The States of Deliberation, Guernsey’s parliament, voted unanimously for introducing foundations into Guernsey law in December 2006. After an extensive period of research and consultation, the Commerce and Employment Department presented a report to the States in March with a view to passing legislation later in the summer. Guernsey has been an international centre of trust administration for more than 50 years. Why is it now proposing to introduce foundations legislation? Has it missed the boat? What will the law look like?
To set the scene, it is necessary to describe the key features of a foundation by reference to what is already known to the trust practitioner. While it is tempting to compare a new juridical concept with what is already familiar, to describe a foundation by comparison with trusts or companies could get lost in translation. Such comparisons are inevitable but a foundation is not a company or a trust. These are three different legal institutions that have evolved differently to do different things in different environments.
Unlike a trust, a foundation has separate legal personality independent from the founder. Assets are ‘dedicated’ to the foundation by the founder to fulfil its purpose, and it is managed by a committee or council. With legal personality and a management board, a foundation can be compared to a company. In other aspects it can be compared to a trust, as assets are held for the benefit of others or for a specific purpose. Like a trust, if there are beneficiaries, they have certain defined rights. Trusts and foundations can be used for similar purposes: both can be used in estate planning, both can be used for philanthropy.
One way trusts and foundations are similar is the consequence of their establishment. In the common-law tradition, establishing a trust takes trust assets out of the estate of the settlor. In the civil-law tradition, every individual has an indivisible ‘patrimoine’ (inheritance) representing that person’s ‘economic value’ as it ebbs and flows during their lifetime. On their death, the patrimoine is transferred intact to the person’s heirs. A purported assignment of part of a person’s patrimoine does not release the person’s heirs from the debts and liabilities assigned, nor does it prevent the automatic transfer of the patrimoine to the heirs on death. Foundations, however, can split the patrimoine so the dedicated assets are applied towards the purpose of the foundation rather than the heirs.
Although the foundation, in all its various forms and guises, has been known to civil lawyers for centuries it was not really until 1926, with the introduction in Liechtenstein of the Law of Persons and Companies, that the foundation became part of the armoury of the private client advisor. The Liechtenstein law was clearly intended, at least in part, to provide a trust-type solution that civil lawyers and clients could work with. There is some irony that Guernsey, an established trust jurisdiction, is introducing a juridical institution that is a civil-law response to the trust. This is because the trust relies upon the recognition of different property rights in the same property. This is an equitable concept that many legal systems simply do not have and for some it can make the trust difficult to fathom or simply unfathomable.
Many of the emerging economies that Guernsey practitioners have identified as providing the Island with business opportunities are civil-law jurisdictions where foundations are more commonly understood. The international appetite for foundations is hearty. There are more than 200,000 foundations in the Netherlands alone. There is also foundations legislation in other civil-law countries, including Austria, Germany (where there are both charitable foundations (the stiftung) and private foundations (the treuhand)), Switzerland, Belgium, Italy, France (for public purposes), Norway and Japan.
Foundations established in other jurisdictions have been administered in Guernsey for many years but, ultimately, if something goes wrong, it is necessary to have recourse to the courts of the country in which the foundations are established, and for some advisors this presents an unacceptable risk. Over time an appreciable number of international private client advisors have explained to Guernsey practitioners that they had clients who would prefer a foundation, as opposed to a trust, to achieve the client’s particular objectives. However, they did not wish to establish foundations in the international finance centres (IFCs) that then provided foundations. Their reasons were varied but it was recognised that there was a demand for foundations that could be established and administered in a tax-neutral jurisdiction where there were tried and tested administrators, professionals and courts and which had a reputation for being well regulated, transparent and cooperative.
There has been circumspection before proceeding with this project. In the same way that those who are unfamiliar with trusts regard the concept with suspicion, those who were unfamiliar with foundations had similar concerns. That the institution itself seemed to be indelibly associated with IFCs with which Guernsey would not want to be associated was initially a concern from a reputational perspective. However, it was recognised that criticism of those jurisdictions was not the result of the foundation as an institution itself but of a broader failure in those jurisdictions to meet international standards on regulation and tax information exchange, combined, usually, with strict banking secrecy laws.
Guernsey has not created a form of “corporate trust” but a recognisable foundation
The Guernsey legislation has been crafted to ensure that there is appropriate oversight of Guernsey foundations, which will only be formed once registered in Guernsey. In some civil-law jurisdictions, it is not obligatory to register private foundations. The formation of Guernsey foundations will be restricted to licensed fiduciaries, which are all regulated by the Guernsey Financial Services Commission. This will ensure compliance with anti-money laundering and combating of financial terrorism obligations, as well as regulatory oversight of the administrators of foundations. A Guernsey foundation will have to maintain a registered office in Guernsey at which the constitution of the foundation and its accounting records will be maintained. Also, there will always be personnel in Guernsey supervised by the Guernsey Financial Services Commission, which shall have access to the other records of the foundation.
One reason for the time taken in producing the legislation has been the research done by the Commerce and Employment Department and the legislative draftsman. The academic and professional criticism of the legislation in other IFCs has been carefully considered. As a result, the proposed legislation will not be similar to that in other IFCs. The draftsman has been at pains not to create a form of ‘corporate trust’ but to establish what will be, recognisably, a foundation from the perspective of the civil-law practitioner. The Guernsey solution will offer an alternative not only to the regimes established in less reputable IFCs, but also to those established in well-regulated jurisdictions.
The law will be drafted in three parts: the substantive law itself and two schedules. This was done deliberately to reflect the civil-law tradition of having a short law (the Swiss legislation on foundations is only nine articles of its Civil Code), then clarification coming in the form of regulations. The first schedule will deal with administrative matters, such as the establishment of the register and registrar. The second will address migration and termination of foundations, and will include new provisions to deal with insolvency. The migration provisions are included as it is understood there are a number of existing foundations that would wish to relocate their administration to Guernsey (provided that they can meet the due diligence threshold that will be expected of them in Guernsey).
The founder will be able to act as councillor or guardian (but not at the same time) and beneficiary, but, consistent with the approach taken on the Continent (but not in other IFCs), the founder can only reserve to themselves limited powers qua founder and only, if a natural person, for a limited time (a period of between 30 and 50 years is anticipated) to ensure that the foundation is clearly independent of the founder.
The councillors will owe their duties to the foundation itself in the same way that a director of a company owes their fiduciary duties to that company. It is clearly proper that the councillors must be accountable for their actions. To ensure this, the Guernsey law will distinguish between enfranchised beneficiaries (who are entitled to see the constitution of the foundation and its records and accounts – but not the sort of material that a trustee can properly deny to a beneficiary – and to make certain court applications) and disenfranchised beneficiaries (who are not entitled to any information). Guernsey law will also recognise the role of guardian – a necessity whenever there are disenfranchised beneficiaries. The guardian will have a duty to enforce the constitution and the purpose of the foundation.
While foundations are not trusts, and the building blocks of the two institutions are fundamentally different, at their core they both involve professionals administering assets put into their care by others for a specific purpose, or to provide for others and do so with care, skill and integrity. This is something that Guernsey has done for decades. The introduction of foundations is simply the next part of that story.
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