Asset law stumbling blocks for private equity managers
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.
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.
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.