Foundations have been around for many centuries particularly in European civil law jurisdiction. There are currently several hundred thousand foundations in Europe, most being philanthropic and more than half of which have been established since the 1950's.
There are over 50,000 Private Foundations in Europe which together hold more than 200 billion Euros.
The use of Foundations is principally for private wealth management and charitable purposes and to a lesser extent they are used in commercial transactions.
Private Wealth Management
Many wealthy families establish Foundations as an alternative to a family trust.
The advantages of a Foundation over a Trust are:
- The client may be more familiar with civil than common law jurisdictions and thus understands a foundation better than a trust
- The Foundation is a separate legal entity and the assets are beneficially owned by the Foundation whereas with a Trust, it is not a separate legal entity and the trustee owns the assets beneficially for the beneficiaries.
- A Foundation can enter into contracts and relationships in its own right whereas a Trust must enter into those arrangements through the trustee.
- A Foundation can continue indefinitely whereas in many countries a trust must end within a period of 80years to 150 years.
- A Foundation can sue in its own right whereas a Trust can only sue through the trustee.
- There is no requirement to put any assets in the Foundation at the outset whereas with a Trust it is generally a requirement that assets be settled into the Trust, even a nominal sum.
- With a Foundation it is possible to have a mixture of interests for beneficiaries, non-charitable purposes and charitable purposes whereas with a Trust there can be no mixture. This means it is possible to create a Foundation for a non-charitable purpose, such as to hold the shares of a company and to add beneficiaries at a later date.
- With a Foundation, a certificate of establishment is produced by the Foundations Registrar to show that it exists. No details of the Founder, Donor, Beneficiaries or specific assets held are published. This can be important for contractual and banking relationships. A Trust is a private arrangement and no such certificate of its existence can be issued by a government body.
Similarities of Foundations and Trusts
- Both Foundations and Trusts in the Isle of Man can ignore the forced heirship laws of other jurisdictions which are not enforceable in the Isle of Man
- Both involve a transfer of the assets from the beneficial owner to the Foundation or Trust which generally remove the assets from the estate of the beneficial owner. This is useful for estate planning.
- The Settlor of a Trust and Founder of a Foundation can include provisions to appoint and remove Trustees or Council Members.
Charitable foundations operate in a similar way to a charitable trust.
Ownership of assets for a purpose
A foundation can be the equivalent of a purpose trust and can have as its objects the ownership of assets.
A foundation might for example be used to hold assets off the balance sheet of a borrowing company whilst a loan is in place so the assets are better secured for the lender.
Examples of circumstances where a Foundation might be used
1. First Scenario:
Client lives in a country where there are forced heirship laws and he wishes to leave his estate to his family in proportions which differ from those laws.
- Client creates a Foundation in the Isle of Man of which the Client and his family are beneficiaries. There is no public information regarding the identity of the Founder/Donor or the Beneficiaries.
- IOM Trustee Service Provider (TSP) acts as the Council Member
- The Client, as Founder, has the power during his lifetime to change the Foundation Rules and to appoint and remove the Council Member.
- Client transfers the shares of his private company and other assets to the Foundation which is now the legal owner of those shares/assets and which shares/assets are no longer part of his estate.
- When the Client dies, the Council Member ensures the Client's family receive the benefit from the Foundation. The Rules of the Foundation can set out precisely how the Founder wants his family to benefit.
- Any challenge to the ownership under say forced heirship laws of another country can be defended by the Council Member as the Isle of Man legislation specifically states that laws of other jurisdictions, such as forced heirship, are not recognised in the Isle of Man.
- The Founder may pass onto one of his family or to a family advisor or to a third party professional, the right to change the rules of the Foundation to suit any changes in his family's circumstances and to appoint and remove Council Members.
2. Second Scenario:
Client has created and owns a successful international business which on his death he does not wish to have sold but he wishes it to continue for the benefit of his family and those who have helped to make the business successful.
- Client creates a Foundation in the
Isle of Man the purpose of which is to hold the shares of certain
companies which own the successful business with the following
- To ensure that the companies are managed in accordance with guidelines set out in the Rules of the Foundation
- The profits of the business pass to the Isle of Man Foundation.
- The profits of the businesses are applied for re-investment into the businesses and/ part distributed to a Family Trust (set up by the Client with the assistance of IOM TSP) which is a beneficiary of the Foundation.
- The Isle of Man Foundation can continue indefinitely and a succession plan is introduced to ensure that the businesses continue into the future with dynastic benefit for family members and future managers/employees of the business.
- The Client can decide whether to put the shares of the business into the Foundation before or after his death. In some circumstances it is better to do so before so there can be no issues over the estate/forced heirship laws etc.
3. Third Scenario:
Client wishes to create a philanthropic structure and possibly at same time provide for family members.
- Client creates a Foundation in the Isle of Man the purpose of which is to provide monies for certain philanthropic purposes as set out in the Rules and if required certain family members.
- The Client is the Founder and chooses to be one of the Council Members with some friends and associates. Client can have one or more Council Members which can, but does not have to include an IOM TSP. An IOM TSP would be the Registered Agent in any event as every Foundation requires a Registered Agent.
- Only the Client's funds are to be transferred to the Foundation and the Client does not want the Foundation to be registered as a Charity in the Isle of Man and accordingly the Rules are designed to achieve this, which means all the business of the Foundation is private.
- The Foundation can continue indefinitely.
