From time to time, we are asked about using foundations as a substitute for asset protection trusts. In our judgment, there is no substitute for a competent, well crafted trust. This does not mean, however, that foundations should not be used in asset protection planning. For clients with charitable goals and objectives, foundations provide an excellent vehicle to satisfy those inclinations while at the same time providing a shield for the client’s assets. If you are considering using a foundation, the first thing you must understand is “What exactly is a foundation, and how does it differ from a trust?”
What Is a Foundation?
A foundation is a legal entity established under a government charter, much like a corporation or a limited liability company. It must serve a purpose or fulfill a mission (as opposed to merely providing for a named beneficiary). For example, a charitable foundation may be established with broad goals, such as to alleviate poverty.
By contrast, a trust can be created by private agreement between almost any two people and does not need to be registered with a government agency to have legal effect.
What Is a “Purpose Trust”?
A close analog to the foundation is something called the purpose trust. A “purpose trust” is a trust that does not necessarily have named beneficiaries. Rather, it is created to achieve a purpose, such as the promotion of arts and sciences or to alleviate poverty. A charitable trust is a classic example of a purpose trust.
The purpose trust is a creature of common law and a close cousin of the foundation, but differs in two fundamental respects:
- Purpose trusts are created by private agreement and need not be registered with a government agency in order to achieve legal recognition.
- Purpose trusts must generally have an exclusively charitable purpose in order to enjoy legal recognition in most common law jurisdictions. By comparison, a foundation does not need to have a charitable purpose. In fact, a foundation may be formed for exclusively non-charitable purposes.
How Is a Foundation Formed?
Two prominent foundation statutes are the Lichtenstein Foundation Statutes and the Nevis Multiform Foundation Ordinance. In Nevis, a multiform foundation is formed by filing a Memorandum of Establishment along with any By-laws that are intended to govern the foundation. Once filed, the registrar issues a Certificate of Establishment. This is similar to the manner in which one may form a “Company” in a British Commonwealth jurisdiction (i.e., by filing a Memorandum of Association and Articles of Association (“MemArts”)). In fact, Articles of Association are comparable in many ways to the By-laws of a multiform foundation.
The Memorandum of Establishment that gets filed with the Nevis registrar requires certain basic details about the foundation (name, address, registered agent, etc.). In addition, Nevis law requires that the following information also be submitted:
- Details of any persons serving on the management board;
- Details of any persons serving on the supervisory board; and
- Details of the person serving as the secretary of the foundation.
While confidentiality laws in Nevis serve to shield these details from public view, this is still a high level of disclosure as compared to a trust, where the identity of the settlor and beneficiaries are not submitted to any government agency or public registry.
Accordingly, the first important distinction between a foundation and a trust is that foundations require a public filing disclosing the names the key parties involved in the foundation’s management and operations.
A second important distinction is that a foundation can only come into existence by registering its organizational documents with a government registrar. By contrast, a trust is formed by private written agreement between the settlor and the trustee. While a trustee will file a notification containing the name and date of the trust with the government registrar, it is a mere formality and does not require the disclosure of any interested parties to the local government.
The first important important distinction between a foundation and a trust is that foundations require a public filing disclosing the names the key parties involved in the foundation’s management and operations.-Stephen E. Speiser, Esq.
How Is a Foundation Governed?
A foundation is governed by a management board. Under Nevis law, a management board must meet at least once a year. Those who serve on the management board are referred to as “members” of the management board. In Nevis, a management board must consist of at least one member. There is no maximum number of persons who may serve on a board.
A foundation must also have a secretary. The person who serves as secretary may also serve on the management board, provided there is at least one other member on the board.
The affairs of a foundation are often administer by agents who are appointed by the board. An agent may delegate power to one or more sub-agents.
A Nevis multiform foundation may, but is not required to, have a supervisory board. The function of a supervisory board is ensure that the management board complies with the foundation’s governing documents. A member of a management board may serve on the supervisory board, provided there is at least one other non-management member on the supervisory board.
Nevis multiform foundation law treats the management board as something akin to a trustee, and the supervisory board as having duties similar to that of a trust protector. However, unlike Nevis trust law, multiform foundation law does not require that there be a Nevis resident trust company as at least one member of the management board. While some may consider this a benefit of foundations over trusts, in our view it creates a significant risk that creditor claims can be brought against assets of the foundation held outside of Nevis. This is particularly the case where a creditor holds a judgment obtained outside of Nevis.
Under prevailing international legal practice, a judgment may attach to assets in any jurisdiction where the foundation is effectively managed. This means that a creditor can bring a claim wherever a non-Nevis member of the management board happens to reside or is acting on behalf of the foundation. With a Nevis resident trust company, this is not a concern.
A creditor can bring a claim wherever a non-Nevis member of the management board happens to reside…. With a Nevis resident trust company, this is not a concern.-Stephen E. Speiser, Esq.
Who Owns the Foundation?
Foundations are not owned; rather, they have subscribers and beneficiaries. This is not unlike a trust, which has settlors and beneficiaries.
With a trust, a settlor establishes the trust and transfers title to the assets to a trustee. The trustee acquires “legal” title to the assets and the trust beneficiaries acquires “beneficial” title.
With a foundation, a subscriber contributes assets, sets the foundation in motion, and is the person who gives the foundation a life of its own. The subscriber does not own the foundation or its assets. This is quite similar to the settlor of a trust. In fact, Nevis law on multiform foundations defines subscribers in in much the same way as a settlor of a trust, with the authority to appoint members to the supervisory board (which is meant to act like the protector of a trust) and to seek judicial appointment of managers (who are meant to function like trustees of a trust) where circumstances warrant.
