Foundations And Their Practical Application In The Isle Of Man – Wealth Management – Isle of Man – Mondaq News Alerts
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Foundations have been around for many centuries particularly in
European civil law jurisdiction. There are currently several
hundred thousand foundations in Europe, most being philanthropic
and more than half of which have been established since the
1950’s.
There are over 50,000 Private Foundations in Europe which
together hold more than 200 billion Euros.
The use of Foundations is principally for private wealth
management and charitable purposes and to a lesser extent they are
used in commercial transactions.
Private Wealth Management
Many wealthy families establish Foundations as an alternative to
a family trust.
The advantages of a Foundation over a Trust are:
- The client may be more familiar with
civil than common law jurisdictions and thus understands a
foundation better than a trust - The Foundation is a separate legal
entity and the assets are beneficially owned by the Foundation
whereas with a Trust, it is not a separate legal entity and the
trustee owns the assets beneficially for the beneficiaries. - A Foundation can enter into contracts
and relationships in its own right whereas a Trust must enter into
those arrangements through the trustee. - A Foundation can continue
indefinitely whereas in many countries a trust must end within a
period of 80years to 150 years. - A Foundation can sue in its own right
whereas a Trust can only sue through the trustee. - There is no requirement to put any
assets in the Foundation at the outset whereas with a Trust it is
generally a requirement that assets be settled into the Trust, even
a nominal sum. - With a Foundation it is possible to
have a mixture of interests for beneficiaries, non-charitable
purposes and charitable purposes whereas with a Trust there can be
no mixture. This means it is possible to create a Foundation for a
non-charitable purpose, such as to hold the shares of a company and
to add beneficiaries at a later date. - With a Foundation, a certificate of
establishment is produced by the Foundations Registrar to show that
it exists. No details of the Founder, Donor, Beneficiaries or
specific assets held are published. This can be important for
contractual and banking relationships. A Trust is a private
arrangement and no such certificate of its existence can be issued
by a government body.
Similarities of Foundations and Trusts
- Both Foundations and Trusts in the
Isle of Man can ignore the forced heirship laws of other
jurisdictions which are not enforceable in the Isle of Man - Both involve a transfer of the assets
from the beneficial owner to the Foundation or Trust which
generally remove the assets from the estate of the beneficial
owner. This is useful for estate planning. - The Settlor of a Trust and Founder of
a Foundation can include provisions to appoint and remove Trustees
or Council Members.
Charitable Foundations
Charitable foundations operate in a similar way to a charitable
trust.
Ownership of assets for a purpose
A foundation can be the equivalent of a purpose trust and can
have as its objects the ownership of assets.
A foundation might for example be used to hold assets off the
balance sheet of a borrowing company whilst a loan is in place so
the assets are better secured for the lender.
Examples of circumstances where a Foundation might be used
1. First Scenario:
Client lives in a country where there are forced heirship laws
and he wishes to leave his estate to his family in proportions
which differ from those laws.
- Client creates a Foundation in the
Isle of Man of which the Client and his family are beneficiaries.
There is no public information regarding the identity of the
Founder/Donor or the Beneficiaries. - IOM Trustee Service Provider (TSP)
acts as the Council Member - The Client, as Founder, has the power
during his lifetime to change the Foundation Rules and to appoint
and remove the Council Member. - Client transfers the shares of his
private company and other assets to the Foundation which is now the
legal owner of those shares/assets and which shares/assets are no
longer part of his estate. - When the Client dies, the Council
Member ensures the Client’s family receive the benefit from the
Foundation. The Rules of the Foundation can set out precisely how
the Founder wants his family to benefit. - Any challenge to the ownership under
say forced heirship laws of another country can be defended by the
Council Member as the Isle of Man legislation specifically states
that laws of other jurisdictions, such as forced heirship, are not
recognised in the Isle of Man. - The Founder may pass onto one of his
family or to a family advisor or to a third party professional, the
right to change the rules of the Foundation to suit any changes in
his family’s circumstances and to appoint and remove Council
Members.
2. Second Scenario:
Client has created and owns a successful international business
which on his death he does not wish to have sold but he wishes it
to continue for the benefit of his family and those who have helped
to make the business successful.
- Client creates a Foundation in the
Isle of Man the purpose of which is to hold the shares of certain
companies which own the successful business with the following
provisions:- To ensure that the companies are
managed in accordance with guidelines set out in the Rules of the
Foundation - The profits of the business pass to
the Isle of Man Foundation. - The profits of the businesses are
applied for re-investment into the businesses and/ part distributed
to a Family Trust (set up by the Client with the assistance of IOM
TSP) which is a beneficiary of the Foundation.
- To ensure that the companies are
- The Isle of Man Foundation can
continue indefinitely and a succession plan is introduced to ensure
that the businesses continue into the future with dynastic benefit
for family members and future managers/employees of the
business. - The Client can decide whether to put
the shares of the business into the Foundation before or after his
death. In some circumstances it is better to do so before so there
can be no issues over the estate/forced heirship laws etc.
3. Third Scenario:
Client wishes to create a philanthropic structure and possibly
at same time provide for family members.
- Client creates a Foundation in the
Isle of Man the purpose of which is to provide monies for certain
philanthropic purposes as set out in the Rules and if required
certain family members. - The Client is the Founder and chooses
to be one of the Council Members with some friends and associates.
Client can have one or more Council Members which can, but does not
have to include an IOM TSP. An IOM TSP would be the Registered
Agent in any event as every Foundation requires a Registered
Agent. - Only the Client’s funds are to be
transferred to the Foundation and the Client does not want the
Foundation to be registered as a Charity in the Isle of Man and
accordingly the Rules are designed to achieve this, which means all
the business of the Foundation is private. - The Foundation can continue
indefinitely.
