A Firm Foundation: Guernsey Foundations in Practice

Although foundations are new to Guernsey, having only been introduced in January, interest is high and several have already made it onto the register.

So why are clients choosing Guernsey and what are Guernsey foundations being used for?

Why Guernsey?

Despite being one of the first Crown Dependencies to consider introducing foundations, Guernsey was the last Crown Dependency to do so - perhaps learning the lessons from other jurisdictions to introduce "best of breed" legislation.

Like the trusts law, Guernsey's foundations law is modern and plain English - making it user friendly for service providers and clients alike.

Furthermore, Guernsey is uniquely placed to offer foundations being a common law jurisdiction with Norman roots and a familiarity with civil law concepts.

Also, unlike civil law jurisdictions offering foundations, Guernsey's Royal Court is not simply a forum for determining disputes - the Court is also used for non-hostile applications (such as directions) which can greatly assist the service providers and key players involved in fiduciary structures.

So Guernsey is ideally placed to offer foundations. In terms of uses - that will depend in large part upon how imaginative the lawyers, wealth planners and trust service providers ("TSPs") are in pitching foundations to their clients.

Foundations in Practice

In the Middle East, for example, foundations have traditionally been thought of as a philanthropic vehicle but that is changing.

Lawyers, wealth planners and TSPs have often struggled to engage Middle Eastern families in the concept of a trust, particularly where the family's ‘golden egg’ - the business - is to be structured.

Some success has been seen in using private trust companies (PTCs) to enable the patriarch and the wider family to hang on to control by mirroring the board of the operating company on the PTC board.

For many clients, however, the estate planning discussion falls at the last hurdle with PTCs. The PTC's shares need to be owned by a trust and, even though the patriarch can take some comfort from ultimate control as enforcer of the purpose trust, for clients who are unfamiliar with trusts this is often a deal breaker.

Foundations solve this problem.

Being an ‘orphan’ vehicle, the foundation does not require shareholders so a trust is not needed to hold its shares. It also has separate legal personality (like a company) which many Middle Eastern families feel more comfortable with. In addition, the land registries and banks of non-trust jurisdictions are also more willing to register assets in the name of the foundation than they have been to register in the name of trustees of a trust.

The idea of using a Guernsey foundation in place of the PTC is really gathering pace. Using a foundation in place of a PTC completely avoids the need for the purpose trust/enforcer layer thereby reducing the administration costs and increasing simplicity.

In Guernsey the law allows foundations to be used for certain purposes; in this case for the sole purpose of acting as trustee of family trusts which in turn hold the family's assets.

Seeing how this works in practice is, perhaps, best illustrated through a case study.

Case Study

Khalid is seventy. He and his family are Muslim. He is a self-made man and keen to instil the same values in his children as his father instilled in him.

Khalid is resident in Dubai and is married with one son, Amal, and two daughters, Yasmin and Nissa. Khalid is a successful businessman, having established a manufacturing business and is interested in establishing a structure to protect his wealth and ensure that the business passes to his children successfully.

Khalid has concerns over his son Amal who, despite attending a prestigious university in London, has shunned the family business. Except to demand money, Amal has had little contact with his parents since he married his wife in 2008, due to their belief that his wife's only interest in Amal is for the family's money. In recent years Amal's spending habits have increased to an unhealthy level. Khalid is worried about how quickly Amal and his spendthrift wife would dissipate a lump sum of inheritance.

In contrast, Yasmin is a highly successful businesswoman who, having excelled at a prestigious university in London, has since worked for her father in the family business where she has recently been promoted onto the board. Khalid wants to ensure that Yasmin is appropriately rewarded for her contribution to the family business upon his death.

Sadly, Nissa was involved in a car accident several years ago suffering from severe brain damage and is entirely reliant upon her parents. Khalid is very keen to ensure that she is provided for in the future.

Khalid wants to protect his wealth and transmit the family business to the next generation and future generations but, under Sharia law, Amal would inherit the lion's share and this does not fit with Khalid's wishes. Khalid has spoken to several lawyers and wealth planners over the years about trusts and about moving assets out of the Sharia spotlight in order to achieve his objectives but he has always been deeply suspicious about transferring assets out of his own pockets and into the pockets of a distant trustee to manage on the basis of, what he considers to be, a rather flimsy agreement.

He has also had several discussions about being his own trustee by using a PTC but it seems that this is ultimately controlled by a foreign trustee and he cannot get comfortable with this.

He has spoken to friends in the Majilis who have mentioned foundations.

The possibility of using a foundation instead of a PTC to act as the trustee of the discretionary trusts which hold his business and his properties has found favour with Khalid. A foundation is a legal entity and so can act as trustee of the discretionary trusts but, more importantly, as it is an orphan vehicle it does not have any shareholders. The foundation council, who are responsible for the management of the foundation, can mirror the board of directors of Khalid's business ensuring there is no effect on the control of Khalid's business. He has, however, decided to have a professional TSP on the council as well in order to ensure that the foundation runs in accordance with Guernsey law.

Khalid will act as founder and reserve the power to amend, vary or terminate the foundation, and he has appointed his right hand man to act as guardian. Amal's wife has been excluded from the underlying trusts and Yasmin must sign a pre-nup before benefitting.

Importantly, the foundation meets Khalid's key objectives; (i) Sharia law will be circumvented due to the robust anti forced heirship regime in Guernsey; (ii) control of the family business will be unaffected as the foundation council effectively mirrors the board of directors of the business; and (iii) as the foundation is an orphan vehicle there are no shares to be caught by succession regimes.

Conclusion

Although it is early days, the indications are that the uses of Guernsey foundations are likely to be wide ranging and imaginative. The foundation offers clients a simple and practical solution for succession planning and is particularly useful for those clients who are unfamiliar with trusts.

About the Author

Angela and Bethan work within Collas Crill's Fiduciary Team in Guernsey.

Angela is a senior trust and foundations lawyer having previously worked for top City firms in Dubai, Singapore and the UK.

Bethan has recently joined the Fiduciary Team from Collas Crill's wills and estates practice and she specialises in local as well as international estate planning.

For any questions about the issues discussed in this article or about trusts and foundations in general please do contact Angela and Bethan on 01481 723191 / www.collascrill.com.