Edward Stone of Collas Crill in Guernsey explains how foundations can be a useful feather in the bow of trustees and how Guernsey is leading the way in their implementation.
Foundations are still quite new in Guernsey but thirteen Guernsey foundations have already been registered, with more in the pipeline. So why are clients choosing Guernsey and what are Guernsey foundations being used for?
Guernsey's foundations law, like its trust law, is modern and written in plain English - making it user friendly for service providers and clients alike. Furthermore, Guernsey is uniquely placed to offer foundations being a common law jurisdiction with Norman roots and a familiarity with civil law concepts.
Foundations are neither trusts nor companies
In order to consider the possible uses of foundations, it is necessary to consider how they differ from trusts and companies. Although they share many of the characteristics of companies and trusts, foundations are quite distinct:
- Whereas companies can and are most often designed to carry on commercial activities, a Guernsey foundation cannot carry on commercial activities unless ancillary or incidental to its purpose.
- Foundations are generally designed to hold assets which have already been acquired and to preserve rather than risk them. Foundations have no shareholders like companies do and the beneficiaries of a foundation do not have any proprietary interests in the foundation as do the beneficiaries of a trust.
- A foundation is managed by its council and the councillors have a duty to the foundation to act in good faith, similar to the duty of directors of a company but different to the duties of trustees to the beneficiaries of a trust.
- The council of a foundation, however, differs from a board of directors of a company in that it is neither appointed by nor overseen by the equivalent of shareholders. How the council operates and how the councillors are appointed is determined by the foundation's constitutional documents, which are drawn up to reflect the founder's wishes.
- A foundation, as a legal entity, is the sole owner of the foundation assets and there is no separation of legal and equitable ownership, nor any question of ownership by any of the foundation officials.
Uses of foundations
Although some of the foundations registered to date in Guernsey are philanthropic, others have been set up to hold shares in a bond issuing vehicle and as alternatives to family trusts. Foundations will be useful where an "orphan" vehicle is required and solve many of the problems which have arisen to date when using incorporated entities and, in particular, succession issues for shareholders. Often, in complex trust structures for large families with several branches, a company is incorporated to act as a common protector of all the trusts with, typically, different family branches having the right to appoint their own director to represent their interests. As a company (unless limited by guarantee - which raises other issues beyond the scope of this article) must have a shareholder the shares are usually held by a purpose trust to ensure that no single branch of the family has overall control of the protector company. This adds a layer of complexity and administrative costs which could be avoided by forming the protector as a foundation. The purpose of the foundation would be to act as a protector and the different branches of the family could each have their own appointed councillor to represent them. A foundation could also be used in a similar way as a reserved power holder under a trust or to act as investment adviser in a complex trust or private family fund structure.
Foundations could also be used as general or limited partners in partnership structures or even as corporate directors in family companies. It is important, therefore, not to consider foundations, companies and trusts as being mutually exclusive. As seen from the above examples, a complex structure for a wealthy family could in the future involve all three. Private trust companies (PTCs) have become popular in recent years but for many clients the promised simplicity of having a PTC controlled by them evaporates when the ownership structure of the PTC is discussed. The PTC's shares need to be owned by a purpose trust and, even though the client can take some comfort from ultimate control as enforcer of the purpose trust, for clients who are unfamiliar with trusts this is often a deal breaker. Outright family ownership of the PTC by the client or his family may well cause succession issues, possibly as soon as the client's death when the following generation seek to get control of the PTC, which owns and manages all of the family's wealth.
A foundation could be used to hold the PTC's shares but that is still an extra layer of complexity and administration. A better solution, which is gathering pace, is to use a Guernsey foundation in place of the PTC, to act directly as trustee of the family trusts. Being an orphan vehicle, the foundation does not require shareholders so no purpose trust or other vehicle is needed to hold its shares and, as it has separate legal personality, many clients, and particularly Middle Eastern families, will feel more comfortable with such a structure. Not only that, the land registries and banks of non-trust jurisdictions are also more willing to register assets in the name of the foundation than they have been to register in the name of trustees of a trust.
Although it is early days, the indications are that the uses of Guernsey foundations are likely to be wide ranging and imaginative. Foundations will be used alongside and as part of trust and corporate structures. The foundation offers clients a simple and practical solution for succession planning and is particularly useful for those clients who are unfamiliar with trusts.
Originally published in Private Client Practitioner's 2014 Guernsey Special Review, January 2014.
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