Just like trusts, foundations have beneficiaries. These can be named individuals in the founding documents, or they can be identified at a later point in time which is common where the foundation has “a purpose”. As with a trust, the management board manages the “legal” title to foundation assets, and the beneficiaries of the foundation possess “beneficial” title to foundation assets.
One key advantage of a foundation over a trust is that a foundation does not need to have a beneficiary at establishment. This may be particularly useful in the asset protection context where a creditor is pursuing potential beneficiaries in anticipation of collecting distributions from the foundation.
The foundation offers a powerful way in which the subscriber may transfer assets out of the reach of unanticipated future creditors.-Stephen E. Speiser, Esq.
As with trusts, foundations may have both charitable and non-charitable purposes. Combined with the intentional omission of beneficiaries at inception, the foundation offers a powerful way in which the subscriber may transfer assets out of the reach of unanticipated future creditors.
How Well Does a Foundation Perform for Asset Protection?
One of our law firm’s primary concerns about using a foundation is that their enabling statutes were not developed by asset protection lawyers with significant litigation experience here in the United States – the litigation capital of the world. Rather, most of these enabling statutes were drafted by trust company lawyers practicing outside the U.S..
Another one of our firm’s concerns about using a foundation is that there are potentially adverse tax consequences for U.S. citizens that are not present when using a trust (which subject is beyond the scope of this article). Briefly stated, a foundation must be treated as a corporation for U.S. income tax purposes, which becomes a significant reporting burden if the foundation is a foreign entity.
This is not to say that a foundation is a bad asset protection tool; to the contrary, the foundation is a valuable planning structure. This is even more so for clients residing in civil law jurisdictions. However, in our view, the foundation simply does not offer the same level of protection as a trust.
In our view, the foundation simply does not offer the same level of protection as a trust.-Stephen E. Speiser, esq.
In Nevis, there are several noteworthy distinctions that make use of the trust superior to the foundation for asset protection planning:
- First, the Nevis International Exempt Trust Ordinance gets periodically updated to respond to case law developments. This is done to help ensure that Nevis asset protection trust law remains preeminent among competing international jurisdictions. The latest update to the trust law occurred in 2015; one of our staff members was a key contributor to these revisions. By comparison, Nevis foundation legislation has not been updated and lacks many of the key protections found in Nevis trust law.
- Second, a creditor may enforce a foreign judgment against a foundation in Nevis (subject to the shortened statute of limitations and the requirement that the claim be recognizable under corresponding Nevis law). By comparison, foreign judgments cannot be brought against a trust in Nevis.
- Third, the bonding requirements for bringing suit against a trust is higher than for a foundation. Nevis foundation law requires that a creditor post a bond equal to US $27,000 in order to bring a claim in a Nevis court. By contrast, a creditor must post a bond equal to US $100,000 to bring a claim against a trust registered in Nevis.
- Fourth, trusts enjoy greater protection against fraudulent transfer claims under Nevis law than do foundations. While Nevis law precludes the application of the “Statute of Elizabeth 1571” against a foundation (the Statute of Elizabeth is the original source for fraudulent transfer statutes found throughout common law jurisdictions), there are other judicial remedies – such as Mareva injunctions, Anton Piller orders, and Black Swan orders – that may be used to freeze assets held by an offshore foundation. By contrast, Nevis trust law comprehensively protects against all of these judicial remedies and any others that may evolve, such as the recent ruling in Convoy Collateral.
- Fifth, a foundation can be managed by non-Nevis board members. This opens the door to the possibility that a creditor can bypass Nevis altogether. For example, a creditor could seek judicial relief in the form of an Anton Piller, Black Swan, or Convoy Collateral order against a member of the management board who lives in a British Commonwealth jurisdiction or, as seen more recently, in the United States. Likewise, civil law jurisdictions frequently grant injunctive relief for creditors seeking to freeze assets or bar a fiduciary from dealing in the assets.
In our view, a foundation established for asset protection purposes cannot be managed by people residing outside of Nevis without exposing it to serious litigation risk. To guard against this risk, the foundation should instead be managed by a fiduciary residing in Nevis, which draws into question the decision to use a foundation in lieu of a trust in the first place. If you are going to appoint a Nevis resident fiduciary to manage a foundation, then you might as well utilize a Nevis trust. After all, the Nevis trust offers greater protection and is more properly regulated as a fiduciary relationship.
Modern foundation law was developed as a substitute for trust law in select jurisdictions, particularly those without a history of trust law such as Liechtenstein. Just as there is no need to re-invent the wheel, why structure a foundation to function like a trust when you can simply opt for a trust. Sometimes, the best idea is the original.
In our judgment, a foundation may be preferable in certain limited circumstances, such as where board members live in civil law jurisdictions. As for everyone else, foundations do not measure up to the asset protection offered by the robust trust laws of jurisdictions such as Nevis and Belize.
One should also bear in mind that lawyers who defend asset protection structures in highly litigious jurisdictions such as the U.S., are generally not familiar with the nuances of foundation law. Rather, they are used to litigating and defending trust structures.
For all these reasons, we cannot recommend the foundation as an equal substitute for the asset protection trust. In fact, unless one is dealing with a highly experienced law firm, a foundation may leave the client at a significant disadvantage as compared with a trust.
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