I. Succession in general

1. Succession in partnerships

Pursuant to section 727 para. 1 German Civil Code [Bürgerliches Gesetzbuch – BGB], the death of a partner of a partnership under civil law [Gesellschaft bürgerlichen Rechts – GbR] leads to the dissolution of the company. The death of a general partner (personally liable) of a general partnership [Offene Handelsgesellschaft – OHG] or a limited partnership [Kommanditgesellschaft – KG] results in general in the withdrawal of the partner (sections 161 para. 2 in connection with section 131 para. 3 no. 1 Commercial Code [Handelsgesetzbuch – HGB]. The heirs are entitled to an appropriate compensation claim. On the other hand, the shares of the limited partner (section 177 HGB) as well as the shares of the silent partner are heritable (section 234 para. 2 HGB).
This means that it is mandatory for a GbR, an OHG and for the succession of the general partner of a KG to agree on a succession regulation in the partnership agreement if the company is to be continued with the heirs after the death of a partner. In the case of a GbR, the partnership agreement must contain a so-called continuation clause. For the general partner (OHG or KG) who is supposed to be succeeded by someone after the death of that shareholder, a corresponding inheritance or legal succession clause must be included in the partnership agreement.
The succession of partner in partnerships is initially predetermined in the partnership agreement, i.e. that the regulations existing therein must be taken into account when drawing up the will. There are certain “clauses” in the partnership agreement: The so-called simple succession clause stipulates that the company business is continued after the death of a partner with the partner’s heirs. The so-called qualified succession clause regulates that only specific heirs of the deceased partner can enter into the position as a partner. It is possible to appoint a heir either by designation or by specific criteria which the heir must fulfill. It is conceivable, for example, that only descendants of the testator can succeed him. In this context, a further differentiation is also possible, that only certain descendants of the entrepreneur may enter into his partner position. The so-called transactional succession clause is to be qualified as legal transaction among living persons for which it is necessary to involve the planned successor of the partner who then becomes a partner subject to the condition precedent on the death of the partner.

2. Succession in corporations

Pursuant to section 15 para. 1 German Limited Liability Companies Act [Gesetz betreffend die Gesellschaften mit beschränkter Haftung – GmbHG] the company shares of a limited liability company [Gesellschaft mit beschränkter Haftung – GmbH] are expressly heritable. An explicit inclusion of a clause regulating the continuation or the entry of heirs in the legal position of the shareholder after his death is thus not necessary. In addition, bearer stocks as well as registered shares of a stock corporation [Aktiengesellschaft – AG] are also heritable. In these cases, it is important to ensure that the articles of association do not contain any provisions to the contrary in the event of the death of the shareholder, e.g. the order to redeem the company shares (section 34 GmbHG) or the stocks (section 237 para. 1 sentence 1 German Stock Corporation Act [Aktiengesetz – AktG]).
In the articles of association, it is possible to regulate by means of corresponding succession clauses who should explicitly succeed the deceased shareholder in his position, whereby this requires a later act of implementation (assignment, redemption, etc.), since – unlike with partnerships – the share/the stock is always part of the estate.

II. Regulations on the estate

1. Possibilities under inheritance law

When drawing up a will, the existing regulations in the articles of association have to be taken into account in order to avoid that the testamentary succession comes “to nothing”. If, e.g., the qualified succession clause in the articles of association does not include the successor initially foreseen by the entrepreneur, this clause has to be changed or another successor has to be chosen from among the “qualified persons” in the will. In the furtherdrafting of the will or the articles of association it depends on the goals pursued by the entrepreneur. It should also be borne in mind that in the event of unequal distribution in terms of value with regard to existing descendants or the spouse, compulsory portion claims may be triggered. In this respect, (possibly conditional or objectively limited) compulsory portion waiver agreements come into consideration.
If it is important to the entrepreneur that the company or his interest in the company is available to as many succeeding generations as possible, it makes sense to regulate prior and subsequent inheritance if the intended successor is not yet in a position to fill in the position of a shareholder or partner. The provisional heir is then entitled (only) to utilize the inheritance. In the case of partnerships, these are the profits that may be withdrawn in accordance with the partnership agreement and, in the case of corporations, the dividend and profit shares.
Furthermore, it may be advisable to order the execution of a will in order to ensure the distribution of the estate, the qualified administration of the estate (also of parts of it), but also the fulfillment of bequests and requirements.
The entrepreneur can not only make corresponding regulations in an individual will, but also conclude a marriage contract with his spouse.
It is very important to check the provisions once set at regular intervals and in particular, to adjust them to current developments.

