Fiona Le Poidevin, chief executive of Guernsey Finance, explores why the Island's new foundations legislation offers an attractive alternative for wealthy Middle Eastern individuals to protect their assets.
Guernsey Finance, the promotional agency for the Island's finance industry, was exhibiting at the Opal Middle Eastern Family Office Symposium in Dubai during November and a key trend to emerge was the extent to which wealthy Middle Eastern clients are seeking out ways to protect their assets.
Trusts vs. Foundations
Guernsey is a leading International Finance Centre (IFC) which has significant experience in servicing structures, such as companies, partnerships and trusts, formed for the protection of assets. Indeed, many of the Island's 150 licensed fiduciaries already have Middle Eastern clients who have established structures, including trusts. However, the trust is rooted in common law and therefore, while it is a tool that is popular in the US, UK, and India, some clients based in other parts of the world are more comfortable with constructs of their native law.
For example, Middle Eastern clients are more familiar with religious concepts such as the waqf, which is a specific Islamic law vehicle for providing charitable donations, and civil law structures, such as the foundation, which does not split legal and beneficial ownership like a trust. Indeed, compared to a trust, a foundation is more like a company in that it is an incorporated entity with a separate legal personality.
Having said that, a foundation differs from a company in that it does not have shareholders to whom the board are accountable but instead it holds assets (in its own name) on behalf of the beneficiaries, for particular purposes, or both. There are no trustees but instead council members provide much the same role of acting in good faith and cannot, without express authorisation, profit from their position. As such, although a foundation looks similar to a company, its operation is more akin to that of a trust but in fact, it is neither.
The Guernsey Foundation
The foundation's constitution comprises: a charter setting out the foundation's purposes, initial assets and duration, which may be unlimited; and rules prescribing (among other things) the functions of the council and procedures they must follow.
Control
As with Guernsey law trusts, the level of involvement that the founder or the beneficiaries may have in running the foundation is flexible. Nothing in the law prevents a founder becoming a council member, guardian or (if suitably qualified) an investment adviser. Also, in principle, it is possible for the founder to appoint themselves as a beneficiary. The founder may reserve a number of different powers.
As with trusts, however, there may be tax or asset protection implications of reserving certain powers so it may be preferable to provide for the consent of the founder before the council can act in a certain way, for example adding beneficiaries or making payments to beneficiaries. Beneficiaries have a number of rights, including to full and accurate information about the foundation property and they can also be council members. However, it is possible for the constitution to 'disenfranchise' the beneficiaries, meaning that they have no right to information at all.
In that case, or if there are no beneficiaries, then a guardian must be appointed to supervise the council. If there are enfranchised beneficiaries then there is no requirement for a guardian but some local lawyers are advising that it is prudent to appoint a protector to act in good faith as an administrator of family wealth. Where the settlor of a trust may retain control in the family i.e. by setting up a Private Trust Company (PTC) to act as a trustee, this is not necessary with foundations as the council can consist of the same people who would have formed the board of the PTC. It is also possible to use the foundation as an alternative to the PTC – the foundation's purpose can be to act as a trustee of underlying trusts. However, if neither a council member nor a guardian is a Guernsey-licensed fiduciary, one must be appointed as a 'resident agent' with powers to request foundation documents and supervise its running.
Asset protection
Foundations are suitable for asset protection as they divorce ownership of assets from the founder. Like trusts, their ability to protect assets in the face of legal claims depends on a number of variables but the Guernsey courts have a strong reputation for not recognising the judgements of foreign courts unless it is in the interest of the beneficiaries.
Confidentiality
Some clients may worry that because foundations are registered entities, they are, unlike trusts, publicly visible. However, under Guernsey law, only limited details are publicly available and while the whole charter is filed with the registry, unlike some other jurisdictions, it is not visible to all. Yet, this limited visibility is also of great benefit when dealing with third parties (such as banks) to be able to quickly prove the entity's existence.
Dynastic planning
The foundation provides a great alternative to the discretionary trust for preserving family wealth for future generations. One of the reasons that it is particularly attractive to Middle Eastern clients (beyond asset protection) is that it also allows the patriarch to be prescriptive about succession planning rather than being required by law to follow forced heirship rules of their own country.
Why Guernsey?
Guernsey has significant expertise in servicing structures established for protecting and preserving private family wealth and the Guernsey Foundation provides another alternative which is expected to be particularly attractive for clients from civil law jurisdictions.
The Guernsey legislation not only provides some aspects which differentiate the Guernsey Foundation from others in the marketplace but there are also provisions which allow for the easy migration of foundations already established elsewhere. Guernsey has the advantage of offering political and economic stability – there is no external government borrowing – and a highly respected judicial system experienced in making judgements on fiduciary matters.
The Island is also renowned for being well regulated and providing tax transparency while retaining client confidentiality within a tax neutral environment. Guernsey is English speaking, uses the British pound Sterling and is in the same time zone and with close proximity to the UK while also being on the doorstep of continental Europe.
Indeed, there are strong links between Guernsey's financial services industry and Switzerland, including a number of the Guernsey licensed fiduciaries, ranging from large organisations to independent, boutique firms, who have offices in Geneva. Middle Eastern clients with assets already in Switzerland may wish to take advantage of these links as a way to access a Guernsey Foundation. Registrations of the Guernsey Foundations are continuing to gather pace and we expect that it will prove particularly popular among wealthy Middle Eastern individuals and families.
Originally published by The Oath, December 2013.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
