What is a private foundation?
A private foundation (sometimes referred to as a "private interest foundation" or "family foundation") is a product of specific laws found mostly in civil law jurisdictions (although some common law offshore jurisdictions have recently added foundation laws) and are particularly useful as an alternative to the trust for those living in civil law jurisdictions where the concept of the Anglo-Saxon trust is less recognized.
Objects of Private Foundations
Private foundations may be used for many purposes, but they are not intended to engage in commercial, for profit activities on a day to day basis. There are no restrictions on the legal activities of a company wholly or partly owned by a private foundation however. For this reason, many choose to incorporate an offshore company such as an international business company (IBC) which is wholly owned by the private foundation which will then engage in investing or trading/commercial activities. It is also quite common for private foundations to be the ultimate holding entity for a number of different offshore companies established for various purposes (perhaps one or more offshore companies holding real estate, another offshore company holding an investment portfolio, one more offshore company engaged in trading/commercial activities, etc.). Objects of a private foundation may include (but are not necessarily limited to) any of the following:
- Wealth protection
- Inheritance/succession planning
- Protection and management of assets
- Avoidance of forced heirship rules
- Charitable purposes
- Pension funds
- Holding art collections
- Receive and manage capital and titles
- Minimizing international income, capital gains and estate taxes
The objects of a private foundation can include more than one purpose and could include any or all of the aforementioned purposes.
Private Foundation Assets
Private foundations are generally restricted from holding interests in property in the location of domicile of the foundation, but may otherwise hold a variety of assets including:
- Stocks, bonds and other securities in public or private companies
- Intellectual property
- Real estate/immovable property
- Bank assets
- Investment portfolios
- Most other assets
Private Foundations may be created via a private or public instrument, by either an individual(s) or corporate entity/entities (the Founders). It is essential that there is an allocation or endowment of funds or assets by the Founder. This must meet the minimum statutory requirement, but need not be paid up at the time of creation of the Foundation (key difference with a trust which must have a transfer of assets to the trustee before it is valid). The Foundation becomes a corporate body by registering the Foundation Charter at the Public Registry.
All private foundations must have a Foundation Charter which usually contains items such as the following:
- The name of the private foundation
- Its domicile (which may be anywhere but it is suggested that this either remain in the jurisdiction of registration or at least in another civil law jurisdiction)
- The initial capital/estate which must meet a statutorily required minimum
- The name(s) and address of the Member(s) of the Foundation Council which administers the estate
- The name and domicile of the Foundation's Resident Agent
- The objectives and goals of the Foundation (these must be possible, reasonable, moral, and legal)
- The manner in which the Beneficiaries (which may include the Founder), are selected
- The duration of the Foundation
- The use to be made of the Foundation's assets and the manner in which its estate is to be liquidated in the event of dissolution
Private foundations usually have a second document called its "Regulations" which is a private document generally drafted by the Founder detailing beneficiaries, assets of the foundation and any instructions as to how they are to be administered and distributed. While it may be possible to file these Regulations, most prefer to keep the content of the By-Laws or Regulations private so that the Protector, if any, and Beneficiaries may remain out of the public domain.
Letter of Wishes
Although not a legally binding document, some private foundations prefer to forgo the formal Foundation Regulations in favor or an informal "Letter of Wishes". A Letter of Wishes may be written by the Founder or Protector with much of the same information found in the Foundation Regulations such as details of the wishes of the author as to how the assets of the private foundation are to be distributed upon a triggering event such as the death or incapacity of the Founder. The letter should state how the affairs of the foundation are to be administered upon this triggering event as well. This may include whether or not the Foundation will continue to exist, who to appoint as Protector or whether to dissolve the Foundation upon this event. Any beneficiaries of the foundation may also be listed in the Letter or Wishes.
The Letter of Wishes is an informal document which may be changed at any point by the author (the Founder or Protector). This Letter of Wishes may be held in private or it may be publicly filed such as the Foundation Charter. For most private foundations this document is maintained in private in order to protect the identity of the Protector and the Beneficiaries.
The Founder is the person or entity that establishes the private foundation. As the founder is named in the publicly filed charter, it is quite common for private foundations to have a "nominee" Founder as well and Sterling provides this service. In this case, the Founder would typically retain no powers or rights instead passing these on to the Protector or other supervisory person.
The Council is made up of one or more councilors similar to a board of directors who act in a mixed capacity with some duties of a trustee and some duties of a company director. Depending on the jurisdiction of the private foundation, the Council can generally be made up of individuals and/or corporate bodies. Sterling can provide professional councilors in order to ensure the privacy and confidentiality of the client as well as ensuring the tax residency of the foundation is not deemed to be in a high tax jurisdiction.
The Foundation Council is usually charged with each of the following duties:
- To manage the assets of the private foundation in accordance with the Foundation Charter and its By-Laws/Regulations (if applicable).
- To carry out those acts, contracts or business as may be expedient or necessary to fulfill the purpose of the foundation and to include in such contracts, and agreements or obligations, such clauses and conditions as are necessary and expedient, being consistent with the foundation's purposes and not contrary to law, morality, good manners or public order.
- To inform the beneficiaries of the foundation about its economic situation if provided by the Foundation Charter or its By-Laws/Regulations.
- To hand over to the beneficiaries of the foundation the assets or resources settled in their favor in the Foundation Charter or its By-Laws/Regulations.
- To carry out those acts or contracts which the foundation, according to the respective foundation law and other applicable legal or regulatory provisions, may be permitted to carry out.
Protector or Guardian
Private foundations usually have a supervisory person, usually referred to as a "Protector" or "Guardian" of the foundation. Depending on the foundation law, Charter and Regulations, this position can be appointed by the Founder or by the Foundation Council at the time of creation or at a later date. The Protector of the private foundation may be any individual or juridical entity (company, foundation, trust, etc.) and does not need to be publicly disclosed except in cases of opening bank and other financial accounts. A Protector is not required though and the Founder may choose not to appoint a Protector at all.
The powers of the Protector, if appointed, are specified in a "Private Protectorate Agreement" or similar document and may be very broad or narrowly defined depending on the wishes of the Founder or the Foundation Council. It is common for the Protector to have a supervisory role over the Foundation Council including:
- Powers to confirm decisions of the Foundation Council
- Suggesting the manner in which beneficiaries should be chosen
- Suggesting the manner in which the Foundation Council should conduct its affairs
- Full power of removal and replacement of the Foundation Council
The Protector may resign or assign its role to a new Protector at any time. Since this is the party often viewed as the controlling party of the private foundation, a nominee is often used for this purpose. Sterling provides nominee protector services.
Unlike a corporation which issues shares to owners, private foundations have no shareholders and no owners. Instead they have beneficiaries. The beneficiaries may be named by the Founder, Foundation Council or even directly by the Protector depending on the exact structure of the private foundation. The beneficiaries may be named via a Letter of Wishes or in the Foundation Regulations/By-Laws.
Beneficiaries of private foundations typically have very limited rights regarding knowledge of the foundation activities or even of the fact that they are beneficiaries in many cases. The Protector or Foundation Council may be able to remove beneficiaries and name new beneficiaries as well or this may be reserved only for the Founder. Beneficiaries of private foundations are not considered the "beneficial owners".
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