The Foundations (Guernsey) Law, 2012 (Law) is awaiting Royal assent, expected to be given by the end of the year or early next year. Whilst Guernsey is not the first jurisdiction to provide for foundations, the Law does provide a number of unique options for individuals wishing to take advantage of the benefits provided by foundations. The purpose of this note is to provide both a general summary of the features of a Guernsey foundation, as well as a summary of these unique options that will be available under the Law.
Foundations: a civil law concept
The concept of a foundation has existed for centuries, primarily in civil law jurisdictions whose laws derive from Roman law. Whilst Guernsey is a common law jurisdiction, the Law has been drafted in such a way as to reflect legal drafting in civil law jurisdictions which do not usually recognise the concept of a Trust, but which are familiar with foundations. It is anticipated that Guernsey foundations will be particularly of interest to wealthy individuals, family businesses and entrepreneurs in “emerging market” countries, many of which are civil law jurisdictions.
Foundations (which in some countries are referred to as Private Foundations or Private Interest Foundations) have characteristics of both a company and a trust, providing sufficient corporate characteristics for civil law jurisdictions to recognise them, and sufficient trusts characteristics to make them an attractive option for succession and estate planning purposes. Most importantly, foundations are not a hybrid of companies and trusts, but are a legal concept all of their own, with their own specific origin and purposes.
A table setting out the similarities and differences between foundations and companies and trusts is set out here.
General uses of a Foundation
- Wealth protection and asset management;
- Inheritance/succession planning and the circumvention of forced heirship rules;
- Charitable and non-charitable purposes;
- Orphan vehicle for funds, private securitisation etc;
- Pension funds; and/or
- Holding capital, income and specific assets;
- As a trustee (as an alternative to a private trust company).
The Guernsey basics
There are a number of provisions in the Law that may be of interest to those contemplating establishing a foundation, some of which are found in the laws of other jurisdictions but some of which are not. We set out the key features of Guernsey foundations below:
A Guernsey foundation is formed by one or more founders, which could be one or more individuals or bodies corporate, who provide assets to the foundation, the initial endowment.
The initial endowment may comprise any property, movable or immovable, tangible or intangible, wherever situated. Unlike in other jurisdictions, there is no minimum initial endowment required to set up the foundation. A foundation therefore could be set up without transferring much capital or a significant asset, which may be desirable in certain circumstances.
Purpose and benefit
A foundation can be established for either a purpose/s or to benefit beneficiaries or both. The purpose/s can be charitable or non-charitable. This may be desirable for those founders wishing to set up a company like structure but with the flexibility of a trust.
Separate legal personality
Foundations have separate legal personality, like companies, and therefore can contract, sue and be sued, in its own capacity. However, foundations provide an even more flexible structure to companies as they can be adapted to fit each bespoke situation.
Like a company, the assets of the foundation belong to the foundation and not to the beneficiaries. This may be worrying to some, but this should be considered in light of the fact that the Founder can retain certain powers over the foundation. In addition, because the beneficiaries are not the legal or beneficial owners of the assets, they have no say over the assets, which may appeal to some founders, particularly those with minor children or those with beneficiaries who may not agree on what is to be done with the assets.
A foundation is administered by a council which acts like the board of a company, making the decisions on behalf of the foundation. A council is made up of councillors and in some cases guardians (if there are disenfranchised beneficiaries (as defined below) or a purpose). The default position in the Law is that a foundation will require at least two councillors but the charter (as defined below) may specify a single councillor if the founder wishes.
Councillors and Guardians
A councillor can be an individual or a body corporate. Councillors must act in good faith in the exercise of their functions and have other duties, similar to a company director, such as duty not to profit, duty to provide information, duty to preserve assets, maintain records and act impartially. Their duties are owed to the foundation and not the beneficiaries, like the duties owed by a company director to a company.
Where a Guernsey foundation has been established for a purpose or with disenfranchised beneficiaries, the Law provides that a guardian must be appointed in either of these circumstances in order to act as an enforcer of the purpose/s or benefit/s. This ensures that the purpose/s or benefit/s are always capable of enforcement, minimising any risk that the foundation ends up having no object/s or means of enforcing the object/s.
The founder can be appointed as guardian, but a councillor cannot be a guardian at the same time as being a councillor.
A guardian owes a duty to act in good faith and en bon pere de famille to the founder and beneficiaries to enforce the constitution. This is a novel feature of the Law and will provide added comfort to founders of foundations for purposes or for the benefit of disenfranchised beneficiaries.
Whilst there has been no case law in Guernsey, Jersey or England (all of which would be persuasive in a Guernsey court), it is expected that the duties owed by councillors and guardians may be held to be analogous to those of a company director or trustee in certain respects, particularly in relation to the question of who duties are owed to.
