Angela Calnan and Bethan Boscher of Collas Crill in Guernsey look at some examples of how foundations in practice.
Although new to Guernsey, interest in foundations is high and since January several have made it onto the register. There are many potential uses for the Guernsey foundation and below we illustrate just one of them.
In the Middle East foundations have traditionally been thought of as a philanthropic vehicle but that is changing.
Lawyers, wealth planners and trust service providers (TSPs) have often struggled to engage Middle Eastern families in the concept of a trust, particularly where the family's 'golden egg' - the business - is to be structured.
Some success has been seen in using private trust companies (PTCs) to enable the patriarch and the wider family to hang on to control by mirroring the board of the operating company on the PTC board.
For many clients, however, the estate planning discussion falls at the last hurdle with PTCs. The PTC's shares need to be owned by a trust and, even though the patriarch can take some comfort from ultimate control as enforcer of the purpose trust, for clients who are unfamiliar with trusts this is often a deal breaker. Foundations solve this problem. Being an 'orphan' vehicle, the foundation does not require shareholders so a trust is not needed to hold its shares. It also has separate legal personality (like a company), which many Middle Eastern families feel more comfortable with. In addition, the land registries and banks of non-trust jurisdictions are also more willing to register assets in the name of the foundation than they have been to register in the name of trustees of a trust.
Using a foundation in place of a PTC completely avoids the need for the purpose trust/enforcer layer thereby reducing the administration costs and increasing simplicity. In Guernsey the law allows foundations to be used for certain purposes; in this case for the sole purpose of acting as trustee of family trusts which in turn hold the family's assets. Although it is early days, the indications are that the uses of Guernsey foundations are likely to be wide ranging and imaginative. The foundation offers clients a simple and practical solution for succession planning and is particularly useful for those clients who are unfamiliar with trusts.
Khalid is seventy. He and his family are Muslim. He is a self-made man and keen to instil the same values in his children as his father instilled in him. Khalid is resident in Dubai and is married with one son, Amal, and two daughters, Yasmin and Nissa. Khalid is a successful businessman, having established a manufacturing business and is interested in establishing a structure to protect his wealth and ensure that the business passes to his children successfully. Khalid has concerns over his son Amal who, despite attending a prestigious university in London, has shunned the family business. Except to demand money, Amal has had little contact with his parents since he married his wife in 2008, due to their belief that his wife's only interest in Amal is for the family's money. In recent years Amal's spending habits have increased to an unhealthy level. Khalid is worried about how quickly Amal and his spendthrift wife would dissipate a lump sum of inheritance. In contrast, Yasmin is a highly successful businesswoman who, having excelled at a prestigious university in London, has since worked for her father in the family business where she has recently been promoted onto the board. Khalid wants to ensure that Yasmin is appropriately rewarded for her contribution to the family business upon his death.
Sadly, Nissa was involved in a car accident several years ago suffering from severe brain damage and is entirely reliant upon her parents. Khalid is very keen to ensure that she is provided for in the future. Khalid wants to protect his wealth and transmit the family business to the next generation and future generations but, under Sharia law, Amal would inherit the lion's share and this does not fit with Khalid's wishes. Khalid has spoken to several lawyers and wealth planners about trusts and about moving assets out of the Sharia spotlight in order to achieve his objectives but he has always been deeply suspicious about transferring assets out of his own pockets and into the pockets of a distant trustee to manage on the basis of, what he considers to be, a rather flimsy agreement.
He has also had several discussions about being his own trustee by using a PTC but it seems that this is ultimately controlled by a foreign trustee and he cannot get comfortable with this.
He has spoken to friends in the Majilis who have mentioned foundations. The possibility of using a foundation instead of a PTC to act as the trustee of the discretionary trusts, which hold his business and his properties, has found favour with Khalid. A foundation is a legal entity and so can act as trustee of the discretionary trusts but, more importantly, as it is an orphan vehicle it does not have any shareholders. The foundation council, who are responsible for the management of the foundation, can mirror the board of directors of Khalid's business, ensuring there is no effect on the control of Khalid's business. He has, however, decided to have a professional TSP on the council as well in order to ensure that the foundation runs in accordance with Guernsey law.
Khalid will act as founder and reserve the power to amend, vary or terminate the foundation, and he has appointed his right hand man to act as guardian. Amal's wife has been excluded from the underlying trusts and Yasmin must sign a pre-nup before benefitting. Importantly, the foundation meets Khalid's key objectives; (i) Sharia law will be
circumvented due to the robust anti forced heirship regime in Guernsey; (ii) control of the family business will be unaffected as the foundation council effectively mirrors the board of directors of the business; and (iii) as the foundation is an orphan vehicle there are no shares to be caught by succession regimes.
Originally published by IFC Review, August 2013.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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