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Foundations: The New Trust?

Lowtax Editorial
10 November, 2015

Foundations have existed for many decades in civil law countries where the concept of an Anglo-Saxon trust is unfamiliar. But as competition for a larger slice of the global wealth management cake has intensified in recent years, several, mainly offshore, common law jurisdictions are now introducing foundations laws into their own legislative frameworks in order to attract new money from a rapidly increasing population of wealthy individuals and families in emerging economies such as China, Russia, and in Latin America. As Lowtax.net reported recently, Gibraltar will soon be the next entrant into the foundations club.

Foundations – What Are They, and How do They Work?

Globally, foundations come in all shapes and sizes and can be used for a wide variety of purposes. In the context of wealth management, the objective of a foundation is much the same as that of a trust. The manner in which a foundation is established and run, however, is quite distinct from a trust. Unlike a common law trust, a foundation is a legal entity more akin to a company and as such, it is usually entered onto the Companies registry in the jurisdiction concerned.

Foundations are formed by a founder who provides the initial assets of the foundation, otherwise known as the endowment. Unlike a trust, assets are held by a foundation for the purposes set out in its constitutive documents and are administered according to contractual rather than fiduciary principles.

Whereas trust assets are held by a trustee, a foundation has a council which acts much like a company board and which is responsible for fulfilling the purpose of the foundation, although there are no shareholders. Beneficiaries have contractual rights to enforce the operation of the foundation in accordance with its constitutive document, rather than proprietorial rights in its assets.

Common Law Foundations

Foundations have been in existence in Europe since the 1920s and notable jurisdictions with foundations laws include Austria, Liechtenstein, the Netherlands and Sweden. They are also to be found in Asia and Latin America, with Panama a notable foundation jurisdiction.

However, as mentioned above, foundation laws are no longer the exclusive domain of the civil law countries, and a number of common law jurisdictions have developed, or are in the process of developing, their own equivalents. Some examples are summarized below:

The Bahamas

Foundations were introduced by the Foundations Act 2004 and accompanying regulations. Under this law, there are no perpetuity period rules applicable to Bahamian foundations, which immediately provides for continual unending succession if it is desired by the founder. A Bahamian foundation is not subject to forced heirship laws of a foreign jurisdiction.

A Bahamian foundation is a distinct legal entity which is convenient for 'proper law' questions. Assets placed within the foundation are owned solely by it, and a change in a Bahamian foundation's governing body does not change the legal ownership of the foundation's assets. There is no statutory requirement for an external audit unless the foundation's charter so provides.

A foundation established in another country may re-domicile in the Bahamas; and a Bahamian foundation may re-domicile into another country, provided such a move is permitted in that country.

The registration process for a Bahamian foundation is comparable to that of a company registration, making it a legal entity that must be filed with the Registrar General of the Bahamas. Like that of a company, the name of the Bahamian foundation must be reserved at the Registrar General's office prior to submission of the necessary documentation. The registrar will confirm that the foundation name is valid for use and that the name has been reserved for a period of 90 days.

Officers of the foundation must keep proper records and accounts, which can be inspected by any officer, foundation council member, founder, auditor or any other supervisory person at any time. However, confidentiality provisions restrict any person acquiring information from disclosing such information relating to the foundation, without the expressed consent from the founder and the beneficiaries, or as required by law, or a Bahamian court.


In June 2009, Jersey's Privy Council approved an order allowing Foundations to be set up in Jersey - the first of the Crown Dependencies (Guernsey, Jersey and the Isle of Man) to bring in a genuine foundation product. The Foundations (Jersey) Law 2009, entered into force on July 17, 2009 and the regulations permit foundations to migrate in and out of Jersey. They also provide for existing Jersey companies to convert to foundations.

A foundation must have regulations. These regulations must:

  • Establish a council to administer the foundation's assets and to carry out its objects;
  • Provide for the appointment, retirement, removal and remuneration (if any) of its members;
  • Set out how the decisions of the council are to be made and, if any decision requires the approval of any other person, specify the decisions and that person; and
  • Set out the functions of the council, and, if they must or may be delegated or exercised in conjunction with any other person, the extent to which this must or may be done.

In particular, the regulations of a foundation must set out a procedure that ensures that a qualified person is appointed to be the qualified member of its council as soon as reasonably practicable if its qualified member dies, retires, or otherwise ceases to act or to be able to act.

Whilst similar in design to foundations in other jurisdictions, the Jersey structure introduces the concept of a 'guardian' with oversight over the council's activities in relation to the foundation and ensures that it achieves the broad objectives outlined in its constitutive documents.

A foundation must have a council to administer the assets of the foundation; and to carry out its objects. The council of a foundation may have one or more members and must include a qualified person. However, although the council of a foundation may include more than one qualified person it may not have more than one qualified member at any one time.

An act of a member of the council of a foundation is valid despite any defect that may afterwards be found in the appointment of the member; or the member's qualifications.

A beneficiary under a foundation has no interest in the foundation's assets; and is not owed by the foundation or by a person appointed under the regulations of the foundation any duty that is or is analogous to a fiduciary duty. However, if a beneficiary under a foundation becomes entitled to a benefit under the foundation in accordance with the charter or the regulations of the foundation and the benefit is not provided, the beneficiary may seek an order of the Royal Court ordering the foundation to provide the benefit.

The beneficiary must seek the order within the period of three years from the time when the beneficiary became aware of his or her entitlement to the benefit, provided they have reached the age of 18.

Jersey has established itself as a dominant player in the foundation industry with a formation rate of 5.5 per month as at August 2014, outpacing both that of the Isle of Man (1.3) and Guernsey (0.7).

