Does a family foundation protect against the forced share

The question of protection against the forced share is one of the most frequent asked by business owners considering a family foundation. The answer is not binary. The family foundation materially limits exposure to the forced share, but does not eliminate it entirely. Key variables include the moment of contributing assets and the circle of persons entitled to the forced share. PLA.partnershelps private clients design a family foundation in a way that genuinely reduces the risk of monetary claims from persons left out of the will.

Does a family foundation protect against the forced share? The general rule

Yes, the family foundation materially limits the family’s exposure to the forced share. The protection mechanism is, however, conditional. A person entitled who has not received the forced share due, neither in the form of a gift, designation to inherit, legacy, nor in the form of a distribution from the family foundation or property received in connection with its dissolution, may bring a monetary claim. This claim is, as a rule, directed against the heir, but in defined situations may also burden the family foundation.

Maciej Pilarek, attorney and partner at PLA.partners, points out that a well designed family foundation can lower the amount of the forced share claim, and under defined conditions also exclude a substantial part of the business assets from the calculation base.

The 10 year rule, the most important mechanism of protection

The most important feature of a family foundation from the forced share perspective is the 10 year rule. When calculating the forced share, assets contributed to the foundation more than 10 years before the opening of the inheritance are, as a rule, disregarded. In practice this means that the earlier the assets ended up in the family foundation, the smaller the business successor’s exposure to a forced share claim.

From the perspective of succession planning, this mechanism requires starting the process well in advance. The family foundation is not a tool for reactive exclusion of assets from the forced share base, it is a tool for long term ordering of the family’s assets.

Exclusions and exceptions. When does a family foundation genuinely protect against the forced share?

Regulations introduce specific exclusions from the forced share base in the context of the family foundation. The most important include:

• the founding fund contributed to the family foundation more than 10 years before the opening of the inheritance, unless the foundation itself is the heir,
• property transferred in connection with dissolution of the family foundation, if it went to persons who are neither heirs nor persons entitled to the forced share, provided that this occurred more than 10 years before the opening of the inheritance,
• the founding fund and property transferred in connection with dissolution of the family foundation, if the forced share is due to a descendant and the transfer took place in a period when the testator had no descendants, except situations where the transfer occurred less than 300 days before the birth of the child,
• the founding fund and property transferred in connection with dissolution of the family foundation, if the forced share is due to a spouse and the transfer took place before marriage to the testator.

In each of these cases the effect is the same, the relevant assets are not taken into account in calculating the forced share. PLA.partners experts design family foundations so as to make maximum use of these exclusions within a coherent succession plan.

Distributions from the foundation and the forced share of the entitled person

The mechanism of protection against the forced share is two-sided. On one side, the foundation’s assets may be excluded from the forced share base. On the other side, distributions that the entitled person has received from the family foundation during its operation or as a result of its dissolution are credited toward their forced share, which further reduces the value of any monetary claim.

In private client practice this means that a properly designed distribution policy reduces the forced share in a double sense, through exclusions on the base side and through credits on the side of distributions received by the entitled person.

Limits of protection. When a family foundation is not enough

The family foundation is not a tool for absolute immunisation of family assets. If the assets contributed to the foundation do not have time to acquire the status of excluded from the base, the foundation may be liable for the forced share. The foundation’s liability is limited to the value of the founding fund and only where that fund was contributed less than 10 years before the founder’s death.

In the practice of the PLA.partners team, this parameter is analysed as one of the main risks of the succession plan. A properly planned schedule for contributing assets to the foundation makes it possible to avoid a situation where the foundation becomes a second entity obliged to pay the forced share alongside the heirs.

Legal and business consequences for the client

From the perspective of the business owner, board member and persons responsible for the family’s asset policy, a family foundation in the context of the forced share means:

• a mechanism for excluding asset components contributed to the foundation more than 10 years before the opening of the inheritance,
• limitation of the foundation’s liability for the forced share to the value of the founding fund,
• the possibility of crediting distributions received from the foundation toward the entitled person’s forced share,
• the need to start the process well in advance,
• the need to carefully design the distribution policy and the circle of beneficiaries,
• the need to complement the family foundation with other tools, including the agreement on waiver of the forced share.

Possible actions, a plan for the business owner

In the practice of the PLA.partners team, protection against the forced share with the use of a family foundation involves:

• diagnosis of the circle of persons entitled to the forced share and the potential calculation base,
• assessment of past gifts and asset transfers within the family,
• design of the family foundation with a distribution policy taking credits toward the forced share into account,
• schedule of asset contributions based on the 10 year rule,
• complementing the plan with an agreement on waiver of the forced share where the family situation allows,
• a scenario for responding to a claim, including deferral, instalments and reduction of the forced share amount.

Contact PLA.partners Law Firm

Do you need legal support or an individual analysis of your matter? Visit PLA.partners and contact our team, we will help assess the situation and propose specific solutions.