About particularly volatile stock market prices as a result of the Corona pandemic and advantages in personal property succession.

August 18, 2020

Last year, in the context of our client information letter HSMV-News, under the title “The asset-managing family company in private asset succession”, we drew attention to an approach that is still - and perhaps especially in troubled economic waters - very attractive and therefore worth considering. The article can be found at this link: HSMV-CENSUS-4-2019

But what does this tool of anticipated succession have to do with the current challenging environment of the Corona pandemic? Imagine the following background:

A mature family man has a large estate that he has distributed among various asset classes - real estate, perhaps some art, a few collectibles, precious metals, and a substantial securities portfolio containing stocks, mutual fund shares, and other financial assets. If one thinks above all of the shares and funds, which form the heavyweight, then the family father had particularly in March and April with view of the depot statements or the electronic inventory evaluations little joy and quite reason for the concern. In the meantime, he has leaned back and relaxed a bit, because the indices and prices have recovered significantly - the capital does not know where to go. Just as the fall in prices in the aforementioned months has sometimes oversubscribed, the anticipation of a hopefully imminent easing of the situation is now also reflected in the ticker - as is well known, anticipation is the best joy.

In the back of his mind, the well-heeled family man - who is approaching 60 - has the idea that he could now transfer a certain portion of his assets to his children after all. But so far he has not been able to bring himself to do so, even though he is well acquainted with the instrument of an asset-managing family company and knows that he would not have to relinquish control of the overall assets for a long time yet if he were to gradually transfer them in order to take advantage of the tax allowances under the Inheritance and Gift Tax Act.

With the next date with its tax advisor becomes in these days - who surprises it? - not only about the pending declarations and usual aches and pains with the tax office, but all the more about the expected economic development and the fundamental changes that the various concerns will bring as a long-term effect. While looking into the crystal ball together, the tax advisor also reports on his current observations in connection with the COVID 19 pandemic - what has now been regulated and what consequences he suspects. He explains that according to the so-called Covid-Maßnehmengesetz from March 2020, the obligation to file for insolvency would be suspended until September 30, 2020, under certain conditions. If the deadline were not extended, the tax advisor said, a wave of insolvencies would probably roll over the beautiful country and one would only see the true extent of the economic damage. This would then certainly have corresponding consequences on the stock exchanges, namely with significant price drops. The Dax [badger] is known to be a very shy animal and would quickly become frightened.

But one could also capitalize on this for tax purposes. The family man listens and asks.

Yes, if you now transfer your assets, especially the stock portfolio, in whole or in part to a family partnership or limited partnership and prepare everything and wait for one of the next price drops, then you can transfer part of your stock and fund investments to the children under very favorable conditions for gift tax purposes. In fact, for the valuation of the donated financial assets, the lowest price quoted in the regulated market on the day of the gift must be used (§ 11 BewG).

The tax advisor makes the following example:.

  • Original purchase price of share X at: 100
  • In mid-October 2020, the share is quoted at: 30
  • Unrealized loss in the depot of the father: 70

Now comes the gift - at the right time!

  • Gift tax base during the phase of the fall in the share price (on the day of the gift): 30.

Now the share is assigned to the tax sphere of the junior, who is eagerly awaiting the nicer days on the stock exchange. And they are coming.

  • In the spring of 2021 the share climbs to: 60

Why not sell now? But what does the tax - in this case the income tax - say? The tax advisor has the answer ready and unerringly hits § 20 EStG. Here, it is stipulated in § 20 para. 4 sentence 6 EStG that in the case of a gratuitous acquisition - i.e. in the case of a full gift - the legal successor follows in the acquisition footsteps of the legal predecessor (in this case, the father). The economically delighted juniors therefore suffer an income tax loss for the purposes of the final withholding tax, which is reflected in the loss offset pot and can be offset against their further gains from share disposals. Thus:

  • Junior income tax loss: -40
  • Realized additional amount compared to the gift value: 30

Thus, some comfort and satisfaction can be found in the tax field, although the background chosen here for the explanation can only be described as catastrophic. Of course, this is not overlooked in all irony - and money, as is well known, is not everything.

The basic tax principle explained is also applied if the transfer of assets to the next generation is carried out in well-dosed steps with the help of a family company and the other advantages of a transfer strategy under company law are made available (by means of a GbR or KG). In volatile stock market times, there are also opportunities to schedule an asset succession favorably - i.e., to transfer with low taxation values.

Furthermore, in times when the state needs a lot of money, it may be advisable to distribute it within the family on several shoulders.

You are welcome to contact us for this topic and further information:

Christoph Bergedick LL.M.
Auditor, lawyer, tax consultant, partner
Telephone 0211 / 87542205

Gerd Scholten
Diploma in Business Administration, Tax Consultant
Phone 0211 / 87542244