4. Fourth Scenario:
A Foundation can be used instead of a Private Trust Company
(PTCs) to be the trustee of a family trust. They can be described
as “PTFs”. The advantages of using a Foundation are:
- Typical PTCs required a purpose trust
to be created to hold the shares of the PTC. In a PTF there are no
shares and therefore no need to have a purpose trust
structure. - The Rules can be structured more
flexibly
The PTF would enter into an administration agreement with an IOM
TSP for the provision of trust administration.
Establishment of a Foundation
A foundation is established by an application to the Registrar
of foundations by a class 4 (corporate services) licence holder
with a fee of £100.
The Client will usually be the Founder who instructs the IOM TSP
to make the application which is in the form of an Instrument, a
short document, setting out the name of the Foundation, the objects
for which the Foundation is formed, the name and address of the
Council Member (s) and the Registered Address of the
Foundation.
The Foundation is typically incorporated within a couple of days
from filing the Instrument.
Only the Registered Agent signs the Instrument and so the
Foundation can be created quickly. The Founder and Council Members
sign the Rules but not the Instrument.
The Foundation Rules
The Foundation Rules must contain:
- provision for the establishment and
proceedings of, and changes to, the council; - provision for the appointment,
retirement and remuneration of the registered agent; - rules in relation to the office of
any enforcer; - provision for accounts
- rules in relation to any initial and
further dedications of assets;
The Foundation Rules, redacted to remove the name of individuals
referred to in the Rules such as beneficiaries and specific assets
held by the Foundation are registered with the Registrar of
Foundations.
Enforcer
If one of the objects of a foundation is to carry out a
specified non-charitable purpose, the foundation must have an
enforcer in respect of that object. Any other foundation may, but
is not obliged to, have an enforcer (charitable objects are
enforced by the Attorney General). The enforcer has a duty to take
reasonable steps to ensure the council carries out its functions,
and may require the council to account to him. The enforcer must be
identified in the foundation rules, which must provide for his
retirement and remuneration. The founder can be the enforcer.
Funding the Foundation
Assets are added to the foundation by dedication. A foundation
need not have an initial dedication of assets, and assets can be
dedicated to the foundation after it is established in which case
the details of the dedication must be specified in the foundation
rules. A “dedicator” is a person, other than the founder
(can be the same person as the founder), who dedicates assets to
the foundation. A dedicator is a “person with sufficient
interest” (see below) but otherwise has no statutory role in
the foundation.
The Foundation’s Council
A foundation acts through its council. The council must have at
least one member who, if an individual, must be at least 18,
however the council member does not need to be resident or
regulated in the Isle of Man and a company may be a member of the
council.
Council decisions are to be taken by resolutions at a meeting of
the council, or consented to in writing or electronic communication
by all (or a majority of, if so provided in the foundation rules)
the council members.
Registered agent
A foundation must have a registered agent. This activity is
within class 4 of the Regulated Activities Order 2009.
Information rights
Unless the foundation rules provide otherwise, a foundation must
provide a “person with sufficient interest” in the
foundation with a wide range of information as soon as practical
after he requests it. The foundation rules can prohibit the
provision of information; it would appear that such prohibition
need not be general but may relate to particular persons or classes
of persons. If such a prohibition applies, the person requesting
the information may apply to Court to obtain the information in
certain circumstances.
Persons with sufficient interest
These are the persons with standing to obtain information from a
foundation or, if the foundation rules prohibit such, to apply to
Court for that information, or to apply to Court to enforce the
foundation instrument and rules. The definition of the expression “person with sufficient interest” includes the
foundation, the founder, a dedicator, a council member, an
enforcer, a beneficiary, and the Attorney General (in respect of
charitable objects). It also includes a person who the High Court
determines to be a person with sufficient interest, if the Court
considers that the person’s interest in the foundation is
sufficiently close that the person ought to be treated as a person
with sufficient interest.
Application to Court for directions
The High Court has jurisdiction under the Act to give directions
in relation to various matters, including the interpretation of a
foundation’s instrument and rules, as to the manner in which
the foundation should be administered, and as to the rights of
beneficiaries. This is similar to the High Court’s jurisdiction
in relation to trusts.
Administration
The foundation must keep proper books and records at an address
(within or outside the Isle of Man) as the council decides, and
notify the registered agent of that address (if not the business
address).
A foundation must keep reliable accounting records sufficient to
enable the financial position of the foundation to be determined
with reasonable accuracy at any time; and allow financial
statements to be prepared. If financial statements are prepared
there are certain requirements as to what they must include
(balance sheet, etc).
An annual return to the Registrar is required, and a foundation
must notify the Registrar of amendments to the foundation
instrument.
Transfer of Foundations to and from the Isle of Man
(Continuance)
Foreign foundations, being a legal person established and
recognised as a foundation under the laws of another jurisdiction
can continue as a foundation under the law of the Isle of Man and
similarly Isle of Man foundations can migrate to other
jurisdictions.
Conflict of laws
All questions that arise in respect of a foundation or the
dedication of assets to a foundation are required by the Act to be
determined solely under Isle of Man law, and there are provisions
in relation to foreign heirship and similar rights.
Isle of Man tax
A foundation is a “corporate taxpayer” for the
purposes of the Income Tax Act 1970.
Simcocks Advocates Limited
(“Simcocks”) has for many years assisted clients
in preserving their wealth to ensure that it benefits the Client
and those chosen by the Client to benefit in the future.
Foundations now form part of the solutions which
Simcocks can provide to its clients through
Juristrust Limited a wholly owned subsidiary of
Simcocks, licenced by the Isle of Man Financial
Services Authority to undertake trust and corporate service
business.
Originally published June 24, 2020.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
Source: mondaq.com