The right opening move.
Orientation. After the sale of a company, a new phase of life begins for former company owners. "It is crucial to ask the right questions at the very beginning. Thanks to our interdisciplinary approach, we can make a difference for 'wealthy entrepreneurs'", Christian Rödl, partner and managing partner of Rödl & Partner, points out.
"At first, the client was only interested in numbers. Reliable figures, so that he could manage his assets as professionally in the future as he used to manage his company," says Christian Rödl, "and then we started asking questions.
The 58-year-old entrepreneur - married, two children - had just sold his company for a three-digit million sum. With the help of a systematic selection process, all he really wanted was to find an external service provider for the investment accounting and the associated consolidated asset reporting of his yet to be founded family office. "At that moment, he was not even aware of the opportunities that were available beyond that. Something completely new is emerging, there are no fixed structures. Everything can be individually designed according to one's own wishes. This opportunity simply must not be missed," Rödl makes clear.
In the case of the entrepreneur, according to Rödl, it quickly became clear that quite different topics were on the agenda in addition to asset reporting. "In order to position oneself optimally, questions regarding the legal form of the family office, taxes, all aspects of setting up an efficient tax compliance and document management system, as well as the topics of inheritance and gifts should be clarified at this point in time".
The experts understand tax compliance to mean the correct fulfilment of all tax regulations and the associated release of the asset owner from liability. "Clients often think that if they hire a tax consultant to do their tax returns, they have done everything that is necessary. But that is wrong. They themselves must always make sure that they are not at fault for any so-called organisational mistakes", explains Rödl. In concrete terms, the aim is to establish processes in such a way that the asset owner is always able to put the right information in the right places. Only then will he or she have actually fulfilled his or her tax obligations. Questions concerning succession must also be discussed as early as possible. Is the family office correctly structured in terms of inheritance tax law? Is this the best way to ensure that as much wealth as possible is passed on to the next generation at the lowest possible cost?
"If a lot of real estate is part of the client's assets, for example, it can be interesting to be considered a real estate company," explains Rödl. Often, real estate would be purchased as private assets in order to benefit from the tax exemption of the increase in value after a ten-year holding period. "From an inheritance tax perspective, however, a real estate company is much more interesting. If the real estate is to be transferred from private assets to business assets later on, there can be considerable problems. That's why it's important to discuss this right at the beginning: Do you want to have real estate assets, do you want to have a lot, and what aspects of inheritance tax and gift tax are then important for you?', explains Rödl.
According to the expert, a company sale and the associated establishment of a family office is the ideal opportunity to put everything to the test, to collect topics and ideas, and then to put the initial structure on track for the next stage of life. "As an international consulting firm - lawyers, tax advisors, auditors, management consultants - we are the ideal sparring partner for this".
This interdisciplinarity, says Rödl, has been an important growth factor since the company was founded in 1977. "It has always been our approach to anticipate what our clients want. To think from the market. And I myself have always been a great advocate of the strategy of bundling these individual services in the respective company," Rödl explains.
Of course, the consultant has also very often encountered wealthy clients who commission individual experts from different firms. Be it because they want to follow individual recommendations from their own network. Or they want to entrust a special problem to the person who has achieved the best results in various rankings.
"But that usually doesn't work well," Christian Rödl is convinced, "because then the person concerned must himself coordinate the advisors, provide them with the necessary information and ensure that the various consulting firms keep each other informed, work well together and don't compete. That can only go wrong." Too often the consultant has experienced that whenever there was a problem, suddenly no one was responsible for it. "It's just hard not to lose track. And quite honestly - I don't think anyone wants to do this job either. It costs life energy and time that would be better spent elsewhere."
At Rödl & Partner, the client therefore has a contact person, the so-called carer, comparable to the key account manager in industry. This is the person with whom the client has the closest and most constant contact. This is where all information comes together. For other services he consults other colleagues from Rödl & Partner. And he is also responsible for complaints, if something like this should occur. "It is of no use to the client if we do everything and he then has twenty contact persons within our company. Then he can also commission twenty individual consultants", Rödl makes clear.