According to Geoff Cook, CEO of Jersey Finance, the promotional agency for the island's financial services industry, the Jersey foundation "continues to prove itself to be a flexible and attractive proposition, equally suited to charitable administration as to orphan structuring and private wealth management."

"The strength of the foundation, combined with its trust and company vehicles, means that Jersey provides a good platform that can cater for a broad range of bespoke family, philanthropic and commercial needs," he added.


The Foundations (Guernsey) Law, 2012 was approved by Guernsey's legislative assembly, the States, in July 2012 and given the green light by the UK Privy Council on January 7, 2013. The Guernsey Registry began accepting applications for the formation of Guernsey Foundations from January 9 that same year.

Like foundation structures in other jurisdictions, the Guernsey foundation is an incorporated entity with a separate legal personality. It does not have shareholders to whom the board are accountable, but instead holds assets (in its own name) on behalf of beneficiaries, particular purposes, or both, in accordance with the foundation's constitution.

The foundation's constitution comprises a charter setting out the foundation's purposes, initial assets and duration (which may be unlimited) as well as rules prescribing, among other things, the functions of the council and procedures they must follow. There are no 'trustees' and instead, council members perform a similar role by having a duty to the foundation to act in good faith, and cannot, without express authorization, profit directly or indirectly from their position.

Guernsey has taken note of the fact that some clients may worry about confidentiality because as foundations are registered entities, they are, unlike trusts, publicly visible. In Guernsey, limited details are available to the public, and although full disclosure must be made to the registrar, in other jurisdictions the whole charter is commonly visible. Guernsey's approach means that this limited visibility offers the benefit of being able to prove the foundation's existence quickly when dealing with third parties.

In Guernsey, the founder's role is flexible but perhaps more restrictive than in some other jurisdictions. However, Guernsey has taken an approach which will be more familiar to those versed in the traditional civil law model where the foundation not only has a separate legal personality but also one that is independent of the founder. This may also help to clarify the appropriate tax treatment for the founder in their own country of residence.

A particular innovation of the Guernsey foundation is the ability for beneficiaries to be classed as either being 'enfranchised' or 'disenfranchised.' Enfranchised beneficiaries will have rights to certain information regarding the foundation, whereas disenfranchised beneficiaries are not entitled to any at all. Where there are disenfranchised beneficiaries then the foundation is required to have a guardian with a duty to act in good faith and en bon père de famille.

A foundation is also useful for corporate entities looking to create an orphan structure where the assets of a particular entity can be held in a foundation, rather than having a parent company and being an asset on that company's balance sheet. This means that the foundation may be used in investment fund structuring as well as for other corporate purposes.

In 2014, Guernsey's company registry approved the first ever migration of a foundation from another jurisdiction to Guernsey.

"Guernsey is very attractive for establishing new foundations because it is a reputable jurisdiction with highly experienced advisers and a sound and rational regulatory environment," said Natasha Kapp, Senior Associate at Carey Olsen, which prepared the migration application for submission to the Registry and advised Lloyd's Trust Company (Channel Islands) Limited on the foundation's move from Lichtenstein to Guernsey. "Many existing structures already include foundations established in other jurisdictions and clients can see the benefits that migrating the foundation to Guernsey might bring."

Will Foundations Catch On?

As mentioned above, foundations are already in wide use in parts of continental Europe and Latin America. But they are entirely new concepts in the Anglo-Saxon jurisdictions that have adopted them so far, so perhaps it is too early to judge whether foundations will eventually rival the common law trust as an asset protection structure.

Nevertheless, Jersey foundations legislation seems to have been quite successful so far, and by June 2015 some 282 foundations had been formed in the jurisdiction. Jersey estimates that around a third of Jersey foundations have been formed for philanthropic or charitable purposes, with a further third being used specifically by ultra-high-net-worth families as wealth and inheritance planning structures. Foundations are also being used for commercial purposes, for holding high value or luxury assets.

While Jersey has 'first mover' advantage over Guernsey in the area of foundations, which may help account for the disparity in the foundation formation rates between the two jurisdictions, the Guernsey authorities appear reasonably pleased with results so far since foundations were introduced in early 2013. Certainly, the fact that a foundation has migrated from Liechtenstein – where foundations are long established – to Guernsey must represent something of an endorsement of the island's foundations regime.

But, as far as Guernsey is concerned, the number of foundations registered in the jurisdiction doesn't tell the whole story. As Guernsey Finance points out, there are already a number of foundations that have been established elsewhere which are administered in Guernsey "because of the Island's reputation for administrative excellence, whether for trusts, companies, partnerships or foundations."

"Guernsey also has a long standing and well respected judicial infrastructure which is experienced in dealing with fiduciary matters," the agency observes. "These factors, combined with Guernsey's high standards in terms of regulation and tax transparency, mean that the Island is especially well placed to administer complex structures."

Still, it has to be said that common law jurisdictions have had mixed success with foundations. In the Bahamas, where foundations legislation has been in place for around a decade, interest in these structures appears to have been lukewarm, and some practitioners have reported that the foundation has been under-utilized. This may be down to the fact that jurisdictions like Guernsey and Jersey have been able to take note of existing foundation laws in other parts of the world, and formulate an optimum blend rules designed to appeal to a wider audience. Or it may be that the authorities in the Bahamas simply haven't promoted foundations aggressively enough. However, it may also come down to the fact that the trust is so well established and understood in common law wealth management centers that investors and practitioners have no reason to abandon it in favor of the foundation.

The example of Jersey suggests that there is demand for foundation structures in common law territories. But it seems that a number of factors may determine whether they will be successful or not, particularly a jurisdiction's level of wealth management expertise, its financial infrastructure, and its overall reputation.

Ultimately, time will tell if investors really do want something different, or whether they will prefer to stick to the tried and trusted.


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