3 questions to smart minds
Photo: Dr. Christoph Philipp

Asset law stumbling blocks for private equity managers

For this 3 questions to Dr. Christoph Philipp

Photo: Dr. Chris­toph Philipp
18. Janu­ary 2023

While family entre­pre­neurs usually deal with ques­ti­ons of asset struc­tu­ring and succes­sion plan­ning at an early stage, this issue often takes a back seat for private equity mana­gers. Howe­ver, it is also important for PE mana­gers to deal with this issue in order to protect them­sel­ves from unwan­ted (tax) asset encroachments.

For this 3 ques­ti­ons to Dr. Chris­toph Phil­ipp, Attor­ney at Law and Part­ner at Poellath

1. What stumb­ling blocks should PE mana­gers watch out for when struc­tu­ring assets?

Those affec­ted face multi-face­ted issues of inhe­ri­tance, family, corpo­rate and tax law. In addi­tion to econo­mic risks, family risks must also be kept in mind. Cohe­sion within the family can quickly be jeopardized.

Let us consider inhe­ri­tance and gift tax. If carried inte­rest and co-invest­ments are inhe­ri­ted or given away, this tran­sac­tion is subject to inhe­ri­tance and gift tax. This also applies even during the term of a fund. In order to be able to subject the tran­sac­tion to inhe­ri­tance or gift tax, the tax offices under­take a compli­ca­ted valua­tion of the share­hol­dings. The extent to which defer­red taxes are deduc­ti­ble in the context of valua­tion remains unre­sol­ved. For this reason, the aim should be to struc­ture assets in a way that is opti­mi­zed from an inhe­ri­tance and gift tax perspec­tive while the bene­fi­ci­ary is still alive.

2. What is the situa­tion with married couples?

On the one hand, claims to a compul­sory portion cause problems. If descen­dants or spou­ses are not provi­ded for in the will or are not provi­ded for suffi­ci­ently, they are entit­led to a so-called compul­sory portion. In the case of a married couple with two child­ren living under the legal matri­mo­nial property regime of commu­nity of gains, the spouse is entit­led to a compul­sory portion amoun­ting to one quar­ter, and each of the child­ren to one eighth, of the total estate value. The right to a compul­sory portion thus guaran­tees a mini­mum share in the inhe­ri­tance. It can be clai­med by the heirs after the inhe­ri­tance. What is often not taken into account here: The right to a compul­sory portion is a purely mone­tary claim.

In contrast to the heirs, the bene­fi­ci­ary of the compul­sory portion does not receive a propor­tio­nate share of the estate. The heirs must fulfill the claim to the compul­sory portion imme­dia­tely after it has been asser­ted by the person entit­led to the compul­sory portion. Inso­far as the estate is mainly exhaus­ted in carried inte­rest and co-invest­ments, the heirs are confron­ted with a major problem: During the life of the fund, liqui­da­tion is hardly possi­ble; other liquid assets are unli­kely to be available. — The only way to preven­tively avoid this risk is for all bene­fi­ci­a­ries of the compul­sory portion to waive their statu­tory right to the compul­sory portion.

3. What applies in the case of a commu­nity of gains or an equa­liza­tion claim?

The claim to equa­liza­tion of gains is also a purely mone­tary claim, so that the same (liqui­dity) problems often arise as with the claim to a compul­sory portion. If the spou­ses live under the legal matri­mo­nial property regime of the commu­nity of accrued gains, the matri­mo­nial property regime is divi­ded between the spou­ses in the event of divorce by means of equa­liza­tion of accrued gains. This does not mean, as is often assu­med, that the assets acqui­red during the marriage hence­forth belong to both spou­ses. Rather, the spouse who has earned a higher gain during the marriage is obli­ged to pay half of the excess increase in assets to the other spouse. Suita­ble arran­ge­ments should ther­e­fore be found within the frame­work of a pren­up­tial agree­ment in order to avoid such outflows of liquidity.

Dr. Chris­toph Philipp is a lawyer and part­ner at Poellath and has specia­li­zed for 20 years in advi­sing on natio­nal and inter­na­tio­nal succes­sion plan­ning and asset struc­tu­ring, inclu­ding inhe­ri­tance law and estate tax law. In Handelsblatt/Legal Success — Best Lawy­ers® 2022, he is listed among the 40 “Top Lawy­ers” for succes­sion and wealth for the ninth time in a row. 

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