Originally published in Private Client Practitioner, Guernsey Supplement, November/December 2007
Much of Guernsey's economic success over past decades has been largely due to its adaptability and flexibility to react to changing market situations and conditions. This adaptability is no better illustrated than by the Island's willingness to amend and review legislation to ensure that it retains its position within the increasingly competitive market place of international finance and over recent years there have been many examples of this.
Following the revision of the Guernsey Trust Law which was approved by the Guernsey parliament in July this year and now awaits approval by Privy Counsel the Island is now planning to introduce legislation to allow the establishment of Foundations. This innovation will add a useful new tool to the Island's current financial product mix and will help ensure that Guernsey remains able to offer a highly flexible spectrum of financial services to its global client base.
Foundations have been created under the laws of other jurisdictions from as early as 1926 (Liechtenstein). More recently Panama introduced legislation in 1995, Netherlands Antilles in 1998 and the Bahamas in 2004. Foundations over this period have become increasingly popular across the globe but particularly in civil law jurisdictions where the concept of the Anglo-Saxon Trust is less well known and not always wholly understood. In certain situations Foundations can offer a viable alternative to the trust for commercial structures, estate planning and for charitable purposes.
Whilst there is no single definition of a Foundation, there are a number of common features and some interesting comparisons to be made with trusts and companies alike.
Unlike a trust, a Foundation is a distinct legal entity and has its own legal personality. It can hold assets, sue (or be sued) in its own name, may enter into agreements with third parties but unlike a company it has no shareholders. Since some Foundations are established for charitable purposes, they may or may not have beneficiaries.
A Foundation is formed by a Founder (either an individual or corporate body) who provides the assets to be administered by the Foundation under contractual rather than fiduciary principles giving a degree of comfort to those clients unfamiliar with equitable principles. Beneficiaries of a Foundation therefore have contractual rights rather than proprietary rights in its assets. A key attraction is the ability for the Foundation to reserve powers to its Founder. A Founder may retain more control than is usual with a Settlor of a trust. Commonly reserved powers include those relating to such issues as investment strategy, the appointment and removal of beneficiaries or even the power to revoke the Foundation.
The Potential Guernsey Foundation
It is proposed that a Guernsey Foundation would be established by Charter and run by a Council responsible for fulfilling the Foundation's purpose as defined in the Charter which would also include the Foundation's name, details of all Council members its registered office (which would be in Guernsey) and the Foundation's purpose. The purpose itself may be quite generic for example "estate planning", or may be something quite specific. It is envisaged that at least one member of the Council will be a corporate body. The Foundation would be entered on the public register however details of the beneficiaries (if any) would remain confidential as with a Trust subject only to the pre-existing rules regarding disclosure in proper cases.
The provision of Council members or administrative services to Foundations will be, a regulated activity as are trustee services at present ensuring that the interests of clients and the reputation of the Bailiwick is upheld.
Over and above the Charter, there will normally be a set of Rules governing the mode of operation for the Council whose members would be subject to duties similar to those of company directors. Unlike the Charter the Rules would be a private document and not on the public registry.
It is not proposed that a Guernsey Foundation will be restricted in terms of the type of assets it can hold. Therefore whilst it is not envisaged that they will be used for purely commercial purposes, they will potentially be able to hold shares in a company carrying on commercial activities.
Filing requirements are likely to be limited to changes in registered office and Council members and changes to the Charter all of which would need to be registered immediately the changes occur. If this is the case it's unlikely that an annual return be required. The filing of audited financial statements would be subject to the same exemptions applicable to Guernsey companies meaning many of them would fall outside the audit requirement. This will ensure that pricing can remain competitive.
It is also proposed that the tax treatment of Foundations be similar to that of Trusts with Guernsey trustees.
A Foundation can also have an Adviser whose role would be set out in the Foundation Charter and Rules. This is largely similar to the role of Protector within a Trust structure both having powers such as to appoint or remove Council members and beneficiaries, or the Adviser's consent may be required before the Council carries out certain acts.
It should also be possible for a Guernsey Foundation to migrate to another jurisdiction if so required and equally for a Foundation established elsewhere to migrate into the Island, a long as it fulfils requirements under the Guernsey legislative framework.
An interesting possibility is to establish structures using both Foundations and Trusts. Private Trust Companies ("PTCs") are very much in vogue. These are companies established for the sole purpose of acting as trustee for one trust or, say, one family. One issue that often concerns advisers is as to the identity of those who will own the PTC. Often a purpose trust is established to hold the shares in the PTC but as Foundations need not have any beneficiaries it is possible that they will be used as trustees themselves; a Private Trust Foundation?
The introduction of Guernsey Foundations will offer the Island's clients an excellent alternative structure assisting with wealth management and will provide further choice and flexibility to the Island's fiduciary sector.
The Foundation combines the flexibility of a trust with the greater degree of transparency of a company. Given the ability of a Founder to retain a certain amount of control and the existing market demand for the Foundation structure from civil law jurisdictions in particular, the Foundation can only enhance the Island's competitive position in the market place.
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.