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A Guide to the Proposed Jersey Foundations

Background

Foundations were created at the end of the Roman Empire by Christendom’s need to manage its divine assets. Consequently it was the Canon Law of the Middle ages which developed the judicial theory upon which later "Public Foundations" with non-profit aims and charitable, scientific, humanitarian or religious objectives were established. These are very similar to Jersey’s own fidéicommis’ or incorporated associations formed under the Loi (1862) sur les teneures en fidéicommis et l'incorporation d'associations.

In 1926 Liechtenstein created "Family Foundations" (for the benefit only of family members) and "Mixed Foundations" (for the benefit of relatives and other persons or institutions). Modern development began in 1995 when Panama introduced the more flexible "Private Foundation" with which financial advisers of today are familiar and which allow international asset planning and commercial transactions.

The Foundation is very much a civil-law invention and usually only existed in jurisdictions where the concept of equity was alien. However, St. Kitts in 2003 and the Bahamas in 2004 both introduced legislation pertaining to Foundations and Jersey is intending to introduce its Foundations (Jersey) Law in 2007.

How will a Foundation be Created?

A Foundation will be created when one or more persons or legal entities (Founders) formalise a Charter, which is registered with the Registrar at the Jersey Financial Services Commission (JFSC), through which such founders undertake to make donations (Foundation Assets) for the benefit of Beneficiaries. Unlike other jurisdictions such as Panama, Jersey will not require a minimum level of capital as foundation assets. The foundation assets will be managed by a Council consisting of individuals or a body corporate, but which must include a qualified person which is a person registered under the Financial Services (Jersey) Law 1998 to carry out trust company business that includes the type of business mentioned in Article 2(4) of that law, so any registered trust company will automatically be a qualified person.

What is a Foundation?

A Foundation is a combination of a corporation and a trust. It has separate legal personality, is able to hold its own assets, contract with third parties and sue and be sued in its own name and capacity, but does not have shareholders and holds the assets for the benefit of beneficiaries.

Some similarities with companies are:

Registration in the Public Registry at the JFSC;
Its proposed name (i) is subject to Registrar’s opinion and must not be misleading or otherwise undesirable and (ii) must end with "Foundation";
Assets are held in separate legal personality;
Council members must discharge similar duties to directors;
The concept of ultra vires does not apply;
An annual fee is payable to the Registrar;
Any act of a Council member is valid despite any defect found afterwards in the appointment or qualifications of that member;
A Council member may be subject to a disqualification order under the Companies (Jersey) Law 1991 (as amended);
Redomiciation and continuances into and out of the Island apply;
Mergers between two or more foundations are permitted;
Is subject to dissolution under the Désastre (Jersey) Law 1991 (as amended);
Capable of a summary winding-up;
Its name and address must appear on stationary, publications; and
Amendments to the charter must be notified to the registrar within a specific time.

Some differences with a company are:

There are no owners, shareholders registers or issued share certificates of title;
It has a Council of members rather than board of directors;
No act of the Council is valid unless a qualified person is a member of the Council;
It may have a guardian (similar to a protector to a trust);
The identity of Founders or beneficial ownership is not disclosed to the Registry;
It must have objectives;
It will have beneficiaries;
It may be created as a testamentary instrument; and
It exists on incorporation without any assets donated.

Some similarities with trusts are:

Assets are transferred or "donated";
It may be revocable;
It may be created either inter-vivos or mortis-causa by testamentary provisions;
It may be unlimited in duration;
A guardian (similar to a protector or enforcer) may be appointed;
Assets are protected from creditors;
The Council is under a duty to keep records (i) sufficient to show and explain its transactions and (ii) that disclose, with reasonable accuracy at any time, its financial position;
The Charter may include provisions governing the right of a beneficiary to receive information and subject to those provisions, the foundation must, during any 12 months, supply to each beneficiary who has attained 25 years a report showing and explaining (i) transactions during the previous 12 months and (ii) the financial position of the foundation at the end of that period;
The Founder can be a member of the Council meaning that provisions of (i) settlor retained assets; (ii) prescribed directions and (iii) reserved powers are available to any founder;
The Royal Court has a supervisory role and may upon application (i) amend the constitution of a foundation on such terms as it thinks fit; (ii) give directions; and (iii) appoint or remove a member of the Council (including any qualified person); and
It is usually created with the purpose of managing, preserving, administering or investing assets for the benefit of the Founder’s close relatives, as well as to obtain confidentiality and fiscal benefits.

