foundation deed and recognition by the competent state foundation authority. Because there are no shareholders, family members cannot sell, pledge or inherit the foundation's assets, and the founder's purpose and governance rules continue after his or her death.

For entrepreneurs, family foundations offer protection of the business against fragmentation among heirs, a stable governance framework and protection against claims of individual family members' creditors or spouses. In return, the foundation is subject to a substitute inheritance tax every 30 years, its purpose can be changed only in narrow circumstances, and the family gives up direct ownership. Whether a foundation is right for a family depends on its goals, the number of branches and the nature of its assets, and the decision is usually irreversible in practice, so it deserves careful preparation and open discussion within the family.

Structuring a family foundation

A family foundation is set up by a foundation deed (Stiftungsgeschäft) during the founder's lifetime or by will, and by the foundation's statutes. The statutes define the purpose, for example to hold and develop shares in the family company and to support family members, the beneficiaries, the governance bodies and the rules on distributions. After recognition by the state foundation authority, the founder must transfer the promised assets to the foundation (§ 82a BGB). Foundations can be established for an unlimited period or for a fixed period during which their assets are to be used up, although family foundations are almost always set up without a time limit.

Common structures include a foundation holding all shares in the family company directly, a foundation holding shares through an intermediate holding company, and the combination of a family foundation with a charitable foundation in a double foundation structure (Doppelstiftung), in which the charitable foundation holds most of the capital and the family foundation holds most of the voting rights. Each structure has different tax consequences and governance implications, and the choice should follow from the family's priorities rather than from tax considerations alone.

Tax on the endowment

The transfer of assets to a family foundation is subject to inheritance or gift tax. For a foundation established in Germany mainly in the interest of a family, the tax class is determined by the relationship between the founder and the most distant beneficiary under the foundation deed (§ 15(2) of the Inheritance and Gift Tax Act, ErbStG). If the beneficiaries are the founder's children and grandchildren, the transfer can benefit from tax class I rates, but the personal allowance of the most distant beneficiary applies only once to the foundation.

Business-asset relief under §§ 13a and 13b ErbStG applies to transfers of qualifying business assets to a family foundation in the same way as to other recipients, subject to the administrative asset test, wage sums and holding periods; see our article on inheritance tax relief for business assets. Because the foundation is a single recipient, large transfers may exceed the EUR 26 million threshold for the full relief, which makes planning of the endowment, possibly in stages, important.

Substitute inheritance tax every 30 years

Family foundations do not die, so the legislature imposes a substitute inheritance tax (Erbersatzsteuer). Under § 1(1) no. 4 ErbStG, the assets of a foundation established mainly in the interest of a family are taxed at intervals of 30 years. The tax is calculated as if the assets passed to two children: the allowance for children is granted twice, and the rate of tax class I is applied that would apply to half of the taxable assets (§ 15(2) sentence 3 ErbStG). Business-asset relief applies accordingly (§ 13a(11) ErbStG).

On application, the substitute inheritance tax can be paid in 30 equal annual instalments that include interest at 5.5% (§ 24 ErbStG). The 30-year cycle makes the tax predictable, which many families value, but it also means that the foundation must plan liquidity and, where it holds a business, maintain the conditions for business-asset relief at each reference date.

Income tax on the foundation and its beneficiaries

A family foundation is subject to corporate income tax on its income, at the corporate rate of 15% plus solidarity surcharge up to 2027, falling to 10% by 2032. Dividends from corporations it holds are largely exempt under the participation exemption. Trade tax applies only if the foundation carries on a commercial business itself. Distributions to beneficiaries are taxed in their hands as capital income comparable to profit distributions (§ 20(1) no. 9 of the Income Tax Act), generally at the flat 25% rate plus solidarity surcharge for private beneficiaries. The overall burden on distributed income is therefore similar to that of a corporation distributing dividends.

Transfers of assets into the foundation can have income tax consequences, for example where business assets or shares in partnerships are contributed, and must be structured to avoid the realisation of hidden reserves. Foreign family foundations and trusts are subject to separate German rules, including attribution of income to German-resident founders or beneficiaries in certain cases.

Family foundations compared with other structures

Family foundations are one of several tools for keeping a family business together. A family holding company, such as a GmbH or limited partnership with restrictive articles and a shareholder agreement, keeps ownership with family members and allows more flexibility, but shares can still be inherited, divided and, within the limits of the articles, sold. A pooling agreement among family shareholders binds voting and transfer rights without creating a new entity. Executorship under a will can protect the business for a limited period after death. Foreign foundations and trusts are sometimes considered, but they are subject to German anti-avoidance rules and attribution of income and assets where founders or beneficiaries live in Germany, and their recognition and tax treatment must be checked carefully.

Family foundations are particularly suitable where the founder wants to exclude the sale of the business for a long period, where many family branches would otherwise hold small stakes, or where there is no obvious successor among the heirs. They are less suitable where the family wants to retain flexibility to sell, reorganise or distribute assets freely, or where liquidity for the substitute inheritance tax cannot be planned. Combining a foundation with a family constitution that sets out values, roles and education of the next generation often improves acceptance within the family.

Setting up a family foundation: process and timeline

Establishing a foundation typically involves a feasibility study covering tax and governance, drafting of the foundation deed and statutes, informal coordination with the state foundation authority and the tax office, and the formal application for recognition. Recognition procedures take several weeks to months, depending on the state and the complexity of the statutes. Where the foundation will hold shares in a company, the articles of the company must permit the transfer, and other shareholders may have pre-emption rights. Binding rulings from the tax office on the treatment of the endowment can provide certainty before the assets are transferred. Families should allow six to twelve months for the entire process, and longer where the business must first be restructured.

Governance and the foundation register

Good governance is the key to a successful family foundation. The statutes should provide for a board (Vorstand) with professional members alongside family members, an advisory or supervisory board with clear competences, rules for appointing and removing members, conflict of interest rules, distribution policies and the foundation's role as shareholder in the family company. Because the purpose and the core structure cannot easily be changed after the founder's death (§ 85 BGB), the statutes should anticipate future developments, such as the sale of the business, new family branches or the entry of non-family managers. State foundation authorities supervise compliance with the law and the statutes, but family foundations are subject to limited supervision in several states.

The reform of German foundation law consolidated the rules in the Civil Code and provided for a public foundation register. The Foundation Register Act (Stiftungsregistergesetz) has been enacted, but most of its provisions are shown as not yet in force on the federal government's legislation portal as of November 2026. Once the register is operational, foundations will be registered with information on their bodies and statutes, which increases transparency. Families should prepare for registration and review whether their statutes are suitable for public disclosure.

Illustration: a founder with three children and a company worth EUR 50 million fears disputes among future generations. She establishes a family foundation that holds 100% of the company through a holding GmbH, with a board including two external professionals and a family council that appoints board members. Distributions to family branches are limited to a share of profits after reinvestment. The endowment benefits from business-asset relief, and the foundation plans for the substitute inheritance tax due 30 years later. Our page on foundations and family offices and our article on family office structuring describe related structures.

How TRW & Co helps with family foundations

We advise entrepreneurs and families on family foundations: assessing whether a foundation suits their goals, designing foundation deeds and statutes, structuring holdings and double foundation models, planning the inheritance tax on the endowment and the substitute inheritance tax, and coordinating with wills, marital agreements and articles of association. We assist with recognition procedures before state foundation authorities, advise foundation boards on governance and distributions, and represent foundations and beneficiaries in disputes. To discuss your plans, contact us. This article provides general information and is not tax or legal advice.