A foundation will be administered in accordance with its constitution which is made up of a charter and rules (if any), much like the memorandum and articles of a company. The charter will set out basic information, including the name, purpose, duration and initial capital/endowment. The rules will include more detailed information, including the function of councillors, appointment of foundation officials, retirement and remuneration and default beneficiaries and can include bespoke provisions including application of assets, addition and exclusion of beneficiaries, conditions on benefitting, benefit termination provisions (such as if a beneficiary divorces or becomes bankrupt in order to avoid a court granting an order to include any foundation benefits in the pool of assets).
Only the charter must be provided to the Registrar (see below) and so there remains a degree of privacy as the detailed operative provisions are not available publicly.
Founder’s powers and wishes
A founder can be an individual or a body corporate. The founder is named in the constitution and must subscribe to it (individually or by the entity registering the foundation).
The fact that the founder can be a body corporate is useful where the individual behind the foundation may not want to act as founder (for whatever reason, including confidentiality) and so the body corporate would provide the initial endowment and would be named on the Register (defined below) and would sign the constitution.
A founder can determine certain matters and can retain certain powers in the constitution (more so than a settler can retain trusts powers) whilst alive (if an individual) or for 50 years from the establishment of the foundation (if a body corporate) including to power to determine the purpose, appoint councillors and guardians, revoke or amend certain terms and terminate the foundation. In addition, if the founder is a body corporate, this avoids any problems that may arise if the founder were an individual and they were to die or become legally incapable of managing their affairs.
In addition, the council can delegate certain functions to the founder and/or the founder can be a councillor or guardian (and will have the responsibilities that come with either role), and can be a beneficiary of the foundation. This allows the founder to retain certain control over the foundation and supervise that the foundation is carrying on its actions as was envisaged by the founder. This may appeal particularly to a family run business.
Apart from the founder's powers under the constitution, a founder can provide to the council a letter of wishes, like a settlor can provide to trustees of a trust, setting out additional matters the founder would like the council to consider. Such letter of wishes would have the same non-binding effect as a letter of wishes to a trustee.
Whilst the founder must be careful not to retain too many powers, the Law provides founders with ample scope for involvement, but with the added certainty that the powers are limited in scope and duration, and seems to have struck a nice balance between ensuring a foundation is validly established and providing the founder with some say in the foundation.
A Guernsey foundation will be required to make certain limited information public in a register maintained by the Registrar, being the name and registered number of the foundation, name and address of councillors and guardians and details of the registered office. However, importantly, the information provided to the Registrar is not all publicly available, as, whilst the charter and declarations must be filed, they will not be publicly available (save for in certain situations, such as criminal investigations).
Information to beneficiaries
Generally, information is available to the beneficiaries of a foundation. However, the Law is unique in that is provides for a class of beneficiary, known as disenfranchised beneficiaries, who are not entitled to certain information and certain rights (see above section on guardians).
This is a welcome novelty of the Law and may appeal to those founders with minor children or where the founder does not want each of the beneficiaries to know their interests or the interests of other beneficiaries.
Registration and regulation
Registration and annual fees
Foundations will need to be registered (in accordance with Guernsey tradition that entities with limited liability require registration) with the Registrar of Foundations, which can only be carried out by a Guernsey fiduciary licensee (see below), and it is anticipated that this process will be straightforward, with a standard fee payable upon registration, and possible standard annual payments.
The foundation only comes into existence upon registration, like a company. A foundation may be required to renew its registration each year.
Any foundation from any other jurisdiction can apply to the Registrar to register in Guernsey. It is up to the Registrar to agree to such registration and it is anticipated that the Registrar will consider such things as the jurisdiction from which the migrating foundation is migrating in, the founder and beneficiaries of the foundation and whether the registration of the foundation would be reputationally damaging to Guernsey. The process will be similar to that for the migration of a company into Guernsey and so practitioners should be quickly prepared to assist in this regard.
Regulation or registered agent
Unless any councillor or guardian is a Guernsey licensed fiduciary (regulated by the Guernsey Financial Services Commission), the foundation must have a local resident agent to maintain the foundation's records.
There will be no taxes payable in Guernsey, unlike in some other jurisdictions.
Guernsey is a well regulated and internationally respected offshore jurisdiction. Guernsey is a politically stable jurisdiction with its own autonomous government but with close ties to the UK.
Guernsey’s finance industry has grown in size and expertise over the last 50 years and there are now a significant number of financial experts based locally who can provide investment, accounting, legal and other advice.
In addition, the Guernsey judiciary is experience in a number of areas, including contentious private structures and trusts, and is capable of dealing with complex and high value cases. The judiciary is made up of a number of very experienced local judges and is supported by, both at first instance and in the Court of Appeal, senior and prominent members of the English Bar.