Business Owner's Will

What is a business owner's will?

Business owner's will (German: Unternehmertestament) describes a disposition upon death, that is, a will or an inheritance contract, in which an entrepreneur regulates succession to the entrepreneur's company or shareholdings. It determines who receives the shares, how other heirs are compensated and who remains able to act until the takeover. It differs from an ordinary will in that it must be coordinated with the articles of association, the marital property regime and powers of attorney.

The business owner's will is the part of business succession that applies in the unplanned case. It concerns owners of mid-sized companies and founders whose shares have a considerable value after several funding rounds. The notary, a law firm and the tax adviser are involved; the framework is set by the articles of association and the shareholders' agreement.

Precedence of the articles of association over the will

Whether an heir actually becomes a shareholder is not decided by the will alone. What the articles of association provide for the case of death prevails over a deviating provision by the testator, that is, the deceased person. Such rules are called succession clauses. The articles of association must therefore be read before the will and, where necessary, adapted during the owner's lifetime together with the co-shareholders.

GmbH shares

Business shares in a GmbH (German limited liability company) are freely inheritable under Section 15 (1) of the German Limited Liability Companies Act (GmbHG); the articles of association cannot prevent their passing to the heirs. They can, however, regulate what happens afterwards if the heirs do not belong to a defined group of persons, for example descendants or co-shareholders. Two routes are common: redemption of the share against compensation (Section 34 GmbHG), whereby it is extinguished, and an obligation of the heirs to assign it to co-shareholders or third parties. The compensation is then governed by the articles of association and is often below the market value. If it is below the tax value, the difference can be subject to inheritance and gift tax for the remaining shareholders or the company.

Towards the company, an heir counts as a shareholder only once the heir is entered in the shareholder list filed with the commercial register (Section 16 (1) GmbHG). For this, succession must be proven, for example by a certificate of inheritance (Erbschein) or a notarial will together with the record of its opening by the probate court.

Partnerships

In partnerships, succession clauses in the partnership agreement determine whether and which heirs step in. Under a continuation clause, the partnership is continued without the heirs, who receive compensation. A simple succession clause lets all heirs step in, a qualified one only specified persons. An entry clause gives a beneficiary the right, but not the obligation, to join.

Compulsory portion and liquidity

Descendants, the spouse or registered partner and, in some circumstances, the parents can demand the compulsory portion (Pflichtteil) if they are excluded from succession by a disposition upon death (Section 2303 of the German Civil Code, BGB). Grandchildren are generally entitled only if their parent has predeceased, parents only if there are no descendants. The compulsory portion amounts to half of the statutory share of inheritance, is a pure claim for money and is measured by the value of the estate including the shareholding in the company. Whoever inherits the company must raise it from personal assets, from distributions or through loans. The law provides for deferral only within narrow limits.

The usual countermeasure is a waiver of the compulsory portion during the owner's lifetime, mostly against compensation from other assets. It requires notarisation. Gifts during lifetime can trigger claims to a supplement of the compulsory portion. In the last year before the death, a gift counts in full, for each further year by one tenth less; after ten years, it is disregarded (Section 2325 (3) BGB). For gifts to the spouse, the period begins only on dissolution of the marriage. If the donor largely retains the benefits, for example through a comprehensive usufruct, the start of this period may be postponed under case law.

Testamentary executorship and lasting power of attorney

If heirs are minors or not yet able to exercise shareholder rights responsibly, the testator can order a long-term executorship (Dauertestamentsvollstreckung): a person of trust then administers the estate for years. For GmbH shares, it is possible in principle; a provision in the articles of association permitting the executor to exercise the shareholder rights is advisable. For interests in partnerships, it is possible only to a limited extent.

For the case that the entrepreneur is alive but unable to act, no will helps. This requires a lasting power of attorney (Vorsorgevollmacht) that expressly covers the exercise of shareholder rights and continues to apply beyond death. If the entrepreneur is also the managing director, the office does not pass to the attorney; representation of the company must therefore be secured separately, for example by a further managing director or a commercial power of attorney (Prokura).

Form of the business owner's will, marital property regime and updating

A will is valid if it is written in the testator's own hand and signed, or made before a notary; an inheritance contract always requires notarial form. For business assets, much speaks for notarial form, because it reduces questions of interpretation and makes it easier to prove succession. The Berlin will (Berliner Testament) is often chosen: the spouses appoint each other as sole heirs, and the children inherit only after the death of the second. This model leaves the children's tax allowances unused on the first death, the assets can be subject to inheritance tax twice, and the longer-living spouse is bound by the joint planning.

