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Foundations set to increase in popularity

Foundations are becoming increasingly attractive vehicles for private clients and will be particularly relevant to those in civil law jurisdictions, say wealth planning experts.

9 November 2012

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“There are some 77 civil law countries in the world, including three out of the four BRIC countries with vast potential workflows,” said Giles Corbin, a partner at Mourant Ozannes.

“Because, for instance, the trust concept is regarded as ‘repugnant’ to Russian law, a foundation, as a civil law construct, represents a much more attractive option where Russian law issues are likely to be in play.”

Foundations are also likely to generate interest from the Middle East market. “Given the vast wealth in the region and the suitability of foundations for the Middle East, it is not surprising that a number of the foundations established for Middle Eastern clients have been of significant size - in excess of US$100m,” said Corbin.

Corbin was a part of the working group that developed and drafted Jersey’s Foundations Law and has been involved in drafting 50 foundations since the law came into force in July 2009.

The island has registered a total of 188 foundations in the three and a half years since the law’s inception, an average of about one a week, which can be categorised in three roughly equal-sized categories: charitable purposes, private family (or dynastic) purposes and special purpose (orphan) vehicles for corporate structures.

Corbin is expecting foundations to increase further in popularity. “Mourant Ozannes in Jersey currently generates 90 per cent of its business from trust-related services and ten per cent from foundation-related services and we expect that in the years ahead foundations work will increase,” he said.

Part of the attraction of foundations is that they remove a number of the uncertainties associated with trusts. They are less susceptible to sham attack, give confidence to the founder as the assets are owned by the foundation, itself a distinct legal entity, and give a multiplicity of control retention mechanisms over key decisions for the founder while offering a higher level of confidentiality than trusts, said Corbin.

“For service providers, the foundations law does not confer the same standard of fiduciary responsibility upon council members as is true for the trustees under trusts law,” he continued.

“The standard is more akin to that directors owe under company law, in that service providers who act as council members owe duties to the foundation rather than to the beneficiaries. As such, council members only have one master.

“This is clearly not the case for trusts where duties are owed to a group of beneficiaries, many of whom who have competing interests,” he said.

Corbin gave examples of where foundations had been used in practice, including for a Swiss resident who wanted to establish a philanthropic infinite duration vehicle to preserve tracts of rainforest, a Luxembourg fund promoter who wanted an orphan manager and a Russian family who wanted a vehicle to hold property in Moscow, Egypt and London.

“It’s an important addition to Jersey – and now Guernsey’s – range of tools in the wealth management space,” he concluded.

Guernsey’s draft foundations law was approved in July this year and is expected to come into force in early 2013.

“Guernsey’s motivation for bringing in foundations is similar to Jersey’s,” said St John Robilliard, joint head of the international trusts and private client practice at Mourant Ozannes.

“Clients have often struggled with the fact that a trust is an expression of a relationship based on property law rather than being a separate legal entity. Foundations address this challenge,” Robilliard said.

“The founder of a foundation under Guernsey law will have no right, in his capacity as founder, to foundation property. There will be no concerns over foundation assets reverting to the founder as you might find with a trust.

“Guernsey’s registration process involves a combination of public and private registration: the public register will be sufficient to demonstrate that a particular foundation exists while a private register is needed to allow regulatory and anti-money laundering oversight.”

Robilliard pointed out that, unlike a Jersey foundation, the founder must make an initial endowment and there is no requirement for the council of members to contain a Guernsey resident and licensed fiduciary, but in that situation a Guernsey licensed fiduciary would have to act as resident agent.

“The resident agent will have the right, but not the obligation, to obtain information in respect of the foundation from the council. Beneficiaries under Guernsey foundations will either be enfranchised beneficiaries, with a right to information, or disenfranchised beneficiaries who will have no right whatsoever to information.

“While Guernsey has implemented reservation of powers to the founder, similar to those in the trust law and in Jersey’s equivalent foundations law, there is a distinction. Certain powers can only be reserved during the founder’s lifetime and if the founder is a corporate entity such powers can only be reserved for 50 years,” he said.

Corbin and Robilliard were speaking at a seminar on foundations in London at the beginning of November that was hosted jointly by Nerine Group of Fiduciaries and Mourant Ozannes.

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Tax & Wealth structuring Wills, Trusts & Probate