Understanding Foundations

Helpful guide

September 10, 2018

Introduction

When we hear the word ‘foundation’ we tend to think of it in its general term where it may be used to describe any organisation to indicate it has charitable purposes. However, its legal structure may be a company, a trust or even a partnership. As an example, The Carnegie Foundation is a corporation incorporated in New York, the Bill & Melissa Gates Foundation is a charitable trust set up in the State of Washington, and in the Cayman Islands, private foundations are a type of company.

What is a private foundation?

Private foundations are intended to preserve family assets which have already been acquired, and in many jurisdictions, including Jersey, they are prohibited from engaging directly in commercial trading activities unless those activities are incidental to the attainment of its objects. The objects may be charitable, non-charitable or both, and may benefit a person or class of persons and/or be set up for a specific purpose.  As soon as a foundation is established it becomes independent from its founder and has its own legal personality.

Unlike a company a private foundation has no equivalent to subscribers or shareholders and, unlike a trust, beneficiaries have no equitable interest in the foundation’s assets.  

Each jurisdiction has its own law on private foundations and, although similarities exist when considering setting up a foundation the law of the chosen jurisdiction must be reviewed in detail as there are differences between them.  

In most jurisdictions, the law merely provides the facility for setting up a private foundation, and it is the constitutional documents (the charter and regulations) that contain the particular provisions required by the founder. This allows for an extremely versatile and flexible vehicle to be created to suit the specific needs of an individual.

Careful professional drafting of these documents is required to ensure the founder’s wishes are clear and that the council fully understand the founder’s intentions.

The following points explain specifically what Jersey private foundations governed by the Foundations (Jersey) Law 2009 need to ensure they conform to:

Foundation terminology explained

The Founder:

Heir agent or lawyer. There is no requirement for the foundation to be endowed with assets when it is initiated, and the provider of any future additions of assets does not become a founder.

Qualified Person:

A person registered under the Financial Services (Jersey) Law 1998 to carry on a trust business who applies to the Registrar for incorporation of a foundation.    

Guardian:

The guardian may share with the foundation council the responsibility for the control of the foundation and they must act in good faith and the best interests of the beneficiaries. Overall the role is supervisory to ensure the foundation council follow the requirements of the charter and regulations. The founder can also be the guardian.

Beneficiaries:

The objects of a foundation may be to benefit a person or class of persons, or the regulations may prescribe for discretionary appointment by the foundation council. A beneficiary has no interest in the foundation’s assets until they are distributed even if the constitutional documents specify the beneficiary by name and his entitlement. Beneficiaries are not entitled to receive information unless the foundation documents provide otherwise. If a beneficiary becomes entitled to a benefit under the charter or the regulations and the benefit is not provided, the beneficiary may seek an order of the Royal Court ordering the foundation to give the benefit. A founder can be a beneficiary.

Foundation Council:

The council must consist of one or more members (individuals or corporate bodies) one of which must be a qualified person (the qualified member). It has powers of management similar to the powers of a board of directors of a company. The members of the Council owe their fiduciary duty to the foundation itself. The founder can be a member of the foundation council.

The Charter:

The charter is a public document. It specifies the name, the objects for which it has been established (which may be charitable, non-charitable or both), details of how it will be endowed, and details of it's winding up if known.  It may contain further information regarding beneficiaries and purpose but to preserve confidentiality, it may instead refer to the regulations.  

The Regulations:

This document is private and is the equivalent of a company’s articles of association. The regulations must establish the council to administer the assets and set out how decisions are to be made.

Why use a Foundation?

The flexibility of a private foundation and the protection it can provide against external claims represent distinct advantages over a traditional trust. The following are some of the principal uses of a foundation:

  1. A general holding vehicle for valuable assets, including traded securities, shares in family businesses and rental property;
  2. To hold assets to avoid forced heirship claims;
  3. Asset protection;
  4. To act as settlor or trustee of a trust, or be a substitute for a private trust company;
  5. Charitable purpose.

In a corporate context, a foundation offers many interesting possibilities, and the range of structuring options to be investigated is extensive. Companies and foundations from other jurisdictions can migrate and convert to a Jersey foundation.

Foundations in Dubai

The Dubai International Finance Centre implemented a Foundation Law in 2018 providing an alternative for clients with family businesses and other assets in the Middle East. A DIFC foundation has an unlimited lifespan and must be registered with the DIFC Registrar of Companies. Its constitutional documents comprise the foundation charter and its by-laws (if issued). Although the foundation must have a registered office in the DIFC at all times, its actual administration may take place elsewhere. Although similar to other jurisdictions, a couple of features are unique to the DIFC foundation regime. The law contains exceptional asset-protection and firewall provisions to safeguard assets from forced heirship or creditor claims based on foreign law, as long as the disposition of the assets was valid under DIFC laws. It may issue securities, including depositary receipts concerning the assets of the foundation.

Author(s)
Jane Hayes
Jane Hayes
Associate Director - Yachts
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More information?

Fiduchi is a regulated provider of trust and company services, and therefore its experts are able to assist you in all aspects of ensuring continued compliance in the constant changing landscape. At Fiduchi we take a pragmatic approach to ensure your interests, whether personal or business, are safeguarded. Because of this, we don’t apply a ‘one size fits all’ methodology, rather the contrary. Our director led teams will assess your needs to ensure we take into consideration all your requirements and provide the bespoke service you require.

To find out more about Foundations, call our Private Wealth team on: +44 (0) 1534 755155

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