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.
  • 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

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