‘Asset protection’ is the term used to describe arrangements designed to prevent creditors from gaining access to certain assets. It covers various aspects of notarial advice, which are often combined:
Asset planning for business owners (insolvency and liability prevention)
Business owners who are personally liable for business debts or who may be liable for professional malpractice should consider the structure of their business and the allocation of their assets. This also applies to doctors, lawyers, tax consultants and certain other self-employed professionals.
With regard to the corporate structure, limited liability legal forms can be chosen, such as a GmbH (limited liability company), a GmbH & Co. KG (limited partnership), or a PartGmbB (partnership with limited professional liability). The tax consequences of the chosen legal form must be considered in all cases.
The options for structuring the allocation of assets with a view to avoiding liability are complex. Married entrepreneurs in particular have the option of acquiring assets through their spouse. That's because the German matrimonial property regime does not generally provide for joint liability of one spouse for the debts of the other. When considering such options, however, it is important to ensure that the correct arrangements are made (no trust agreements!) and that precautions are taken for a divorce or the death of the spouse.
It is also possible to transfer existing assets to your spouse. This applies in particular to real property. In addition to liability-related issues (insolvency challenges, creditor challenges), the tax framework must also be taken into account (gift tax, real estate transfer tax, speculation tax, etc.). Frequently used structuring options for transferring assets to spouses to optimise tax and liability considerations include the matrimonial property regime ‘swing’ and the family home ‘swing’. When transferring existing assets to a spouse, precautions must also be taken to optimise liability in the event of divorce or the death of the spouse. One option is to reserve a right of residence, which is generally protected from seizure.
In addition to transferring assets to the spouse, transferring assets to a cohabiting partner or children is also an option. However, tax law imposes strict limitations on cohabiting partners, meaning that in most cases only transactions involving payments are possible, for example the sale of a house subject to a right of use (life interest, right of residence) in return for annuity payments. When transferring assets to children, especially minor children, solutions governed by company law are often chosen. A ‘family pool’ allows the transferor to retain access to the assets and prevent children from converting the transferred assets into cash. In addition, the family pool can be used to take precautions against further undesirable developments in the lives of the children.
Another option for asset protection for business owners is to transfer assets to a foundation. However, as foundations under German law are permanent institutions, such arrangements go hand in hand with property rights succession planning.
Please note: As civil law notaries, we can advise you on precautionary asset planning. However, if you are facing a specific case of liability or insolvency, you should consult a specialist lawyer.
Asset protection in relation to children entitled to a compulsory portion
You must take appropriate precautions if you do not want children who are entitled to a compulsory portion to have access to the estate or to certain assets. In some cases, you can do this by drawing up a will or a contract relinquishing the compulsory portion. In certain cases, it may also be advisable to transfer assets to other persons as a precautionary measure. However, it is important to bear in mind the statutory claims to a compulsory portion that give persons entitled to a compulsory portion an opportunity to contest certain gifts. The potential risk in this regard is considerable, particularly when transferring assets to a spouse. In this case too, in addition to questions of compulsory inheritance law, the tax framework must also be taken into account (gift tax, real estate transfer tax, speculation tax, etc.). A frequently used structuring option for transferring assets to spouses to optimise tax and compulsory inheritance considerations in this respect is the matrimonial property regime ‘swing’.
Asset protection in the event of long-term care (preventing social welfare recourse)
Statutory long-term care insurance does not cover the full costs of a nursing home, which means that considerable additional payments can be expected in the event of long-term care. Many people therefore consider transferring certain assets, in particular the family home, to their children during their lifetime. Transferring assets at an early stage can be a suitable means of preventing social welfare providers from accessing them. It is important to bear in mind the statutory ten-year period for revoking gifts due to impoverishment of the donor. It should also be noted that children may be obliged to pay maintenance to their parents, although the threshold for parental maintenance obligations has recently been raised significantly, which is why parental maintenance currently plays a minor role in most cases.
Asset protection in relation to former partners (divorce will)
Following a divorce, the former spouse generally has no direct claim on the assets of the divorced person. This applies even more so in the case of the dissolution of a non-marital partnership. However, indirect access to assets may be possible in the event of inheritance. This is the case if a joint child inherits and the former partner is responsible for managing the assets of the minor. The situation is even more problematic if the child subsequently dies and the ex-partner or their family gains access to the assets of the divorced person. Such risks can be avoided by means of a ‘divorce will’. The most important features of such a divorce will are arrangements for provisional and subsequent succession and for execution of the will.