In the case of the entrepreneur who has sold his company, Anna Luce, an expert in family office services, is the caretaker. "My primary concern was to set up a process that was sustainable, cost effective and legally sound."
It quickly became clear: The asset reporting, for which Alexander Etterer is responsible in-house, and the legal and tax requirements - financial accounting, annual financial statements, tax returns - do not have to stand side by side. This can be combined. "If we only have to touch all documents once, we can do asset reporting and financial accounting in one go. Then two complete teams do not have to work in parallel. Each team gets the same documents, for example via a central document management system, but works independently on its own specialist subject areas," explains Luce.
Normally, the asset manager in charge of the transaction prepares a report on the bank. This is then sent to the tax consultant's accounting department together with the banks' income statements. She posts the data again. Then corrections are made in the tax balance sheet. And then at some point there is the tax return. "When I have hundreds of entries, it's not manageable. It's inefficient. And above all it is expensive," Luce makes clear.
At Rödl & Partner, securities transactions are recorded, evaluated and reported anyway by the asset reporting team headed by Alexander Etterer. This means that his partner colleague Ellen Ashauer-Moll can immediately use the tax report and other information from the investment accounting department to prepare her tax return. "In this respect, we have created the client's need by showing him what he is not yet thinking about and what, however, will save him a lot of money, time and nerves in the long term," concludes Anna Luce.
In fact, the original concern of the interested company seller - asset reporting - later receded into the background. "It must work. And it's also important to manage assets proactively with a view to the future. But the other issues became increasingly important because the asset owner understood that mistakes in this status could cost him a lot of money later on," explains Christian Rödl and concludes: "In the end, the tender was no longer relevant. We were awarded the mandate not because of individual facets, but because our overall concept was convincing. The client can now be sure that he has set the right course for the coming decades".
Structure the Family Office correctly.
Setting up a family office can be a complex matter, as experts Anna Luce (far right) and Ellen Ashauer-Moll illustrate, but by asking the right questions and providing the right answers, the asset owner avoids wrong decisions and structures that are difficult or costly to revise later:
// 01 Which criteria are particularly important to the asset owner when setting up a family office? Typical examples from practice are maintaining anonymity, internationality of the asset owner and the assets, avoidance of liability risks, involvement of asset successors, information policy between family office and asset owner, optimisation of the tax burden, administrability.
// 02 What are the areas of expertise of the Family Office? The main focus is on determining internal or external service providers for processing, reporting & controlling and legal and tax compliance.
// 03 What are the liquidity needs of the asset holder? The withdrawal and distribution policy also influences the corporate law structure of the family office.
// 04 Where are the liability risks? Access by third parties, for example by creditors of the company's operating assets or from certain family constellations, should be avoided or at least minimized.
// 05. What are the key parameters for asset protection? It is important to identify regulatory and tax risks and (tax) criminal law stumbling blocks in order to avoid personal risks of the asset owner and unexpected liquidity outflows. This is where a compliance management system helps to avert risks.
// 06 How are the investment processes and relevant asset classes defined? Differently complex investments require different workstreams.
// 07 How are the rights and obligations of the owner of the property and his family members to participate and inform about the transaction secured? This includes the design of information channels, the avoidance of information gaps and lengthy information procurement - also to avert liability risks.
// 08. Who is responsible for setting up and managing a uniform master database in relation to the asset owner(s) and the individual assets? If all work streams use this database, information gaps or redundancies are avoided, processes become more efficient.
// 09. what succession arrangements are planned with regard to the assets? The goals are regular minimisation of the tax burden and protection against asset fragmentation.
Optimize the asset reporting.
"Consolidated asset reporting is the central control unit for family assets. It allows the overall investment strategy to be recorded, analyzed, monitored and planned for the future independently of banks. Risks can also be identified at an early stage and countermeasures can be initiated", explains Alexander Etterer (above) and continues: "Especially in turbulent market phases on the stock exchanges, this also allows faster and better justified decisions to be made".
