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Expat Briefing Editorial Team, 07 April, 2017
The financial lives of expats are usually complicated ones, especially for those peripatetic types with work or business interests across several countries. And such complication often brings the need for more specialized financial solutions and wealth management techniques.
Traditionally, the trust format has been used by many globe-trotting expats, especially for those from English-speaking parts of the world, as a wealth protection mechanism. However, in the common law jurisdictions which have been bastions of the trust vehicle for many decades, a new kid on the block is emerging on the wealth protection front – the Foundation.
Foundations have existed for many decades in civil law countries where the concept of an Anglo-Saxon trust is unfamiliar. But as competition for a larger slice of the global wealth management cake has intensified in recent years, several common law jurisdictions are now introducing foundations laws into their own legislative frameworks in order to attract investment from a rapidly increasing population of wealthy individuals and families in emerging economies such as China, Russia, and in Latin America. As partner site Lowtax.net reported recently, Gibraltar will soon be the next entrant into the foundations club.
Foundations – What Are They, And How do They Work?
Foundations can be used for a wide variety of purposes. In the context of wealth management, the objective of a foundation is much the same as that of a trust. The manner in which a foundation is established and run, however, is quite distinct from a trust. Unlike a common law trust, a foundation is a legal entity more akin to a company and as such, it is usually entered onto the companies registry in the jurisdiction concerned.
Foundations are formed by a founder who provides the initial assets of the foundation, otherwise known as the endowment. Unlike a trust, assets are held by a foundation for the purposes set out in its constitutive documents and are administered according to contractual rather than fiduciary principles.
Whereas trust assets are held by a trustee, a foundation has a council which acts much like a company board and which is responsible for fulfilling the purpose of the foundation, although there are no shareholders. Beneficiaries have contractual rights to enforce the operation of the foundation in accordance with its constitutive document, rather than proprietorial rights in its assets.
Common Law Foundations
Foundations have been in existence in Europe since the 1920s and notable jurisdictions with foundations laws include Austria, Liechtenstein, the Netherlands and Sweden. They are also to be found in Asia and Latin America, with Panama a prominent foundation jurisdiction.
However, as mentioned above, foundation laws are no longer the exclusive domain of the civil law countries, and several common law jurisdictions have developed, or are in the process of developing, their own equivalents. Some examples are summarized below:
Foundations were introduced by the Foundations Act 2004 and accompanying regulations. Under this law, there are no perpetuity period rules applicable to Bahamian foundations, which immediately provides for continual unending succession if it is desired by the founder. A Bahamian foundation is not subject to forced heirship laws of a foreign jurisdiction.
The registration process for a Bahamian foundation is comparable to that of a company registration, making it a legal entity that must be filed with the Registrar General of the Bahamas.
A foundation established in another country may re-domicile in the Bahamas; and a Bahamian foundation may re-domicile into another country, provided such a move is permitted in that country.
Officers of the foundation must keep proper records and accounts, which can be inspected by any officer, foundation council member, founder, auditor or any other supervisory person at any time. However, confidentiality provisions restrict any person acquiring information from disclosing such information relating to the foundation, without the expressed consent from the founder and the beneficiaries, or as required by law, or a Bahamian court.
In June 2009, Jersey's Privy Council approved an order allowing Foundations to be set up in Jersey – the first of the Crown Dependencies (Guernsey, Jersey and the Isle of Man) to bring in a genuine foundation product. The Foundations (Jersey) Law 2009, entered into force on July 17, 2009 and the regulations permit foundations to migrate in and out of Jersey. They also provide for existing Jersey companies to convert to foundations.
Whilst similar in design to foundations in other jurisdictions, the Jersey structure introduces the concept of a "guardian." This officer oversees the activities of the foundation council, which administers the foundation's assets and carries out its objectives, and ensures that it achieves the broad objectives outlined in its constitutive documents.
Jersey has already established itself as a dominant player in the foundation industry with a formation rate of 5.5 per month as at August 2014, outpacing both that of the Isle of Man (1.3) and Guernsey (0.7) (see below). By this time, Jersey had registered 264 foundations, more than four times the total number of foundations in the other Crown Dependencies combined.