2. Adjusting the marriage contract

The structure of the marriage contract – as well as of the articles of association or partnership agreement – has to be aligned with the testamentary disposition. Separation of property can first be agreed. Thereafter, the divorce does not result in an adjustment of accrued gains, i.e. any increases in the value of the interest in the company are not taken into account. In case of death, the spouse and the descendants of the testator inherit in equal shares, section 1931 para. 4 BGB. This quota can also be transferred to the right to a compulsory share of the estate. The possibility of a (objective) renunciation of inheritance and compulsory share of the estate should therefore also be considered.
In addition to the separation of property, which is nowadays often no longer desired, a so called modified community of accrued gains can also be considered. This means that in principle the statutory matrimonial property regime is agreed (i.e. the community of accrued gains), but in the event of dissolution of the marriage (e.g. in the event of divorce, perhaps not also in the event of death) certain objects such as interest in the company remain excluded from the equalization of accrued gains. At the same time, a limited renunciation of the compulsory portion should also be agreed in such a case.

3. Considering an international reference

If the entrepreneur is already habitually resident in a (European) foreign country or intends to relocate his habitual residence abroad, a choice of law in favor of German law should be made when drawing up the last will, provided that the entrepreneur wishes to ensure that German inheritance law is applied. According to the European Regulation on Succession (EU-Regulation no. 650/2012), the applicable law of succession is based on the actual habitual residence of the testator at the time of his death. This must also be taken into account with regard to the European Regulation on the Settlement of Matrimonial Property Rights (EU-Regulation no. 2016/1103), which came into force this year, regarding the drafting of a marriage contract, provided that both spouses do not have their first habitual residence in Germany and at least one of the spouses does not have German nationality.
With regard to the admissibility of succession clauses in the articles of association or partnership agreement, the company law regime must be taken into account, i.e. the law of the country in which the company was established.
If the potential successors themselves are domiciled abroad, the questions of income and inheritance tax law that usually arise are challenging and must also be considered before it is too late.

III. Considerations on inheritance tax

When regulating prior and subsequent inheritance, it should be noted that the prior heir is considered an heir pursuant to section 6 para. 1 German Inheritance Tax Act [Erbschaftsteuergesetz – ErbStG] and thus has to tax the estate as if he had become an heir without limitation. As inheritance tax is again payable in the event of the occurrence of subsequent inheritance, this would result in a doubling of inheritance tax from an economic point of view. The prior heir may pay inheritance tax by means of the prior inheritance, which then leads to a reduction in the inheritance transferred to the subsequent heirs. The subsequent heir may influence the amount of the inheritance tax incurred by the fact that, upon application, the taxation is not based on the relationship to the prior heir but to the testator. If the subsequent heir can be assigned to tax category I, a tax reduction according to section 27 ErbStG might be possible.
If the testator determines a usufruct in his participation as legacy, the usufruct can be deductible from inheritance tax at its net present value, provided that the heir becomes a co-entrepreneur according to criteria of income tax and provided that the business assets are not tax-exempt according to section 10 para. 6 sentence 4 ErbStG pursuant to sections 13a, 13c ErbStG.
In the case of inheritance under a requirement or condition, it is a completely normal inheritance tax-liable transaction. It should be noted that the condition pursuant to section 10 para. 9 ErbStG is not deductible as an inheritance liability pursuant to section 10 para. 5 no. 2 ErbStG if the condition itself benefits the complained party.
In the event of the termination of a community of accrued gains through an agreement on the separation of property, the compensation of accrued gains is exempt from inheritance tax because it is subject to payment. It is also possible to return to the community of gains, whereby a waiting period of one year should be observed from a compulsory share of estate point of view (so-called “matrimonial property swing”).

IV. Conclusion and practical advice

An entrepreneur who wants to avoid the continuation of his business being left to chance must make arrangements in terms of company law, inheritance law and marriage contract at an early stage. The coordination of these regulations with each other is essential to ensure a smooth company succession. This should also take into account an “international dimension”, not only in the case of the residence of the entrepreneur himself abroad, but also in the case of any foreign residence of the potential successors.