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Laying The Foundations For New Developments In Guernsey’s Fiduciary Sector

Mik Underdown

Blenheim Group in Guernsey

8 September 2011

Guernsey’s new foundations law is a major development in the island’s fiduciary offering. Mik Underdown, managing director of Blenheim Group in Guernsey, explores the ways the foundation management structure is different from a trust, and how this can benefit, in particular, those seeking wealth protection solutions in a family context rather than concentrating on tax planning.

Foundations in one form or another have been used within wealth planning structures for decades, principally in civil law jurisdictions where the Anglo-Saxon concept of the trust is imperfectly understood or not fully accepted. Guernsey fiduciaries have been using Panama or Liechtenstein foundations where necessary, but the 2004 Trust Law Revision Working Party identified an increasing interest in a locally-regulated Guernsey Foundation.

The States of Guernsey - the legislative body - approved the concept in 2006, alongside revisions to the Trust Law. It then took five careful years of work for the law officers, regulators and industry representatives to finalise a consultation draft, which was released in April this year.  A formal but flexible period of consultation followed, resulting in the final draft released in early summer. All indications are that the Foundations (Guernsey) Law will be passed during the first quarter of 2012.

Guernsey’s concept of foundations has moved on considerably from the 1928 Liechtenstein Stifftung and the 1995 Panama Foundation.  The legislation in other jurisdictions such as Jersey, Malta and various crown protectorates in the Caribbean have also been carefully scrutinised and the draft law has been welcomed by the fiduciary industry as a useful, workable addition to the toolbox. 

Drawing the differences

The foundation is a difficult concept to define when compared to a trust, which is basically just a contract, and a company, which is an entity engaging in business. A trust has no legal personality; for example, you cannot sue a trust, you have to sue its trustees. A foundation, in contrast, has an identity in law or “persona ficta”, rather like a company. Like a company it will be registered (Guernsey trusts are not) and have a constitution like a company's, whereas the administration of a trust is governed by the trust deed. A company is administered by its directors, who are appointed by the shareholders or members; a trust is administered by its trustees under fiduciary duties, but the council of directors' relationship to a foundation is contractual.

The role of the founder in a foundation has some similarities to the settlor of a trust, but rather like a company limited by guarantee a foundation has no actual shareholders. It will usually have beneficiaries (like a trust) but may instead have purely charitable objects or a charitable purpose.

An amalgam of elements

Generally, foundations embody some elements of a trust and some of a company. Different jurisdictions have elected to bias their foundations one way or another – a Panama Foundation is closer to a limited company, whereas the Jersey version is flavoured much more as an incorporated trust. Guernsey foundations strike a real balance and will also have some unique elements, particularly regarding accountability to the founder and beneficiaries.  For example, foundations may have a guardian, whose role embodies some aspects of the protector of a trust or the enforcer of a purpose trust. In Jersey the guardian acts for the foundation to ensure that the council carries out its functions but in Guernsey the guardian is accountable to the beneficiaries, and in particular any that are disenfranchised through age or disability.

Retention of control by the settlor of a trust has been a contentious issue in the past, and the root of much litigation. This nettle is firmly grasped in the new law, and the old principle of donner et retenir ne vaut (“you cannot give it away and yet keep it”) remains, while certain defined elements of influence by the founder are allowed. This flexibility is combined with strong regulation and the advantages afforded by Guernsey’s highly-efficient registry. There are strict transparency rules, and the ability to form and administer foundations is limited to licensed fiduciaries, as with trusts. 

The early rationale for a Guernsey Foundation was to be able to provide a well-regulated vehicle for wealth preservation in civil law countries – basically everywhere outside the English-speaking world.

Rapid globalisation of business, increased mobility within families (and family businesses) and an increasingly sophisticated client base have shown that foundations have much wider applications. For example, they sit particularly comfortably at the head of family business structures where family members (and business divisions) are located in both civil and common law jurisdictions. Just as hybrid companies (limited by a combination of shares and guarantees) have developed to fill niche markets for active business entities which trade in the international arena, hybrid fiduciary structures are now a distinct possibility. Perhaps a foundation for purpose would hold shares in a private trust company which controls the international trading interests of extended families or businesses.

So, Guernsey’s later entry to the foundations market has allowed it to benefit from the experience of others, while introducing some new concepts to the mix. Although the trust remains the principal structural tool for common law countries, wealth preservation and asset protection planning for high net worth structures in Asia and South America will increasingly be seen to include foundations.

Wealth management trends in the developed west are migrating towards preservation and consolidation in the wake of the market turmoil of the last few years, but market growth in the BRIC countries of Brazil, Russia, India and China reflects the entrepreneurial wave being ridden by the new wealth generators of these and other Asian and South American countries. This new prosperity brings fresh challenges and new markets to financial service providers; the Guernsey Foundation will help to maintain our ability to serve the changing needs of this new style of client.