Some differences with trusts are:

Registration is required in the Public Registry at the JFSC;
It must pay an annual fee to the Registrar at the JFSC;
Its charter is a public document available for public inspection disclosing the name of at least one qualified person who is a member of the Council;
The JFSC can refuse incorporation if the foundation would be contrary to the public interests of the Island of Jersey;
It has separate legal personality and therefore is the owner of its own assets;
It exists without assets being donated by a Founder or beneficiaries being nominated;
A Founder may be a (i) founder; (ii) member of the Council; and (iii) beneficiary;
The Council does not need a license to practice trust company business under the Financial Services (Jersey) Law 1998 (as amended) although a qualified person is required to be on the Council;
Its name is (i) officially recognised by the JFSC, (ii) is not solely for reference purposes and (iii) must end with "Foundation";
There is a Council which combines the functions of a board of directors and a trustee;
It has unlimited capacity but must operate within the confines of its specified objectives;
No rule against perpetuities;
Council member duties are not similar to a trustee’s fiduciary duties;
Does not exist until a written charter is incorporated.

The Advantages and Disadvantages of Foundations

Briefly some advantages of a foundation over a trust are:

Separate legal personality means, for example, (i) a corporate veil exists; (ii) all liabilities remain corporate liabilities of the foundation and do not attach to Council members at any time; and (iii) there is no issue of trustee’s indemnities on retirement or distribution of assets and associated administration time and costs;
No issue of perpetuities;
A Founder can be a (i) founder; (ii) Council member; and (iii) beneficiary;
The charter is a public document and the Foundations (Jersey) Law provides for the disclosure of financial information. Therefore disclosure of information to beneficiaries should be simpler, but rules for the administration of the foundation (which includes rules on beneficiaries for example) and for the distribution of assets on dissolutionment are private and not subject to disclosure;
The definition of "beneficiary" is defined to mean "a person who...is absolutely entitled to receive…a benefit from the foundation" avoiding issues raised in Schmidt v. Rosewood [2003] of any potential beneficiaries being able to claim information.

Briefly some disadvantages of a foundation over a trust are:

Because the Foundation is incorporated it requires name approval formal application with the charter and the payment of fees the cost might be greater than those of establishing a standard discretionary trust and, in addition, an annual fee is payable to the Registrar;
If the Foundation decides to change the law by which it is governed it must do so by a Redomiciliation following a similar procedure to a company, which in comparison to trusts, is time consuming and more costly;
Upon a désastre, the assets of the foundation are held by the Viscount for the benefit of the Foundation’s creditors;
There are no specific provisions in respect of donations being set aside due to foreign law prohibiting the donation or due to heirship rights or otherwise;
Whilst the Council has unlimited capacity, it must only operate within the charter’s stated objectives (which can be wide reaching) whereas the trust proves itself to be a more flexible vehicle potentially providing unlimited capacity and discretion provided it is in the interests of the beneficiaries;

Purposes of Foundations

Foundations elsewhere do not replace companies, but complement them and are primarily used for charitable purposes, to serve as the owners of companies (in which capacity the Foundation is generally called a "holding company" or a "parent company") and for family and/or inheritance purposes. However, purposes to which Foundations have been used are one or a combination of the following which you will notice are very similar to trusts:

To protect persons at a disadvantage due to minority or incapacity who cannot manage their assets or risk losing the same;
To protect against fragmentation and outsiders gaining control of family businesses which are passed down the generations;
To guarantee payment of sums of money or assets to members of one or more families for their requirements;
To carry out scientific, humanitarian, philanthropic, religious or charitable activities or to manage funds reserved for the same;
To administer employee benefits such as pensions and options;
As a substitute for a will thereby circumventing complicated inheritance procedures;
As a substitute to a pre-nuptial agreement;
To own and/or invest in shares, interests and stocks of private companies or other securities;
To collect royalties and other types of returns;
To own real estate or valuable movable property;
To insure assets against different adverse situations, such as excessive taxes for those who reside where the assets are located, future claims by creditors, forced heirs or political or economic instability in the country where the client resides;
To manage bank accounts; and
For any specific asset protection plan.

