Definition and significance of the beneficiary
The term beneficiary designates, in a legal context, a person who is entitled to receive benefits from an asset or another legal relationship without actually being the owner of the underlying asset or legal position. The term is mainly used in foundation law, in fiduciary asset management, as well as in the context of sub-participations and trust relationships.
Beneficiary in foundation law
Legal status of the beneficiary
Under German foundation law, the beneficiary is the individual or group of individuals that, according to the foundation’s charter or by decision of the foundation’s governing body, is to receive financial benefits—primarily distributions from the foundation’s assets. Beneficiaries are often also referred to as favored persons or beneficiaries of the foundation.
The legal status of the beneficiary is determined by the foundation’s purpose and the charter based upon it. As a rule, the beneficiary does not have a claim to the foundation’s assets as such, but only to the allocations specifically intended for them, provided and to the extent that these are stipulated in the charter.
Rights and obligations
Beneficiaries generally have the following rights:
- Entitlement to distributions
- Right to information according to the charter (e.g., information about their beneficiary status)
- Participation rights, if granted by the charter
Obligations may particularly result from duties to cooperate or provide information, for example to allow the foundation to verify eligibility for benefits.
Distinction from other legal positions
Unlike the founder or the foundation board, the beneficiary has no powers of administration or disposal regarding the foundation’s assets. The beneficiary is not part of the foundation’s governing body and stands legally outside the management and administration of the foundation.
Beneficiary in fiduciary law
Position in the trust relationship
The term beneficiary is also used in the context of trust relationships. Here, it denotes the person who holds the economic interest in the trust-held asset. In this context as well, the position of the beneficiary is clearly distinguishable from that of the trustor and the trustee.
The trustee manages the assets on behalf of and in the interest of the beneficiary and, where applicable, the trustor. The beneficiary is entitled to the delivery or transfer of the assets in accordance with the relevant trust agreement or the underlying arrangement.
Claims and legal consequences
The beneficiary’s claims arise from the trust agreement. These can typically include:
- Claim to receive the income generated from the trust assets
- Claim to the return of the trust assets after the expiration of the trust
However, the beneficiary does not generally obtain real power of disposition until the trust relationship has ended.
Beneficiary in sub-participations and security structures
In the context of sub-participations (e.g., in financing structures or syndicated loans), the term is also used. Here, the beneficiary is often the economic owner of a benefit, for example in the case of payment flows, even if they do not formally own the underlying claims or assets.
Distinction from the favored person
The term “favored person” is often used synonymously, but there is a subtle difference: every favored person in a legal relationship can be called a beneficiary, but not every beneficiary is necessarily a favored person in the narrow sense, especially when entitlement to benefits may only arise in the future or is subject to conditions.
Rights in cases of purpose failure and legal enforcement
Legal actions
Beneficiaries have legal options against the managing bodies (e.g. foundation board, trustee) to enforce their rightful claims. This can be done in particular by means of an action for performance or a declaratory action.
Rights of supervision
In many cases, the law or the charter grants rights of supervision, such as the right to inspect the use of funds for transparency purposes or for the prosecution of breaches of duty on the part of the management.
Tax aspects of the beneficiary’s position
Beneficiaries must declare the benefits received as other income or gifts in their income tax return, depending on the structure of the underlying legal relationship. The exact taxation depends on the type and amount of the benefit as well as the personal tax situation of the beneficiary.
International aspects and comparative law
In Anglo-Saxon legal systems, the beneficiary is typically referred to as “beneficiary” and often occupies a legally analogous position. The distinction from “trustee” and other parties to the legal relationship largely corresponds to that in German-speaking jurisdictions, but exhibits unique peculiarities under common law.
Summary
In German and international civil law, the beneficiary is a significant legal concept to describe persons favored in connection with foundations, trust relations, and similar structures. Their main function is to act as the eligible recipient of benefits from assets allocated or managed, without themselves directly holding ownership or direct managerial power. The specific rights and duties of the beneficiary are primarily determined by the charter, contract, and the applicable legal provisions.
Frequently asked questions
Do beneficiaries have a legal claim to benefits from a foundation?
