The New German Foundation Law: A Game Changer for Philanthropy, Asset Management, and Financial Advisors
If you are a high-net-worth individual considering philanthropy, a trustee of a foundation, or a financial advisor serving affluent clients, Germany's new foundation law represents a significant evolution. With over 24,650 legally capable foundations and steady growth—863 new foundations established in 2021 alone—the sector is robust. To strengthen it further, the German legislature has enacted a uniform federal foundation law, effective in stages from July 2023. This reform, which consolidates foundation private law in the Civil Code (BGB), brings crucial clarifications and flexibilities, particularly in foundation asset management and trustee liability. For you, this means new opportunities to structure charitable giving, manage endowment assets more effectively, and provide sophisticated advisory services. This guide breaks down the key changes and their practical implications.
Core Reform: Uniform Federal Law and a Central Foundation Register
The law creates a unified legal framework for all foundations—whether charitable (gemeinnützig), private/family (Familienstiftung), corporate, or endowment—replacing the previous patchwork of state laws. A central foundation register (Stiftungsregister) will increase transparency and simplify administrative processes. This legal harmonization provides greater certainty for founders, trustees, and advisors nationwide.
Key Change #1: Enhanced Flexibility in Foundation Asset Management
Foundations must fulfill their purpose from the yields of their capital. In a persistent low-interest-rate environment coupled with inflation, rigid rules threatened this mission. The new law introduces vital flexibility:
- Capital Gains Utilization: Even without explicit provisions in the foundation's statutes, gains from the reallocation of assets (e.g., selling appreciated securities) may now be used for the foundation's purpose. This helps balance the dual mandate of purpose fulfillment and capital preservation.
- Broader Investment Spectrum: The strict primacy of absolute capital preservation at any cost is relaxed. Trustees can now consider a wider range of liquid and illiquid assets to generate necessary returns, aligning the investment strategy with long-term goals.
Key Change #2: The Business Judgement Rule – Reducing Trustee Liability
This is arguably the most impactful reform for those managing foundation assets. The introduction of the Business Judgement Rule (unternehmerische Entscheidungen) provides crucial legal safety for trustees.
| Aspect | Old Paradigm (Risk) | New Paradigm under Business Judgement Rule |
|---|---|---|
| Decision-Making Basis | Trustees could be held personally liable for investment decisions that resulted in losses, fostering extreme risk aversion. | Trustees are protected from personal liability for a business decision if they: 1) are sufficiently informed, 2) act in the best interest of the foundation, and 3) have a reasonable basis to believe the decision is sound. |
| Investment Strategy | Often limited to ultra-conservative, low-yield instruments to avoid any potential loss of principal. | Enables prudent, risk-adjusted investment strategies. Trustees can now justify measured risks (e.g., in equities, alternative assets) that are suitable for achieving the foundation's long-term financial goals. |
| Practical Outcome | Stagnant or declining real endowment value due to inflation and low returns, threatening the foundation's mission. | Potential for healthier, more sustainable returns that outpace inflation, ensuring the foundation's purpose can be fulfilled in perpetuity or as planned. |
Implications for Financial Advisors and Wealth Managers
For financial professionals, this law opens a significant advisory frontier. As trusted contacts for affluent clients, you are often the first point of discussion for philanthropic goals. You can now:
- Proactively Initiate Conversations: Educate clients about the new, more flexible foundation structures as a powerful tool for legacy planning, tax optimization, and sustained impact.
- Act as a Trustee Advisor: After a foundation is established, you can be entrusted with its asset management. The new rules allow you to craft modern, diversified portfolios that were previously considered too risky under the old liability standards.
- Provide Holistic Structuring Advice: Work alongside tax advisors and notaries to help clients draft foundation statutes that leverage the new flexibilities from the outset, particularly regarding the use of capital gains.
Action Steps for Founders and Trustees
- Review Foundation Statutes: Existing foundations should review their governing documents with legal counsel to understand how the new law applies and whether updates are beneficial.
- Re-evaluate Investment Policies: Trustees, in consultation with their investment advisors, should reassess their investment policy statement (IPS) to incorporate the new possibilities under the Business Judgement Rule.
- Document Decision-Making: Trustees must meticulously document the information, analysis, and rationale behind significant investment decisions to benefit from the liability protection of the Business Judgement Rule.
- Engage Specialized Advisors: The interplay of foundation law, tax law, and investment strategy is complex. Build a team including a foundation law specialist, tax advisor, and an experienced wealth manager.
Conclusion: A Modern Framework for Sustainable Philanthropy
The new German foundation law is a forward-looking reform that acknowledges the economic realities of the 21st century. By providing necessary flexibility in asset management and sensible liability protections for trustees through the Business Judgement Rule, it empowers foundations to preserve their capital in real terms and thereby secure their charitable missions for the long term. For potential founders and financial advisors, this creates a more attractive and viable environment for establishing and managing philanthropic vehicles. It's an invitation to think strategically about legacy and impact, backed by a more robust and modern legal framework.
Disclaimer: This article provides an overview of the new German foundation law. It is for informational purposes only and does not constitute legal, tax, or investment advice. The application of the law is complex and depends on individual circumstances. Founders, trustees, and advisors must consult with qualified legal and tax professionals (Fachanwalt für Stiftungsrecht, Steuerberater) for guidance on specific cases and before making any decisions.