Real estate is one of the most common components of family wealth. For the business owner, the decision whether to contribute real estate to a family foundation is strategically significant. It affects tax efficiency, succession planning, asset protection and the investment policy over a long horizon. PLA.partners helps private clients assess whether a specific property is a good candidate for placement in a family foundation.
Short answer, in many cases yes
Contributing real estate to a family foundation is, as a rule, beneficial in terms of succession planning and tax efficiency. It enables taxation to be deferred until the moment of paying distributions to beneficiaries and makes it possible to avoid tax in the case of reinvesting funds obtained from real estate sale within the foundation. This solution is particularly profitable for commercial real estate generating steady income.
Maciej Pilarek, attorney and partner at PLA.partners, emphasises that this does not mean every property should unconditionally go into a family foundation. The decision always requires an individual evaluation of the purpose, character and manner of use of a specific property.
Tax benefits, capital accumulation in the family foundation
After contribution to the family foundation, income from rental and lease is tax neutral at the foundation level, under the conditions of the corporate income tax exemption within the scope of permitted activity. Sale of real estate within ordinary management of the foundation’s assets is also tax neutral, provided it was not acquired solely for the purpose of further sale.
In the practice of the PLA.partners team this feature makes the family foundation one of the most tax efficient structures for gathering a real estate portfolio. Rents reach the foundation in a neutral way, capital from any sales may be reinvested in full amount, and taxation appears only at the time of distributions to beneficiaries.
Asset protection, succession and limitation of the forced share
A family foundation with a real estate portfolio performs a protective function with respect to asset risks. It provides protection of real estate against creditors’ claims, prevents fragmentation of assets through inheritance and minimises the risk of forced share claims with respect to assets contributed with appropriate lead time.
In projects conducted by PLA.partners, the family foundation’s real estate portfolio is often used as part of a long term succession strategy. It allows the family to be provided with a stable stream of distributions without the need to sell assets and without the risk of their fragmentation.
Caution with private properties used by the family
In the case of contributing private properties in which the founders or beneficiaries live, particular caution is required. Free use of a property belonging to the family foundation by the founder or beneficiaries may result in the need to tax such a benefit.
In the practice of the PLA.partners team this parameter is analysed in every project covering private properties. PLA.partners experts advise on how to structure the relationship between the family foundation and the users of the real estate, so that the legal and tax situation is ordered and the foundation does not generate unexpected tax burdens.
Legal and business consequences for the client
From the decision-making perspective within the family, contributing real estate to a family foundation means:
- tax neutrality of income from rental and lease at the foundation level,
- tax neutrality of sales within ordinary management of assets,
- protection of real estate against the founder’s creditors,
- prevention of fragmentation of the real estate portfolio through inheritance,
- reduction of exposure to the forced share with respect to assets contributed earlier,
- the need to carefully structure relationships in the case of private properties used by the family.
Possible actions, a plan for the business owner
In the work of the PLA.partners team, designing the family foundation’s real estate portfolio involves:
- a map of properties and their current use,
- assessment of the purpose of contributing each property to the foundation,
- decision on the structure and order of contributing individual properties,
- shaping rental and lease agreements consistently with the family foundation,
- setting rules for the use of private properties used by the family,
- tax and succession evaluation of the entire real estate portfolio.
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.
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