Fortune telling

  • Author : Val Cox
  • Author : Professor John Goldsworth
  • Date : April 2013
ABOUT THE AUTHORS: Professor John Goldsworth is a Barrister of the Middle Temple and visiting professor of Glamorgan University. He holds many advisory roles connected with foundations and trusts, and with offshore jurisdictions concerned with legislative, regulatory and policy issues. Val Cox is CPD Manager at STEP
What will the balance between trusts and foundations will look like in ten years’ time in jurisdictions where foundation legislation has recently been introduced?

In retrospect, looking at the trust world ten years ago one would hardly have foreseen the changes brought about by case law. Various doctrines have been developed and demolished, such as the Hastings-Bass principle, but the essential structure of a trust has remained faithful to its original concept. What has changed is the perception of what is a legitimate use of asset-planning vehicles. The expansion of foundations for private use has come in the middle of this reappraisal; transparency and the exchange of information between authorities to prevent money laundering and tax evasion are part of the financial climate in which foundations are now born.

I think the days of bundling up money into an offshore trust, keeping quiet about it, then one day repatriating the funds after they have earned lots of interest or dividends free of tax, have disappeared. The OECD Global Forum on Transparency and Exchange of Information for Tax Purposes has seen to that. Since foundations are included in their requirements, they seem to offer little advantage over trusts for aggressive tax planning. It is fairly safe to say that foundations will be set up for more commercially substantial objectives than merely to place assets out of reach of individuals or tax authorities.

In my view, foundations will have to be part of a sound business plan and their success will depend on the commercial facilities that the domicile of the foundation can offer. Banking, legal, insurance, investment and professional services of the highest calibre will now be needed to attract investors. I think the need for greater tax revenues by OECD members will precipitate action against any structure that lacks real substance and integrity.

Are there any advantages to using a foundation rather than a trust, given the pressures on both?

There is one way in which a foundation can claim a substantial advantage, especially as the economic power is moving away from states that have a long history of exposure to trusts. Foundations do not force an investor, especially one from a non-common-law background, to put their faith in a trustee and relinquish control of their assets. That act of faith has been enough to paralyse with fear many potential investors from civil-law jurisdictions. The position of a foundation as an incorporated body is more familiar; investors know about companies, but they aren’t comfortable with the mysterious concept of ‘equity’.

Foundations are able to perform the same function as purpose trusts. In many jurisdictions, purpose trusts that are not charitable are not allowed and a foundation could be a useful alternative. It is not unusual for a foundation to be tasked with both caring for beneficiaries and furthering some purpose of the founder.

Foundations also take a different view of their beneficiaries, so I think it is less likely that a beneficiary entitled to a discretionary award from the trustees, as in a trust, will be identified as an automatic recipient of the foundation assets.

In your co-authors’ interview last month, they mentioned that the ‘chain production’ of offshore trusts is over

Welcome news! Trusts were never suitable for mass production other than for simple placing of insurance proceeds in the hands of trustees. Standard-form documentation of foundations is also not advisable.

Overall, foundations have the versatility and adaptability of trusts, but lack the reservoir of previous decisions that provide substantive rules if the documentation has not had them drafted in.

Foundation laws should not be compared with common-law Acts, such as the UK Trustee Act 1925, which is familiar to most jurisdictions that have adopted the English trusts ethos. Each foundation law is independent of and different from any other; it owes no family relationship to some parent foundation law and foundation administrators cannot draw on a reservoir of case law from other jurisdictions to guide their decisions in the way that trust administrators can.

Foundation laws also don’t provide default provisions that can be used if a foundation’s constitutional documents haven’t covered a particular eventuality. In trust law, the courts do their utmost not to allow a trust to fail, influenced by the English law of equity. I suspect that foundations can anticipate no such judicial sympathy and I believe that court decisions are likely to rely on the interpretation of a foundation’s constitutional documents, not on principles that will affect all foundations.

Are there any other areas that you think will need litigation to give practitioners some guidance?

The family courts have disregarded many principles of trust law when dealing with trusts set up by husbands. Are foundations better equipped to deal with this situation? They seem to be. However, we have recently returned to the question of piercing the corporate veil, which still has many unanswered questions. But there is no reason to think that a foundation could not survive such a treatment (not only in matrimonial affairs, but in general commercial ones).

It is difficult to speculate further, since foundations have yet to face any serious litigation, but this is where the STEP Certificate in Foundations should become especially valuable. It will arm practitioners with a core technical understanding of foundations that prepares them for the kind of difficulties that might arise.

To find out more about the new STEP Certificate for Foundations, visit www.cltint.com/stepcertfoundations. Enrolment will close on 29 April 2013


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