Under the statutory marital property regime of community of accrued gains (Zugewinngemeinschaft), a claim to equalisation of accrued gains may arise, that is, to equalisation of the increase in assets achieved during the marriage. This concerns mainly divorce and the case that the spouse does not become an heir. A marriage contract can exclude business assets from it.

Worked example: compulsory portion and inheritance tax in the business owner's will

A widowed entrepreneur with two children appoints the son as sole heir; the daughter receives nothing. The estate consists of GmbH shares with a market value of EUR 6 million and other assets of EUR 1 million. There is no waiver of the compulsory portion.

• Value of the estate, simplified without estate debts: 6 million + 1 million = EUR 7 million
• Statutory share of inheritance of the daughter: 1/2, compulsory portion: 1/4
• Compulsory portion claim: EUR 7 million × 1/4 = EUR 1.75 million, in money and due on the death
• Coverage from other assets: EUR 1 million, shortfall EUR 0.75 million
• Required distribution to the son for EUR 0.75 million net, simplified at 26.375% flat-rate withholding tax (Abgeltungsteuer) including solidarity surcharge, without church tax: 0.75 million / 0.73625 = about EUR 1.02 million. The GmbH needs enough distributable profit and liquidity for this
• Inheritance tax of the daughter on the compulsory portion, without earlier gifts: (EUR 1.75 million minus EUR 400,000 allowance) × 19% = EUR 256,500

For the son, the compulsory portion claimed reduces the taxable acquisition. The son's own inheritance tax adds to the liquidity burden; for the GmbH shares, the business relief may come into consideration if the father held more than 25%. A waiver of the compulsory portion by the daughter against compensation during the father's lifetime would have made the burden plannable.

Distinction: business owner's will, succession clause, lasting power of attorney

• Succession clause: provision in the articles of association or partnership agreement that determines who can become a shareholder as an heir.
• Lasting power of attorney: secures the ability to act in the event of illness or accident during lifetime. It does not regulate who is entitled to the assets after death.
• Anticipated succession (vorweggenommene Erbfolge): transfer during lifetime, often subject to a usufruct. It reduces the estate that the will still has to regulate.

Common mistakes

• Will without a look at the articles of association. If the testator appoints an heir whom the articles do not admit as a shareholder, redemption against compensation below value is a risk.
• Community of heirs in respect of the business share. Several heirs can exercise the rights from a GmbH share only jointly (Section 18 (1) GmbHG); disagreement paralyses the shareholders' meeting.
• Compulsory portions without liquidity planning. The claim is immediately due in money and can exceed the funds that the heir and the company have available.
• Power of attorney without shareholder rights. A general lasting power of attorney that does not expressly cover voting rights and representation in the company helps little in an emergency.
• No updating. After funding rounds, amendments to the articles, marriage or divorce, the will must be reviewed.

Frequently asked questions

Do the articles of association take precedence over the will?

Yes, to the extent that they regulate the passing of the shareholder position. The will can only operate within what the articles of association permit.

Can a GmbH's articles of association exclude the inheritance of business shares?

No. The shares first pass to the heirs. The articles can, however, provide for redemption or an obligation to assign if the heirs do not meet certain conditions.

What applies if there is no will?

Then statutory succession applies. Spouse and children inherit together; under the statutory marital property regime, the spouse receives half and the children share the other half. The business shares belong to a community of heirs until the estate is divided.

Is a handwritten will sufficient?

Legally yes, if it is written entirely in the testator's own hand and signed. For business assets, notarial form is usually preferable.

Is there a template for a business owner's will?

Templates exist, also free of charge on the internet and in form books, but they serve only as an outline. A business owner's will must fit the articles of association or partnership agreement, the marital property regime, the family and the assets; a template adopted without review easily contradicts the succession clauses.

A draft should regulate at least the appointment of heirs and substitute heirs, the compensation of heirs who do not receive the company, the executorship, the handling of compulsory portions and the relationship to existing powers of attorney.

The Roemer Capital view

Wills are drafted by law firms and notaries, not by us. In funding rounds and sale processes, however, the question regularly arises what happens to a founder's shares on death. Articles of association and shareholders' agreement regulate redemption, acquisition rights and compensation, and investors and buyers review these rules in due diligence.

In succession, we lay articles of association, shareholders' agreement and the key points of the testamentary planning side by side early, so that the law firm can resolve contradictions before the transfer. We include compulsory portions and compensation payments as a liquidity requirement in the financial planning.