The German Federal Fiscal Court (Bundesfinanzhof) has held in its judgment of June 25, 2021, file number II R 13/19, that assets in a trust to which the grantor has reserved comprehensive powers are to be considered owned by him for inheritance and gift tax purposes.
Substantive excerpts from the Decision
a) If a person has transferred assets into an effectively established, legally independent and non-transparent foreign pool assets (Vermögensmasse ausländischen Rechts) within the meaning of Sections 3 (2) No. 1 Sentence 2, 7 (1) No. 8 Sentence 2, 7 (1) No. 9 Sentence 2 ErbStG, they are no longer attributable to him and consequently do not belong to the taxable estate (Nachlass). However, if the grantor can continue to freely dispose of the assets on the basis of reserved powers, the foreign pool of assets is to be considered opaque and the assets continue to be attributable to the grantor. Upon the grantor's death, it falls into the taxable estate (Nachlass).
b) The assets of a non-transparent, effectively established and legally independent foreign foundation within the meaning of §§ 3.2 no. 1 sentence 1, 7.1 no. 8 sentence 1, 7.1 no. 9 sentence 1 of the German Inheritance Tax Act (ErbStG) are no longer attributable to the founder (…). If assets have actually and legally accrued to a foundation prior to the inheritance, they can only be attributed to the foundation. In this respect, the death of the founder is of no significance under inheritance tax law (cf. BFH ruling in BFHE 263, 283, BStBl II 2020, 655, para. 21). If, however, according to the agreements and regulations made, comprehensive powers of control over the assets of a foreign foundation are reserved for the founder, so that the foundation is prevented from actually and freely disposing of the assets transferred to it vis-à-vis the founder, the assets continue to be attributable to the founder. Powers of domination in this sense result, for example, from the founder's reservation of the right to make decisions regarding the investment and use of the assets, the possibility of demanding the retransfer of the assets in whole or in part, and the subjection of the foundation and its organs to instructions from the founder. On the basis of his powers, the founder may dispose of the foundation's assets as if they were his own bank deposits. In the absence of changes to the agreements or other interim dispositions, this applies until the time of death (cf. BFH judgements of 28 June 2007 - II R 21/05, BFHE 217, 254, BStBl II 2007, 669, under II.2.b, and in BFHE 263, 283, BStBl II 2020, 655, para. 22).
c) These legal principles also apply to foreign pool of assets, including Anglo-American trusts. If the settlor of the estate has reserved such comprehensive powers of control over the assets that the estate cannot actually and freely dispose of the assets vis-à-vis him, these assets remain those of the settlor and are equivalent to a bank deposit of his own.”