4. Fourth Scenario:
A Foundation can be used instead of a Private Trust Company (PTCs) to be the trustee of a family trust. They can be described as "PTFs". The advantages of using a Foundation are:
- Typical PTCs required a purpose trust to be created to hold the shares of the PTC. In a PTF there are no shares and therefore no need to have a purpose trust structure.
- The Rules can be structured more flexibly
The PTF would enter into an administration agreement with an IOM TSP for the provision of trust administration.
Establishment of a Foundation
A foundation is established by an application to the Registrar of foundations by a class 4 (corporate services) licence holder with a fee of £100.
The Client will usually be the Founder who instructs the IOM TSP to make the application which is in the form of an Instrument, a short document, setting out the name of the Foundation, the objects for which the Foundation is formed, the name and address of the Council Member (s) and the Registered Address of the Foundation.
The Foundation is typically incorporated within a couple of days from filing the Instrument.
Only the Registered Agent signs the Instrument and so the Foundation can be created quickly. The Founder and Council Members sign the Rules but not the Instrument.
The Foundation Rules
The Foundation Rules must contain:
- provision for the establishment and proceedings of, and changes to, the council;
- provision for the appointment, retirement and remuneration of the registered agent;
- rules in relation to the office of any enforcer;
- provision for accounts
- rules in relation to any initial and further dedications of assets;
The Foundation Rules, redacted to remove the name of individuals referred to in the Rules such as beneficiaries and specific assets held by the Foundation are registered with the Registrar of Foundations.
If one of the objects of a foundation is to carry out a specified non-charitable purpose, the foundation must have an enforcer in respect of that object. Any other foundation may, but is not obliged to, have an enforcer (charitable objects are enforced by the Attorney General). The enforcer has a duty to take reasonable steps to ensure the council carries out its functions, and may require the council to account to him. The enforcer must be identified in the foundation rules, which must provide for his retirement and remuneration. The founder can be the enforcer.
Funding the Foundation
Assets are added to the foundation by dedication. A foundation need not have an initial dedication of assets, and assets can be dedicated to the foundation after it is established in which case the details of the dedication must be specified in the foundation rules. A "dedicator" is a person, other than the founder (can be the same person as the founder), who dedicates assets to the foundation. A dedicator is a "person with sufficient interest" (see below) but otherwise has no statutory role in the foundation.
The Foundation's Council
A foundation acts through its council. The council must have at least one member who, if an individual, must be at least 18, however the council member does not need to be resident or regulated in the Isle of Man and a company may be a member of the council.
Council decisions are to be taken by resolutions at a meeting of the council, or consented to in writing or electronic communication by all (or a majority of, if so provided in the foundation rules) the council members.
A foundation must have a registered agent. This activity is within class 4 of the Regulated Activities Order 2009.
Unless the foundation rules provide otherwise, a foundation must provide a "person with sufficient interest" in the foundation with a wide range of information as soon as practical after he requests it. The foundation rules can prohibit the provision of information; it would appear that such prohibition need not be general but may relate to particular persons or classes of persons. If such a prohibition applies, the person requesting the information may apply to Court to obtain the information in certain circumstances.
Persons with sufficient interest
These are the persons with standing to obtain information from a foundation or, if the foundation rules prohibit such, to apply to Court for that information, or to apply to Court to enforce the foundation instrument and rules. The definition of the expression "person with sufficient interest" includes the foundation, the founder, a dedicator, a council member, an enforcer, a beneficiary, and the Attorney General (in respect of charitable objects). It also includes a person who the High Court determines to be a person with sufficient interest, if the Court considers that the person's interest in the foundation is sufficiently close that the person ought to be treated as a person with sufficient interest.
Application to Court for directions
The High Court has jurisdiction under the Act to give directions in relation to various matters, including the interpretation of a foundation's instrument and rules, as to the manner in which the foundation should be administered, and as to the rights of beneficiaries. This is similar to the High Court's jurisdiction in relation to trusts.
The foundation must keep proper books and records at an address (within or outside the Isle of Man) as the council decides, and notify the registered agent of that address (if not the business address).
A foundation must keep reliable accounting records sufficient to enable the financial position of the foundation to be determined with reasonable accuracy at any time; and allow financial statements to be prepared. If financial statements are prepared there are certain requirements as to what they must include (balance sheet, etc).
An annual return to the Registrar is required, and a foundation must notify the Registrar of amendments to the foundation instrument.
Transfer of Foundations to and from the Isle of Man (Continuance)
Foreign foundations, being a legal person established and recognised as a foundation under the laws of another jurisdiction can continue as a foundation under the law of the Isle of Man and similarly Isle of Man foundations can migrate to other jurisdictions.
Conflict of laws
All questions that arise in respect of a foundation or the dedication of assets to a foundation are required by the Act to be determined solely under Isle of Man law, and there are provisions in relation to foreign heirship and similar rights.
Isle of Man tax
A foundation is a "corporate taxpayer" for the purposes of the Income Tax Act 1970.
Simcocks Advocates Limited ("Simcocks") has for many years assisted clients in preserving their wealth to ensure that it benefits the Client and those chosen by the Client to benefit in the future. Foundations now form part of the solutions which Simcocks can provide to its clients through Juristrust Limited a wholly owned subsidiary of Simcocks, licenced by the Isle of Man Financial Services Authority to undertake trust and corporate service business.
Originally published June 24, 2020.
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.