The draft Foundations (Jersey) Law does not require a Jersey Foundation’s objectives to be non-profit making aims which is the case with Panamanian Foundations, but it seems likely that Foundations will be primarily used for charitable or investment purposes, to serve as the owners of companies (in which capacity the Foundation is generally called a "holding company" or a "parent company") and for family and/or inheritance purposes rather than be actively trading.

The Draft Foundations (Jersey) Law

There are a number of questions that arise from the draft Foundations (Jersey) Law (which we have investigated with Paul de Gruchy of Economic Development), namely:

Will there be a procedure for converting a trust into a foundation avoiding the issue of perpetuities periods of existing trusts? This was considered but rejected due to the complexity of transforming a non-legal entity into a legal entity. Therefore an appointment of trust assets to a foundation would be required subject to the terms of the trust. Currently the Trusts (Jersey) Law 1984 as amended does not envisage a trust to foundation transfer of assets and therefore since the Trusts (Amendment No.4)(Jersey) Law 2006 came into force it is unlikely a Jersey foundation receiving trust assets would be subject to the trust’s perpetuity period as a Panamanian foundation is.
Will Jersey foundations be revocable or irrevocable? This is a matter for the founder to determine in the charter upon incorporation. It is suggested that it is essential that the charter have a statement as to irrevocability particularly as the Jersey statute will remain silent.
Will Jersey foundations be able to hold Jersey realty? There is nothing expressed in the draft law intended to prevent this from occurring, but ultimately it is a political decision.
Will there be any prescription periods for creditors or heirs bringing claims against a foundation for transferred assets? Article 14 of the draft law tackles the issue of heirs and is very similar to the provisions of Article 9 of the Trusts (Jersey) Law 1984 (as amended). Creditor claims are a matter for the founder’s jurisdiction of domicile and its provisions in relation to transactions at an undervalue or preferences given.
Must a foundation amend its Charter or rules by the equivalent of a special resolution? The proceedings of a Council are entirely a matter for the constitution of the charter and the draft law leaves it to the Council to determine how to manage its own affairs. Therefore an amendment to the charter may be by a 75% majority of Council or otherwise.
Will objectives be limited to non-profit making aims? There is no doctrine of ultra vires applicable to foundations and therefore it is impossible to limit a foundation to non-profit aims. Foundations should not activity trade, but there is a fine line between investing and trading.

Conclusion

Some Jersey Trust Companies already advise upon and incorporate foundations (usually either in Liechtenstein or Panama) for clients seeking a viable alternative to the trust. The introduction of Foundations into Jersey law can only strengthen Jersey’s successful financial services armoury allowing Jersey Trust Company service providers to market a vehicle with appealing characteristics, but with behind it the strength of Jersey’s reputation of stability, excellence and expertise.

Once the draft Foundations (Jersey) Law receives States of Jersey approval Crill Canavan’s Trust Team will be considering the legislation in detail and will amend this article accordingly. Should you have any queries and wish to have a confidential conversation with regard to any concern then please do not hesitate to call or email.

Advocate Richard Pirie – 01534 601755 Email
David Dorgan – 01534 601757 Email
Carl O’Shea - 01534 601750 Email

THIS ARTICLE IS FOR INFORMATION PURPOSES ONLY AND NOT BY WAY OF LEGAL ADVICE. PROFESSIONAL LEGAL ADVICE SHOULD BE SOUGHT BEFORE ANY ACTION IS TAKEN.