Foundations are an important wealth management vehicle for clients from jurisdictions where trusts are either not readily understood, or are not recognised. These include most civil law jurisdictions in Europe, Latin America and elsewhere, as well as China, Russia and the Middle East. Thus foundations are attractive in the majority of the emerging markets.
There has been a significant shift in the private wealth managed in the Channel Islands in the past 25 years, from inherited to self-generated wealth. Significant business growth is most likely to come from the emerging markets, where the majority of wealth is self-generated. The level of influence that such clients wish to retain does not always sit comfortably with trusts, particularly where the principal asset is the business that generated the wealth. The challenge has been to develop something to meet the needs of such clients, for which the foundation is ideally suited.
Jersey foundations have been available since July 2009 and, despite being introduced in the middle of the worst financial crisis the world has seen for many years, they have been popular from the outset. As an entity of great flexibility, which both complements and offers an alternative to trusts and companies, the Jersey foundation is proving a welcome addition to the island’s “toolbox” of entities for wealth planning and commercial structuring.
Nearly 100 Jersey foundations have been registered, with an average of two new registrations per week in March and April this year; double the average for 2010, and their popularity is bound to increase further.
First, its separate legal personality, like a company, means that a foundation can own assets in its own name, whereas a trust does not have its own legal personality and the assets have to be held in the name of the trustees. Therefore, the foundation can be much more comprehensible than a trust to people from civil law jurisdictions.
Second, it is registered like a company and its validity depends solely on registration, so there is much greater certainty, with none of the issues, such as sham or lack of certainty or assets, which can invalidate a trust.
Third, no duties are owed to beneficiaries and they have no interest in the assets, so there is no requirement for the Foundation Council to disclose information about the foundation and its assets to them. This also means that the beneficiaries cannot collectively force the termination of a foundation and the distribution of assets to them as they can with a trust – an important quality for those seeking to preserve family wealth while permitting enjoyment of it.
A foundation’s benefits might best be illustrated using a case study: Collas Crill recently prepared a Jersey foundation for a wealthy Middle Eastern family with five branches, which owns companies operating trading businesses and holding property portfolios and passive investments. The foundation will own the shares in all of those companies, but only as a passive shareholder, and the family will continue to control them at board level. Thus, in deciding the level of dividend the companies declare, the family controls the flow of money into the foundation.
The mandatory guardian is a committee comprised of one member from each branch of the family and the council cannot make distributions without guardian approval, thus the family also controls the flow of money out of the foundation.
Guernsey has resolved to introduce foundations, and a six-week consultation on the draft legislation closed on 23 May. Its primary goal is to create legislation that would be treated as a foundation under a civil law jurisdiction, particularly steering away from criticisms leveled at other jurisdictions that a foundation could be treated as a company. In addressing these concerns, the states of Guernsey have sought to offer something distinctive to that which has been offered elsewhere. Both Jersey and Guernsey have reputations for high standards and significant expertise in using trust and company structures, so clients can have complete confidence in using the Channel Islands for their foundations.
Richard Pirie is a senior associate at Collas Crill
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