Compulsory portion problems in business succession

What entrepreneurs need to consider when inheriting companies and company shares has already been covered in this article. The challenges and problems faced by the next generation of the business owner with regard to compulsory portion claims become particularly serious. The assertion of compulsory portion claims can have consequences that threaten the existence of the company. The options for structuring this are as varied as the problems that arise. In addition to the instruments of inheritance law, there are also effective measures under company law to mitigate the effects of the compulsory portion.


What problems arise with regard to the compulsory portion in corporate succession?

The question of the actual value of the company to be used to calculate the compulsory portion is particularly complex. In contrast to listed stock corporations, where the value is easy to determine, this is more complicated for small and medium-sized companies. Those entitled to a compulsory portion are entitled to a valuation and can request an expert opinion from the heir. This can lead to discussions about the appropriate method for determining the value of the compulsory portion.


How to avoid problems with the compulsory portion?


1. Waiver of the compulsory portion

In the context of business succession, the most effective structuring instrument is undoubtedly the waiver of the compulsory portion. By waiving the compulsory portion, the entrepreneur obtains unrestricted testamentary freedom.

Such a waiver of the compulsory portion requires timely planning and presupposes that the relative concerned is at all (still) prepared to conduct negotiations at the family table. Of course, a waiver of a compulsory portion cannot be had without a counter-gift. The parties involved must agree on compensation. This could, for example, be the immediate payment of a financial settlement or the allocation of the entrepreneur's personal assets in the will.

In the case of a waiver of the compulsory portion, personal sensitivities and interpersonal relationships in the family as well as the composition of the assets and the liquidity of the testator play a decisive role. Therefore, it is essential to carefully examine the individual interests as well as the economic needs and possibilities when drafting an agreement on a waiver of the compulsory portion.


2. Gifts
If a waiver of the compulsory portion is not possible, an entrepreneur can try to circumvent the right of the relative to the compulsory portion by making lifetime gifts. For this purpose, shares in the company are often transferred early to the chosen successor. However, several aspects must be taken into account here.

Firstly, it should be noted that in the case of gifts to a third party by the decedent, the beneficiary of the compulsory portion can demand as a supplement to the compulsory portion the amount by which the compulsory portion is increased if the item given away, in this case the company share, is added to the estate. However, in accordance with Section 2325 (3) of the German Civil Code, the gift is taken into account in full within the first year prior to the inheritance and thereafter by one tenth less in each case. It is particularly important to emphasize that the gift is not counted if ten years have elapsed since the performance of the item given away. Therefore, it is strongly recommended that business owners take care of estate planning early and complete planned gifts as early as possible.

A common and far-reaching mistake in planning the reduction of the compulsory portion is the establishment of a usufruct. In fact, the 10-year period mentioned above does not even begin to run if the donor does not suffer any economic loss as a result. A reservation of usufruct in respect of a property or a share in a company therefore generally constitutes an obstacle to the reduction of the compulsory portion.

It is also important to take legal precautions to ensure that the entrepreneur is not restricted in his freedom of action by the new shareholders and continues to retain control. For this reason, rights of recovery should be stipulated in the gift agreement and the partnership agreement should be adapted in favor of the company to ensure this.

An early gift can also bring tax advantages. For inheritance and gift tax purposes, the personal allowance is available every ten years and amounts to 400,000 euros for children, for example.


3. tied special-purpose assets without compensation
In addition, corporate law also offers a special possibility for reducing compulsory portions in the case of corporate succession. Under certain circumstances, the premature transfer of shares in a company may not constitute a gift relevant to gift tax, even if the newly joining shareholder does not make a capital contribution. This is mainly justified by the personal liability that is assumed and the other obligations under company law, such as the provision of labor. This also applies if the entitlement to compensation in the event of death has been set at 0 euros in the partnership agreement.

The legal situation is different for companies whose objective is to manage private assets within the family, there are no relevant liability risks and there is no intention to continue the business by the company in the event of death. This is mainly justified by the personal liability that is assumed and the other obligations under company law, such as the provision of labor. This also applies if the entitlement to compensation in the event of death has been set at 0 euros in the articles of association.


It therefore depends on the specific structure, purpose and partnership agreement of the partnership to determine the extent to which measures reducing the compulsory portion are possible through company law.