Are donor-advised funds a suitable model for the German art sector?

In Germany, the DAF model is largely unknown. Art collectors with charitable and philanthropic intentions should take a closer look at this model for their succession plans, whether in the private or business sphere, as German tax and foundation laws offer flexible and diverse structuring options with similar effects.

DAFs

Rather than regulated financial funds, DAFs are charitable donation vehicles subject to charity and tax laws. A DAF manages donated assets like artworks or collectibles, which can be commercialized through a later sale, for example. The proceeds are used for charitable or philanthropic purposes as recommended by the donor.

The donor benefits from tax advantages immediately after transferring the artworks to the DAF, for example in the form of lowering their taxable income in the year of the contribution. Depending on the structure, different amounts can be considered for tax deduction—either the acquisition costs or the later sales proceeds.

The donor can make recommendations for their donation’s specific use at a later date, or establish a strategy for distributing the funds to various organizations over several years. However, the sponsoring organization managing the DAF must legally make the final decision on the use of the donated artwork or the proceeds.

Often, DAF sponsors are banks or asset managers who both provide asset management advice and handle the administrative work of distributing donations.

Implementation in Germany

In Germany, various methods exist to structure succession planning for both private and business assets individually and similarly to DAF according US law in order to achieve tax benefits. The vehicles most like the DAF are the legal foundation under private law, endowments to legal foundations, and the non-independent foundation

Legal foundation under private law

The establishment of the foundation does not require notarization, but merely written form. However, the approval of the foundation supervisory authority is mandatory for the foundation to be legally effective. The foundation is generally intended to exist in perpetuity. This requires a sufficiently large asset base (typically exceeding €500,000) and, ideally, a diversified asset portfolio to mitigate risks from one-sided asset classes.

The foundation’s purpose should be achieved through the income generated by the asset base. It is also possible to design the foundation’s assets as “consumable assets,” so these can also be used toward this purpose.

The legal foundation is subject to specific supervision, which regularly checks the assets’ whereabouts and use per the statutes. In addition, the foundation’s statutes must comply with the German non-profit law.

Subsequent amendments to the statutes are only possible in exceptional cases, provided the founder’s intentions do not oppose such changes. This usually requires extensive coordination with the foundation supervisory authority. If the changes are deemed permissible, they must be notarized.

Under the German foundation law, subsequent changes to the foundation’s purpose are virtually impossible.

Endowment

Instead of establishing a legal foundation, it is also possible to make an endowment to the asset base of an existing legal foundation. This must be shown and managed separately from the other assets. The endowment’s purpose must be specified in advance.

It is also possible to qualify the endowment as “consumable assets.” Given the strict requirements of the foundation law, it is virtually impossible to make changes to the endowment’s purpose after the fact.

Non-independent foundation

In contrast, non-independent foundations are not subject to the strict foundation law and can be established under civil law by a contract between the donor and the sponsor.

Notarization is not mandatory unless the assets require it (e.g., real estate). Generally, the foundation contract can be amended at any time, subject to the German non-profit law’s requirements, and there is no public supervision of the use of the assets.

Sponsors of a non-independent foundation can be private individuals, companies, banks, asset managers, or other already recognized charitable organizations.

German non-profit law

To be eligible for tax privileges, the requirements of the German nonprofit law are identical for private law foundations and non-independent foundations. The statutes or contract must formally include standard clauses; for example, it is necessary to specify the charitable purpose for which the assets are to be used. Details are not required, so later use of the assets is generally possible.

The so-called principle of asset dedication also requires that, in the event of dissolution, the assets must be used for charitable purposes or transferred to another charitable organization. Repayment to the founder is not permitted.

The catalog of charitable purposes is diverse and ranges from promoting art and culture, sports, science and research, to environmental protection and aid for marginalized and disadvantaged groups. There is no restriction to a single purpose.

Within certain limits, tax deductions are immediately possible under German law. For foundations—whether legal or nonindependent— there is also an additional donation deduction of €1 million, which can be spread over 10 years upon request. For married couples, the amounts can be doubled.

Conclusion

In the US, the DAF is an ideal option for tax-optimized succession planning that also serves philanthropic purposes. Under German law, similar effects can be achieved through the legal foundation under private law, an endowment to an existing foundation, or a non-independent foundation.

The legal foundation is particularly suitable for large assets, as the supervisory authority usually regards foundation assets under €500,000 as insufficient. The same applies to endowments unless they are qualified as “consumable assets.”

In comparison to the legal foundation, the non-independent foundation offers art collectors the advantage of planning and pursuing their donation strategy under simplified legal conditions, with the sponsor handling all administrative work and managing the donated artworks.

Therefore, this structure is particularly suitable for donors who, given the size of their assets, wish to avoid the effort of establishing and maintaining their own legal foundation and want to use their donations as flexibly as possible.

The Deloitte experts from Germany will be happy to provide you with further information and support in the legally compliant design and implementation of succession planning, taking into account DAF models.