When setting up an asset reporting system, the communication channels must first be defined and rights assigned - who may do what? "It goes without saying that guaranteeing security and data protection is a basic requirement, as is the implementation of an efficient document management system and the setting up of a suitable asset structure. Asset classes should basically be freely selectable and, if necessary, individually definable", Etterer enumerates. What an asset reporting system should "be able to do" in concrete terms, the expert specifies in ten points:
// 01. establish efficient booking interfaces to ensure a smooth, fast flow of documents and data from the depositaries, investment, real estate and fund companies. Import and export options (DATEV, Excel, Bloomberg) must be available.
// 02. data sharing: Uniform and location-independent online access for all authorized persons to the entire data stock.
// 03. continuous recording and holistic depiction of liquid and illiquid investments such as shareholdings, art, real estate, infrastructure, collectors' items, etc. The data update of the liquid assets must take place in real time.
// 04 "Slice-and-Dice": Is it possible to group, filter and evaluate assets according to special criteria (e.g. currencies, ratings, residual maturity, regions, sub-categories)?
// 05. presentation of various individual asset and ownership structures and report contents according to personal specifications and on individual charts of accounts (for example SKR03, SKR04, SKR49). Precisely fitting provision of the respective report folders and online views.
// 06. setting up individual alarm messages in case of violation of investment limits and the investment guideline.
// 07. organisation of back office, tax reporting and the submission of tax returns in such a way that tax compliance is ensured at all times.
// 08. Tax reports, for example with regard to the preparation of the KAP/SO annex to the tax return as well as information on deferred charges for inheritance and gift tax calculated at valuation rates updated daily.
// 09 Establish digital document management system.
// 10. create a digital client experience: Information and navigation via the online dashboard, independent of time and location and in real time. Access via smartphone application.
Although the ancient Romans already knew: "Mors certa, hora incerta - death is certain, but not its hour", entrepreneurs often put the issue of succession on the back burner and suppress the problem of an unregulated transfer of assets. "Anyone acting in this way cannot avoid the succession either, of course. However, he is giving away a multitude of legal options for appropriate succession planning. Because then the inheritance is handled in accordance with the legal regulations, which often cause disputes in the family," Elke Volland makes clear. To prevent this from happening, she has put together a ten-point plan:
// 01. Draw up a will or inheritance contract. Legal succession often leads to undesirable results, fragmentation of assets and inheritance disputes.
// 02. if company law structures exist, the contracts must be coordinated with the last will of the shareholder.
// 03. consider those entitled to a compulsory portion - if necessary by concluding compulsory portion contracts.
// 04. Drafting a power of attorney and living will in the event of incapacity to act or to do business.
// 05 In the case of spouses, a marriage contract should regulate the financial circumstances during the marriage and when the marriage ends. Different regulations can be made for death or divorce.
// 06. tax optimisation in succession planning protects against liquidity outflows and ensures asset preservation. The appropriate legal form and corporate structure are decisive for company investments. In any case, the gift tax allowances should be used every ten years.
// 07 In the case of real estate assets, a so-called housing company can be set up with considerable inheritance tax benefits.
// 08 Often, asset owners want to have a certain influence on the younger generation after the transfer of assets. This can be achieved through a family business, by agreeing on pension payments upon transfer of assets or by a usufruct clause. In this way successors can also be gradually introduced to the responsibility for the assets.
// 09 Certain corporate law structures can prevent assets from falling into the "wrong hands". Succession clauses, divorce clauses or withdrawal restrictions are therefore common in partnership agreements.
// 10. if the assets are to be preserved in a bundled form and the family's provision for the future is to be secured through the income from the assets, a foundation solution makes sense. Alternatively, it is also possible to dedicate the assets or part of them to charitable purposes.
Rödl & Partner GbR; www.roedl.de
Outer Sulzbacher Street 100,
Prof. Dr. Christian Rödl