View more on these topics

Shaking the foundations

Guernsey’s decision to introduce a foundations law during 2009 is the latest example of the rapid growth of foundations. The structures are increasingly popular with family offices, high-net-worth individuals and company managers. Foundations provide a series of particular benefits for asset protection, succession planning and estate management particularly for wealthy families with diverse interests. Beyond this, advisers say foundations are also useful as a part of a package of fiduciary products which can be used collectively for personal and corporate financial structuring.

Foundations come from the same family of products as trusts. They have similarities but in many cases provide alternative approaches to solving particular wealth planning problems. Traditionally, foundations have excited debate among the legislators of continental European jurisdictions concerned about flexibility and transparency. Jersey and Liechtenstein have countered such objections by introducing the robust concept of enforcer or guardian.

Liechtenstein is the traditional home of foundations but has come increasingly under greater competitive pressure from more nimble-footed centres. As a result, the government has passed a new law to revamp Liechtenstein foundations, which comes into force on April 1.

Philip Munro, an associate at Withers LLP in London, says: “The Hague Convention on the Law Applicable to Trusts and their Recognition has now been ratified by a significant number of civil law jurisdictions, including Italy, Luxemburg, Monaco, the Netherlands and Switzerland, reflecting the widespread use of trusts in international succession planning and in commercial transactions. Although foundations have traditionally been identified with Liechtenstein, they are a form of legal entity which is known in most continental European jurisdictions although in most cases their use is limited to charitable purposes (with the notable exceptions of Austria, Liechtenstein and the Netherlands).

“In the offshore world, Panama was first to introduce a foundation law in 1995. The Bahamas, Anguilla, St Kitts and Nevis have all followed suit. Jersey’s law is now in place. A foundation as a legal vehicle has some particular advantages which mean that it can be useful for financial planning in a variety of contexts.”

There is a distinction between private and public foundations. In many continental countries, private foundations were banned and so an association has developed over the decades between foundations and charities. There are local variations in local foundation laws but the essence of private foundations is characterised by certain common features.

Munro says: “As a general characteristic, a foundation is a legal entity which is created when a person (the founder) dedicates assets to a specific purpose observing certain formalities. Thus a foundation is immediately distinguishable from a trust in that it has separate legal personality. This form of entity, however, is also fundamentally different from a company in that a foundation is not owned by shareholders or members but is instead self-owned, being administered in accordance with the principles laid out by the founder in the foundation statutes.”

Foundations have a series of benefits compared with trusts:

  • They can be formed for an unlimited per-iod of time. Trusts normally exist for a specific and limited time period.
  • Foundations have an independent legal identity. With trusts, an intermediary company is needed to give a separate legal personality.
  • A foundation does not require an owner so there is no need for succession planning.
  • It is entirely independent and can leg- ally refuse beneficiaries’ demands for information. This is not consistent with demands for accountability and Jersey and Liechtenstein rules require a guardian or enforcer.
  • Flexibility is a key facet. Foundations can be created to meet a specific need and can be adapted to changing requirements.
    The characteristics of a foundation include:
  • The governing body of a foundation is a board or council which is comprised of individuals or companies. The powers of the board of a foundation will be governed by the constitutional documents of the foundation as well as the law.
  • The beneficiaries of a foundation acquire a bundle of rights and/or expectations as to the administration of the foundation. As they act on behalf of the foundation, the members of the foundation council do not assume any personal obligations (unlike trustees) and the liability of the foundation itself is limited to the value of its assets.
  • The person or persons entrusted with the administration of the foundation owe duties to the foundation that are usually akin to fiduciary duties in the common law sense of the word and may be held accountable for their stewardship of the foundation.
  • They are particularly useful for the long-term holding of businesses. They possess their own legal identity and can protect assets prior to dispersal to individual beneficiaries.

    A primary purpose for a foundation is as a vehicle for succession planning for family wealth – assets transferred to a foundation cease to be part of the estate of the founder, being assets of the foundation itself following transfer. Foundations can be useful in estate planning because they are not subject to perpetuity periods and because they can be created in different ways. Under Liechtenstein law, for example, a foundation can be created by deed, by will or by inheritance contract.

    The long-standing locations for foundations have been Liechtenstein and Panama. Both jurisdictions have recently come under adverse scrutiny.

    In the case of Liechtenstein, banking secrecy has been the issue. The theft of customer details from the LGT Bank sparked off major condemnation of the principality, particularly from the German government. European Commission issued threats to the longevity of the jurisdiction’s financial sector and increased interest in any transactions involving Liechtenstein have encouraged investors and professionals to seek safer harbours.

