Foundations: The New Trust?

Expat Briefing Editorial Team, 30 September, 2013

Asset protection, tax minimisation and succession planning are important concerns for many expats, especially those who have acquired a substantial net worth as a result of their foreign employment or business dealings abroad, and the trust has traditionally been the vehicle of choice for those from Western countries seeking to protect their wealth. However, there is now a new kid on the block in the asset protection stakes: foundations.


Foundations have actually 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, mainly offshore, common law jurisdictions are now introducing foundations laws into their own legislative frameworks in order to attract new money from a rapidly increasing population of wealthy individuals and families in emerging economies such as China, Russia, and in Latin America.

Foundations – What Are They, and How do They Work?

Globally, foundations come in all shapes and sizes and 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. This highlights another area where foundations differ from trusts in that the assets are held for the purposes set out in the foundation’s 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 notable foundation jurisdiction.

However, as mentioned above, foundation laws are no longer seen just in civil law countries, and a number of common law jurisdictions have developed, or are in the process of developing, their own equivalents. Notable examples include the Bahamas and the British Crown Dependencies of Jersey and Guernsey. These laws are described briefly below:

The Bahamas

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.

A Bahamian foundation is a distinct legal entity which is convenient for ‘proper law’ questions. Assets placed within the foundation are owned solely by it, and a change in a Bahamian foundation’s governing body does not change the legal ownership of the foundation’s assets. There is no statutory requirement for an external audit unless the foundation’s charter so provides.

A foundation established in another country may redomicile in the Bahamas; and a Bahamian foundation may redomicile into another country, provided such a move is permitted in that country.

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. Like that of a company, the name of the Bahamian foundation must be reserved at the Registrar General’s office prior to submission of the necessary documentation. The registrar will confirm that the foundation name is valid for use and that the name has been reserved for a period of 90 days.

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 to bring in a genuine foundation product. As a result, the Foundations (Jersey) Law 2009, entered into force on July 17, 2009.

The regulations permit foundations to migrate in and out of Jersey. They also provide for existing Jersey companies to convert to foundations.

A foundation must have regulations. These regulations must:

In particular, the regulations of a foundation must set out a procedure that ensures that a qualified person is appointed to be the qualified member of its council as soon as reasonably practicable if its qualified member dies, retires, or otherwise ceases to act or to be able to act.

Whilst similar in design to foundations in other jurisdictions, the Jersey structure introduces the concept of a ‘guardian’ with oversight over the council’s activities in relation to the foundation and ensures that it achieves the broad objectives outlined in its constitutive documents.

A foundation must have a council to administer the assets of the foundation; and to carry out its objects. The council of a foundation may have one or more members and must include a qualified person. However, although the council of a foundation may include more than one qualified person it may not have more than one qualified member at any one time.

An act of a member of the council of a foundation is valid despite any defect that may afterwards be found in the appointment of the member; or the member’s qualifications.

A beneficiary under a foundation has no interest in the foundation’s assets; and is not owed by the foundation or by a person appointed under the regulations of the foundation any duty that is or is analogous to a fiduciary duty. However, if a beneficiary under a foundation becomes entitled to a benefit under the foundation in accordance with the charter or the regulations of the foundation; and the benefit is not provided, the beneficiary may seek an order of the Royal Court ordering the foundation to provide the benefit.

The beneficiary must seek the order within the period of three years from the time when the beneficiary became aware of his or her entitlement to the benefit, provided they have reached the age of 18.


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 this year.

The Guernsey foundation is an incorporated entity with a separate legal personality. However, it does not have shareholders to whom the board are accountable. Instead, the foundation holds assets (in its own name) on behalf of beneficiaries, particular purposes, or both, in accordance with the foundation's constitution.

The foundation's constitution comprises a charter setting out the foundation's purposes, initial assets and duration (which may be unlimited) as well as rules prescribing, among other things, the functions of the council and procedures they must follow. There are no 'trustees' and instead, council members perform a similar role by having a duty to the foundation to act in good faith, and cannot, without express authorisation, profit directly or indirectly from their position.