A potential legal claim by the beneficiary to foundation benefits primarily depends on the design of the foundation charter and the act of allocation. In most cases, allocations to a beneficiary are voluntary benefits of the foundation, and a claim exists only if this is expressly stipulated in the charter or arises from an individual legal position, such as a contract between the beneficiary and the foundation. The Federal Court of Justice differentiates between purely factual and legal favoring; a real legal claim (e.g., an enforceable right under § 194 BGB) generally arises only through an explicit declaration of allocation. Simply being named as a beneficiary in the charter does not usually grant a direct entitlement to performance. Only with a binding promise of performance or in foundations established on the basis of contractual obligations—such as a foundation trust—can a beneficiary derive rights and, where applicable, enforce them in court in case of non-performance.
What obligations does a beneficiary have in relation to the foundation?
Beneficiaries are generally the recipients of foundation benefits and therefore only bear obligations towards the foundation when this is expressly stipulated in the charter, by a legal act, or in legally regulated exceptional cases. Examples include the obligation to use allocated funds for their intended purpose, for example as part of requirements to provide evidence of use in accordance with § 55 AO, or to make repayments in the case of misuse. In individual cases, the charter or foundation law may provide that beneficiaries are liable for damages or must return received allocations in case of breaches of duty. Beyond this, there are no general statutory obligations of beneficiaries towards the foundation beyond the received benefit.
How is a beneficiary legally designated in relation to the foundation?
The designation of the beneficiary is made either already upon the establishment of the foundation in the foundation charter or by a subsequent decision of the foundation board within the framework of the applicable rules. If the charter merely defines the group of beneficiaries as open or as a group (e.g., “descendants of the founder”), a specific selection decision must be made by the foundation body. The designation is legally effective when it is made in accordance with the procedures of the charter and does not violate binding statutory provisions (§ 80 et seq. BGB for legal foundations) or the founder’s will. In case of abusive selection, a beneficiary may examine potential claims arising from breaches of duty of loyalty against the foundation.
Can a beneficiary’s claims for performance be subject to attachment?
If a beneficiary has a legally secured claim to benefits from the foundation—such as regular payments or disbursement of assets—these claims are generally considered attachable assets of the beneficiary and may be seized by creditors in accordance with §§ 829 et seq. ZPO. However, commitments to beneficiaries are often subject to conditions, revocable, or voluntary, meaning that they may not or may only be partly attachable. Furthermore, statutory and charter-specific purpose restrictions may exclude or limit attachment, especially if the benefits are earmarked for specific purposes and not freely disposable. The exact circumstances depend on the details of each case and the nature of the claim.
What is the legal position of a beneficiary in relation to the foundation’s governing body?
A beneficiary is clearly distinct from the foundation’s governing bodies, usually the board. While the foundation’s bodies act as its representatives and administrative organs and bear legal responsibility both internally and externally (§ 86 BGB analogously), the beneficiary is typically an external favored party. The beneficiary does not exercise managerial or supervisory functions and has no rights of co-determination in decision-making processes of the foundation. Their rights are, as a rule, limited to receipt of the benefit; rights to initiative and challenge, for example with regard to board decisions, are available to the beneficiary only exceptionally, where corresponding enforceable claims or charter provisions exist.
Can a beneficiary be excluded from receiving benefits?
An exclusion from benefit is legally possible if the foundation’s charter allows for modification, if the board has discretion, or if there are factual reasons (e.g., violation of a purpose restriction or serious misconduct by the beneficiary). The specific requirements for exclusion are usually set out in the foundation’s charter. Both the founder’s intentions and legal protection mechanisms—such as the prohibition on arbitrary or discriminatory treatment—must be observed. If an enforceable claim exists, exclusion may only occur through a court or by means of an amendment to the charter. Otherwise, the foundation board enjoys a margin of discretion, provided it is not abused.
Is a beneficiary subject to tax treatment?
If the beneficiary receives allocations from a foundation, they are generally required to declare these for tax purposes. The classification depends on the nature of the allocation: if it is a maintenance payment, tax benefits may apply; for other types of payments, taxation as income under § 2 (1) EStG is possible, while gifts may fall under the Inheritance and Gift Tax Act (ErbStG). In particular, in the case of family foundations, special benefits for natural persons under § 15 (1) ErbStG apply. The foundation is required to provide information about recipients of allocations and to fulfill tax reporting obligations. Repayments required for improper use of funds are also taken into account for tax purposes. The beneficiary should therefore always declare received grants in their tax return and keep supporting documents ready.
