Are you a company owner and considering whether you should draw up a business will to protect your partners and heirs in the event of your death? Is this really worthwhile or is drawing up a business will an unnecessary expense?
My short answer: Yes, every company owner needs a business will. This is the only way to ensure the continuity of your business when you are not around anymore.
In my consultations, however, I often feel that many entrepreneurs are uncertain or totally unaware of this necessity. What points do you have to include? What happens if you don’t have a business will?
In this article, I will explain these and other questions you may have about business wills. You will learn:
- What a business will is
- How a business will differs from a “normal” will
- The four points that must be included
- What the biggest mistake with a business will is
- What happens if you don’t have a business will
This post was updated on 18 August 2021.
What is a business will?
From a purely legal point of view, a business will is the same as an ordinary will that private individuals use to regulate the inheritance of their property (see Section 1922 German Civil Code (BGB)).
In a business will, however, you determine who should inherit your assets (real estate, company shares, cash, etc.). However, you can almost never exclude close relatives (your children, spouse and, if you have no children, your parents) from inheriting.
These family members are in fact entitled to a so-called compulsory share (Pflichtteil). The compulsory share must amount to at least 50% of the legal entitlement to the inheritance.
Disinheriting your closest relatives is only possible in extreme situations (relative threatens you with murder or has been sentenced to a prison term of at least one year in the past). (See also Section 2333 German Civil Code (BGB) and Section 2338 BGB).
How does a company owner’s will differ from an employee’s will?
There is, in essence one significant difference here: As a business owner, you must ensure in your will that the succession of your business is in accordance with your wishes. In addition to this, you also determine how your private assets are to be divided up.
In the case of a “normal” will for an employee, company succession is not an issue. In this case the will is all about the distribution of private assets.
These four points must be included in every business will
- Safeguard the existence of the business:In your will, you must designate a successor who can continue to run your business. This means: This person must have enough experience and knowledge to run the business effectively.
If you make a mistake here and appoint the wrong heir as your successor, the continued existence of your business could be at risk.
- Protect your heir financially:Check in advance whether your company is burdened by direct provisions for pensions, severance claims or similar obligations. These payments can put your successor at risk, especially in the first phase after the handover.
Therefore, try to reduce or completely exclude these obligations.
- Compensate other heirs properly:To prevent family disputes, heirs who do not receive a share in the business must be compensated.
Failure to do so can result in years of litigation and distract your successor from their real work.
- Minimize the tax burden with clever asset transfer:Asset transfers are subject to inheritance tax in Germany. Without tax-optimized planning, your heir will be liable for thousands or even tens of thousands of euros in inheritance tax. With skillful optimizations, however, you can greatly reduce this tax burden.
The catch: To fully exploit the potential savings, you need to start planning years in advance. My recommendation is to start as early as ten years before anything could possibly happen.
Of course, you never really know when this day will come. To be on the safe side, you should therefore start succession planning as early as possible.
Inheritance tax not considered: This is the biggest mistake with wills
The biggest mistake, in my opinion, is that business owners only prepare for the distribution of assets and not for the consequences of an inheritance.
Inheritance is in fact taxable in Germany. In other words: Depending on the degree of relationship and the amount of the inheritance, 7 to 50% can go directly to the tax authorities.
This also applies if your children do not inherit cash but real estate, for example. If the inherited property is worth €1,000,000, your children may have to pay several hundred thousand euros in taxes.
If they do not have sufficient financial means, they may be forced to hastily sell the property just to be able to pay the inheritance tax.
The same thing can happen with company shares.
The result: Your legacy disintegrates. The heirs lose control of the company and the real estate is sold. Then there is not much left of your life’s work.
As part of your succession planning, you must definitely prepare yourself and your heirs for this inheritance tax.
What happens if you don’t have a business will?
If you don’t have a business will, your legacy will be governed by legal succession (see Sections 1924 – 1936 German Civil Code (BGB)).
In short, this means for you: You do not determine your successor yourself, instead each heir gets a share in your business. In practice, this often leads to conflicts.
Some heirs want to actively participate in the company, while others want to sell their shares quickly. In this case it is difficult to keep control of the company and in order to end family disputes, the company is sold to an external investor after a lot of legal wrangling.
If you want your company to continue to be run as you intended, you must specify your successor in a will.
But don’t worry: The other heirs will not go away empty-handed here, as they must receive financial compensation.
The business will therefore kill two birds with one stone: You regulate your company succession according to your wishes and prevent inheritance disputes.
Conclusion: A business will is an important but often neglected part of succession planning
If you want to safeguard the continuation of your company, a business will is absolutely essential. This is because without a will, you cannot choose your own successor and your business will be divided up among all your heirs.
Specifically, in your will you must…
…appoint a suitable person as your successor and prepare them to run your business
… relieve your successor of obligations such as severance entitlements or direct provisions for pensions
…properly compensate your other heirs to prevent family disputes
…plan the transfer of assets decades in advance and thus reduce taxes
For the most part, my clients agree with these recommendations and they are relatively easy to put into practice.
Nevertheless, only about 1 in 100 company owners in Germany have implemented these steps in a legally “clear cut” way.
The result: Company succession is chaotic, disputes arise between the heirs and, in the worst case, the company goes bankrupt a few years after the handover.
Therefore, my advice to you is: Do not keep putting off making your will. It will cost money, but this investment will save your heirs taxes and result in fewer family disputes.
The bottom line is that making a will (almost) always pays off.
Do you have further questions about business wills?
If you have further questions about these issues, you are welcome to visit me in my tax consultancy office.
As a tax consultant in Hamburg with many years’ experience, I can help you draft your will and show you what you need to pay attention to so that it complies with your wishes and safeguards your legacy for your heirs.
For a personal consultation you can reach me anytime via phone (+49 40 443311), e-mail (anfrage@steuerberatung-breit.de) or my contact form (click here!).
Kind regards,
Thomas Breit
Photo: © Proxima Studio – stock.adobe.com
