Originally published in HNW Journal, March 2008, Online Version
Over the past 50 years Guernsey has established itself as a leading international centre for wealth management. The Island has built a reputation for excellence in providing a range of products from sectors broadly comprising banking, investment funds, asset management, stockbroking and fiduciary services. Guernsey's continued presence at the forefront of the wealth management industry is largely due to its adaptable, flexible and innovative nature.
These traits are no better illustrated than by the Island's willingness to review and amend legislation even in times of success so as to ensure that providers based in Guernsey can continue to offer clients the very widest range of products and services. A significant example is the new Guernsey Trusts Law that will be effective from Monday 17 March and includes the introduction of Purpose Trusts and abolishes the personal liability of directors in Private Trust Companies (PTCs). This will further enhance Guernsey's fiduciary environment where there are already more than 140 licensed trust companies ranging from large organisations to independent, boutique operations holding between £200bn and £300bn worth of assets in trust and boasting significant expertise in using the modern structures that are available on the Island for the preservation of institutional and individual/family wealth and assets.
However, Guernsey is far from resting on its laurels and is now working to introduce legislation that will allow the establishment of Foundations. This innovation will add another new tool to the Island's current product mix and 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. Since then, and noticeably more recently, they 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 both trusts and companies.
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 are 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 will take place through the new Guernsey Company Registry that will come on-stream at the start of July this year in parallel with the new Guernsey Companies Law. This will see the Island's system for company formation and maintenance move from a court-based model to a streamlined statutory process. The registry will utilise the very latest systems and online technology to provide users with a simpler and quicker service whilst maintaining the Island's hallmark of personalised delivery. The new arrangements will intimately involve the corporate service providers who will become the gatekeepers for the incorporation and maintenance of companies and the registration and filings of Foundations.
Filing requirements for Guernsey Foundations 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: having powers 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.