Jersey estimates that around a third of Jersey foundations have been formed for philanthropic or charitable purposes, with a further third being used specifically by ultra-high-net-worth families as wealth and inheritance planning structures. Foundations are also being used for commercial purposes, for holding high value or luxury assets.
According to Geoff Cook, CEO of Jersey Finance, the promotional agency for the island's financial services industry, the Jersey foundation "continues to prove itself to be a flexible and attractive proposition, equally suited to charitable administration as to orphan structuring and private wealth management."
"The strength of the foundation, combined with its trust and company vehicles, means that Jersey provides a good platform that can cater for a broad range of bespoke family, philanthropic and commercial needs," he added.
The Foundations (Guernsey) Law, 2012 was approved by Guernsey's legislative assembly, the States, in July 2012 and given the green light by the UK Privy Council on January 7, 2013. The Guernsey Registry began accepting applications for the formation of Guernsey Foundations from January 9 the same year.
Like foundation structures in other jurisdictions, the Guernsey foundation is an incorporated entity with a separate legal personality. It does not have shareholders to whom the board are accountable, but instead holds assets (in its own name) on behalf of beneficiaries, particular purposes, or both, in accordance with the foundation's constitution.
Guernsey has taken note of the fact that some clients may worry about confidentiality because, as foundations are registered entities, they are, unlike trusts, publicly visible. In Guernsey, limited details are available to the public, and although full disclosure must be made to the registrar, in other jurisdictions the whole charter is commonly visible. Guernsey's approach means that this limited visibility offers the benefit of being able to prove the foundation's existence quickly when dealing with third parties.
Guernsey has taken an approach which will be more familiar to those versed in the traditional civil law model where the foundation not only has a separate legal personality but also one that is independent of the founder. This may also help to clarify the appropriate tax treatment for the founder in their own country of residence.
A particular innovation of the Guernsey foundation is the ability of beneficiaries to be classed as either being 'enfranchised' or 'disenfranchised.' Enfranchised beneficiaries will have rights to certain information regarding the foundation, whereas disenfranchised beneficiaries are not entitled to any at all. Where there are disenfranchised beneficiaries then the foundation is required to have a guardian.
A foundation is also useful for corporate entities looking to create an orphan structure where the assets of a particular entity can be held in a foundation, rather than having a parent company and being an asset on that company's balance sheet. This means that the foundation may be used in investment fund structuring as well as for other corporate purposes.
In 2014, Guernsey's company registry approved the first ever migration of a foundation from another jurisdiction to Guernsey.
"Guernsey is very attractive for establishing new foundations because it is a reputable jurisdiction with highly experienced advisers and a sound and rational regulatory environment," said Natasha Kapp, Senior Associate at Carey Olsen, which prepared the migration application for submission to the Registry and advised Lloyd's Trust Company (Channel Islands) Limited on the foundation's move from Lichtenstein to Guernsey. "Many existing structures already include foundations established in other jurisdictions and clients can see the benefits that migrating the foundation to Guernsey might bring."
The Guernsey authorities appear reasonably pleased with results so far since foundations were introduced in early 2013. Certainly, the fact that a foundation has migrated from Liechtenstein – where foundations are long established – to Guernsey must represent something of an endorsement of the island's foundations regime.
But, as far as Guernsey is concerned, the number of foundations registered in the jurisdiction doesn't tell the whole story. As Guernsey Finance points out, there are already a number of foundations that have been established elsewhere which are administered in Guernsey "because of the Island's reputation for administrative excellence, whether for trusts, companies, partnerships or foundations."
"Guernsey also has a long standing and well respected judicial infrastructure which is experienced in dealing with fiduciary matters," the agency observes. "These factors, combined with Guernsey's high standards in terms of regulation and tax transparency, mean that the Island is especially well placed to administer complex structures."