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, although full disclosure must be made to the registrar whereas in other jurisdictions, the whole charter is commonly visible. However, Guernsey's approach also means that this limited visibility offers the benefit of being able to prove the foundation's existence quickly when dealing with third parties.

In Guernsey, the founder's role is flexible but perhaps more restrictive than in some other jurisdictions. However, 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 for 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 with a duty to act in good faith and en bon père de famille.

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.

Will Foundations Catch On?

As alluded to above, foundations are already in wide use in parts of continental Europe and Latin America. But they are entirely new concepts in the Anglo-Saxon jurisdictions that have adopted them so far, so it is too early to tell whether they will eventually rival the common law trust as an asset protection structure.

Nevertheless, Jersey foundations legislation seems to have been quite successful so far, and in April 2013 Jersey Finance, the body responsible for promoting the jurisdiction’s financial centre, revealed that more than 200 foundation structures had been established in less than four years.

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.

Geoff Cook, CEO of Jersey, said: "It is encouraging that, almost four years since their introduction, Jersey Foundations have established themselves as mainstream vehicles within global wealth management strategies."

"Their long-term appeal is also proving hugely valuable as Jersey builds relationships with key markets in Asia, thanks both to their flexibility and control structures,” Cook added. “The consistent growth both in terms of bare numbers but also in terms of the levels of funds being placed into Foundations reflects the success of Jersey's Foundations Law and reinforces Jersey's position as a center of excellence for private wealth management business."

Giles Corbin, Partner at law firm Mourant Ozannes and a leading practitioner on Jersey Foundations, observed: "The growth in Foundations being used for philanthropic purposes demonstrates Jersey's position as a leading offshore center for this type of activity. In addition, while the majority of Jersey Foundations have been new structures, a number have been migrated from other jurisdictions, providing more evidence of Jersey's attraction as a flexible jurisdiction with high standards of regulation and governance."

According to Fiona Le Poidevin, the current Chief Executive of Guernsey Finance, interest in the new vehicle had been growing even before the Foundations Law came into force.

"We've been hearing from a number of industry practitioners over the past few months that there has been a great deal of interest in the Guernsey foundation. As well as clients looking to set up a foundation, much interest has come from clients who have foundations currently domiciled in other jurisdictions and are looking to migrate these to Guernsey,” she said following approval of the legislation by the UK Privy Council.

"We believe Guernsey's expertise in servicing private clients means that we are especially well placed to administer complex structures due to the heritage we have in providing trust and corporate services as well as, of course, our reputation for being a well regulated and transparent international finance centre."

Indeed, three foundations were registered upon the opening of the Guernsey Foundations Registry at one minute past midnight on January 9.

As of September 20, 2013, 13 foundations had registered with the Guernsey Foundations Registry.

While it is still very early days in the life of foundations laws in common law jurisdictions, doubts have been cast over whether these structures will really take off as a concept. In the Bahamas, where foundations legislation has been in place for about seven years, interest in these structures appears to have been lukewarm. In an article originally published in the STEP Journal, Timothy J. Colclough, Assistant Vice President, Head of Business Development & Custody Butterfield Bank (Bahamas) Limited, observes that, since its birth in 2004 “it’s fair to say the Foundation has been under utilised by both local and international practitioners.” One reason for this, Colclough notes, is that the trust is so well established and understood that it “is, and will continue to be the main tool used by practitioners in this area”.

Jersey’s experience, however, indicates that there may be a brighter future for the common law foundation. 

Time will tell if investors really do want something different, or whether they will prefer to stick to the tried and trusted.

Tags: audit | business | interest | Europe | Finance | individuals | retirement | Panama | Bahamas | Netherlands | Russia | Guernsey | Jersey | Liechtenstein | regulation | trusts | legislation | law | asset protection | offshore | tax |


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