    Panama signed up for the harmful tax practices initiative of the Organisation for Economic Cooperation and Development but has been lambasted by its director of tax policy Jeffrey Owens for failing to follow through on its commitments.

    This has left the field open to other centres which enjoy a more harmonious working relationship with the OECD. Jersey published its foundations law in December to take effect last month, Guernsey has announced that its law will appear in the spring and the Caribbean jurisdiction Anguilla enacted its foundations law in September last year.

    But Liechtenstein is still the template for foundations. It was estimated that that there are more than 51,000 foundations (stiftungen) created under Liechtenstein law, making the stiftung the form of Liechtenstein entity most commonly used by individuals resident outside the principality.

    The establishment of foundations is contained in the Law on Persons and Companies of January 20, 1926. A review of the Liechtenstein foundation law was begun in 2001, resulting in a decision being taken in 2004 to implement a new foundation law.
    The new law was passed by the Liechtenstein Parliament in June 2008 and will come into force on April 1.

    The aim of the legislation is to modernise the law on foundations. In practice, two types of foundations will exist after April. One form will be governed by the 1926 Act and a second constituted under the latest rules. One key advantage is that new law includes the possibility to limit forced heirship rights. This is likely to appeal to founders from European and Shariah law states.

    The new law gives greater access to beneficiaries in both existing and new foundations to obtain certain information regarding the foundation. In the future, a beneficiary with a vested interest (whether present or future) may be entitled to inspect the foundation’s statutes, as well as any bye-laws and regulations and to receive information on the foundation’s assets if he or she has a legal claim as a beneficiary.

    By contrast, the information rights of a discretionary beneficiary’s information are more limited and in any event, information must not be used in a way that is improper or contrary to the interests of the foundation.

    A novelty of the new law consists in the possibility, for the founder, to restrict these information rights by establishing an internal controlling body or by voluntarily placing the foundation under supervision by the Foundation Supervisory Authority.
    Panama’s foundations have different characteristics to those in Liechtenstein.

    The Liechtenstein model is more expensive to set up. The annual government charge is higher and the capitalisation requirement is 30,000 Swiss francs ($26,000) as opposed to $10,000 in Panama.

    The composition of the foundation council is also different. In Liechtenstein law, board members must include an EEA-resident professional. In Panama, there is no similar requirement. Panama stipulates that three individuals sit on the council (unless a corporate does so), in contrast to Liechtenstein where presently there is no minimum number of board members.

    Filippo Noseda, a partner at Withers, says: “Panama’s law says a foundation may not be affected by foreign forced heirship rights while the position in Liechtenstein is more complex. Under the 1926 law, an individual’s succession is governed by the law of his/her nationality so that a foundation established by a civilian may easily be attacked and set aside.

    “The new law provides that any attack based on forced heirship needs to pass a double test: in addition to the law of the founder’s nationality, a claim must satisfy the requirements of the law which governs the transfer of assets to the foundation.

    “In either case, any attempt to limit claims might fail if the foundation’s underlying assets are located in a jurisdictions where such claims will be recognised. In Panama, there is no public record of contributions to the foundation. In Liechtenstein, no information regarding a foundation can be obtained by a third party.

    “Beneficiaries of Liechtenstein foundations may have certain information rights (subject to the opt-out provisions under the new law) but so do beneficiaries of Panamanian foundations (including rights to annual accounting information) unless the constitution of the foundation provides otherwise.”

  • Recommended

    Profits fall 19% at St James’s Place

    St James’s Place Wealth Management Group saw a fall of 19.7 per cent in operating profits in 2008 to £204.3m from £244.7m in 2007 on an European embedded value basis.

    Investment Forum

    Position Portfolios for a Changing China, Accelerating Disruption and More Political Discourse Is China an asset class? Why Investors’ Understanding of China is Changing How is disruption changing the way we invest? Established Ways of Doing Business Are Being Challenged What to Watch: Why politics matters more than ever in 2017 Key takeaways: Despite volatile […]


    News and expert analysis straight to your inbox

    Sign up


      Leave a comment


      Why register with Money Marketing ?

      Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

      News & analysis delivered directly to your inbox
      Register today to receive our range of news alerts including daily and weekly briefings

      Money Marketing Events
      Be the first to hear about our industry leading conferences, awards, roundtables and more.

      Research and insight
      Take part in and see the results of Money Marketing's flagship investigations into industry trends.

      Have your say
      Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

      Register now

      Having problems?

      Contact us on +44 (0)20 7292 3712

      Lines are open Monday to Friday 9:00am -5.00pm