Isle of Man
In the Isle of Man, foundation structures were introduced in January 2012 by the Foundations Act 2011. As in other jurisdictions, an Isle of Man foundation is an incorporated, self-owning, legal entity which, although having much in common with a trust, has a distinct legal personality. All foundations established under the Foundations Act are recorded in the Isle of Man Companies Registry.
The Government believes that the legislation adds to the jurisdiction's offering as a center for international wealth management, and was promoted by the Treasury Department in collaboration with the Department of Economic Development and the private sector.
Then Treasury Minister Eddie Teare said: "The Manx Foundation will be a bespoke product that will provide our financial services industry with an additional tool to open up new business opportunities. The world of wealth management is highly competitive so it is vitally important that Government keeps working in partnership with the private sector to enhance the Island's offering to international clients."
John Rimmer, a partner at the law firm Appleby, commented: "The Island needs to offer decent solutions for all those whose custom we want to attract. Trusts form a key part of our offering, but they are not the answer for everyone. Foundations offer greater familiarity and comfort for individuals and families from civil law countries, as well as interesting opportunities in commercial legal structures. The Treasury have shown real commitment in bringing this offering to the statute books in response to an initiative from the Isle of Man branch of the Society of Trust and Estate Practitioners. The Foundations Act is another good example of what cooperation between government and private sector can achieve.'
Annemarie Hughes, senior associate within Dougherty Quinn's specialist trust team, added: "Having recently returned from the STEP (Society of Trust and Estate Practitioners) Asia Conference in Singapore, where Foundations and estate planning formed a key part of that conference, I am confident that the Isle of Man's new sophisticated yet flexible foundation vehicle is ideally placed to service the numerous opportunities and growing demand in the international market."
The Government of Gibraltar announced on March 31, 2017 that legislation to permit the establishment of Private Foundations in Gibraltar had been passed by Parliament together with the consequential amendments to the jurisdiction's income tax law. Welcoming the development, Albert Isola, Minister for Commerce, said:
"I am delighted that Parliament has passed these Bills. There has been a considerable amount of work undertaken by a number of private sector practitioners to get to this successful conclusion. In addition, there has been significant further involvement by the public sector and wider private sector financial services community in participating in an extensive consultation process."
"Private Foundations have long been on the wish list of those professionals who advise their clients in complex financial engineering and I am grateful to the STEP organisation in Gibraltar for lobbying for this legislation over a number of years. It offers them a platform to create new business opportunities and adds to the strength of the Gibraltar proposition as a leading transparent and compliant onshore financial services jurisdiction in Europe. It also fulfils this Government's commitment to create an excellent suite of private client legislation."
Isola concluded: "Our research tells us that there is international demand for this product and our ability to serve clients with this legislation continues to promote our financial services industry very positively."
Will Foundations Catch On?
If Isola is to be believed, these wealth management structures are certainly in demand. And as mentioned above, foundations are already in wide use in parts of continental Europe and Latin America. But they are quite new concepts in the "Anglo-Saxon" jurisdictions that have adopted them so far, so perhaps it is too early to judge whether foundations will eventually rival the common law trust as an asset protection structure. Nevertheless, Jersey foundations legislation seems to have been quite successful so far.
Still, common law jurisdictions have had mixed success with foundations. In the Bahamas, where foundations legislation has been in place for around a decade, interest in these structures appears to have been lukewarm, and some practitioners have reported that the foundation has been under-utilized.
This may be down to the fact that jurisdictions like Guernsey and Jersey have been able to take note of existing foundation laws in other parts of the world, and formulate an optimum blend rules designed to appeal to a wider audience. Or it may be that the authorities in the Bahamas simply haven't promoted foundations aggressively enough. However, it may also come down to the fact that the trust is so well established and understood in common law wealth management centers that investors and practitioners have no reason to abandon it in favor of the foundation.
The example of Jersey suggests that there is demand for foundation structures in common law territories. But it seems that a number of factors may determine whether they will be successful or not, particularly a jurisdiction's level of wealth management expertise, its financial infrastructure, and its overall reputation.
Ultimately, time will tell if investors really do want something different, or whether they will prefer to stick to the tried and trusted.