In the last two decades more than 20 common law jurisdictions adopted private foundation laws, introducing the civil law entity into the common law world.[i]
This differs from the migration of legal concepts within the same legal family, as the division between the civilian and common law worlds is often seen as a fundamental difference, one that shapes every aspect of a legal system.[ii] While the two families share a greater degree of common ancestry than is commonly recognised,[iii] there remain significant differences in the roles of judges, statute laws, and precedents, as well as overall legal cultures. The migration of foundations provides an opportunity to test how well civilian legal concepts adjust to the common law environment and raises questions about how the common law versions will differ in practice from their civilian ancestors. I argue that as common law judges are called upon to interpret their jurisdictions’ private foundation statutes, they will bring to the discussion both the common law conception of courts’ roles and the background of common law business entities and trust laws. This will lead the common law foundation to develop differently than its civilian counterpart, a divergence that will enhance the range of options available for solving clients’ problems.
The Development Of Private Foundation Laws
Private foundations are often portrayed as the civilian answer to the common law trust.[iv] Indeed, the historic development of family foundations in multiple civilian systems mirrors in important ways the development of English trust law. The modern private foundation emerged from Liechtenstein’s creation of the private foundation (Privatstiftung) as one among several entities with which it sought to lure business from the successor states to the Austro-Hungarian and German Empires. By providing a “neutral and independent country” where these firms – which found themselves multinationals as a result of the breakup of the empires within which they had previously operated – Liechtenstein successfully sought to lure foreign capital, generate government revenue and spur business tourism.[v] Perhaps the most important impact was that Liechtenstein’s strategy “created an indigenous body of business, financial and legal expertise”, “an essential precondition for the country’s later prosperity”.[vi] This suggests an element that the smaller common law jurisdictions now adopting foundation statutes (including New Hampshire and Wyoming) need to take into account – their statutes are likely to flourish only if a significant community of expertise in implementing foundation solutions develops.
While Liechtenstein’s business structuring business flourished (with an interruption for World War II), there seems to have been relatively little flow of legal ideas from the principality to the common law world. Among the civilian legal jurisdictions, Austria developed its own private foundation law, but not until 1993; Belgium, Luxembourg, the Netherlands, Netherlands Antilles, and Panama have all also adopted variations on private foundations, although only the Panamanian version seems to have been vigorously marketed to foreign clients. Liberia (2002) and St. Kitts (2003) became the first common law jurisdictions to adopt private foundation statutes, and more than 20 others have followed, including New Hampshire (2017) and Wyoming (2019). Each of these jurisdictions made different choices as to how to adapt the entity. For example, New Hampshire’s version bears a closer resemblance to trust law than does Wyoming’s, which some suggest resembles its LLC statute.[vii]
How Will Private Foundations Fare In Common Law Courts?
A foundation of common law legal reasoning is analogies from prior cases. As there are yet few common law jurisdiction court decisions addressing issues under the various foundation statutes (and borrowing across jurisdictions will be complicated by the variety of English-language formulations jurisdictions chose for various foundation concepts), and the English-language foundations literature is rich in trust analogies, it seems likely that courts will reach for trust precedents and concepts in interpreting the new statute. Further, some of the most successful common law trust jurisdictions – many of which have adopted foundation statutes – have well developed procedures for trustees to seek court approval of actions as well as legal frameworks for coping with trustee mistakes or Hastings-Bass situations. Thus it seems inevitable that trust concepts will seep into the new foundation jurisprudence, giving legal culture a significant impact.
For example, consider an area where foundations differ from trusts and examine how trust concepts might influence future interpretations of foundation statutes. One important advantage of foundations over trusts is that foundation beneficiaries generally do not have the same sort of rights to information that trust beneficiaries do. But Wyoming’s foundation statute has an exception to this; providing that if there is no protector serving after the death of the last founder (and Wyoming does not require that a protector be appointed at all for noncharitable foundations), then the foundation must provide “all information” requested by a beneficiary. [viii] By contrast, Guernsey’s foundation law allows beneficiaries to be classified in the foundation’s constitution as “disenfranchised beneficiaries” who are “not entitled to any information about the foundation”.[ix] Taking a third approach, St. Kitts provides broad information rights for beneficiaries without an explicit provision to restrict them comparable to Guernsey’s, although it may be that the articles of the foundation can restrict beneficiaries’ rights to information (the statute does not specify this).[x] Liechtenstein – as befits a jurisdiction with longer experience with foundations – has a much more complex statutory framework on information rights of beneficiaries than any of the common law jurisdictions, one which allows foundations to severely limit the default beneficiary rights.[xi]
There are unlikely to be interpretative issues with a Guernsey foundation that opted to designate its beneficiaries as disenfranchised; such a designation is explicitly permitted by the statute. Wyoming provides at least a partial bar to beneficiary requests for information (so long as there is a protector or a living founder). However, the St. Kitts statute offers an opportunity for common law judges’ trust background to influence how they read the statute. The St. Kitts statute lacks an explicit provision similar to Guernsey’s disenfranchisement language or Wyoming’s less aggressive limitations. While a Kittian foundation might argue that the default rule for foundations ought to be that the founder can limit the beneficiaries’ information rights in the founding documents because there was no explicit bar to such a provision in the St. Kitts statute, the fundamental nature of a trust beneficiary’s right to an accounting could influence a common law court to be skeptical of such arguments.
The answer to this question may turn on whether the common-law jurisdictions have many fluent German speakers, as much of the most important civilian jurisprudence and legal literature is from Austria and Liechtenstein. My prediction is that little will be imported from German-language sources due to language barriers. As a result, lawyers and judges in common law jurisdictions are likely to turn to the small number of English-language treatises on foundations[xii] coverage in legal journals such as Trusts & Trustees (which does an annual survey), and programmes from organisations like STEP.
Much will turn on how onshore tax authorities treat the new foundation entities. In the case of the other major common law borrowing from civil law, Wyoming’s creation of the limited liability company (LLC) derived from the Panamanian limitada, the entity only achieved widespread adoption in the United States (and then spread internationally) after the Internal Revenue Service (IRS) settled its pass-through tax status. Subsequent adoptions of LLC statutes by US jurisdictions were careful to maintain the characteristics that enabled that status. Similarly, some jurisdictions, such as New Hampshire, have sought to position their foundations as analogous to trusts, hoping for the IRS to grant them tax treatment as trusts.[xiii]
If tax authorities in the major onshore common law jurisdictions settle the tax status of foundations favourably, there two reasons to believe there is considerable potential for growth. First, proponents often suggest they are needed because potential clients in civilian and Islamic law jurisdictions are uncomfortable with the necessity under Anglo-American trust law to vest legal ownership of their assets in a trustee. If common law jurisdictions adopt foundation laws, such clients will be comforted by both the familiarity of the foundation structure and the significant founder’s rights foundations offer, both formally and informally through the ability to establish the foundation’s board. I am sceptical of the “trusts are part of the common law legal culture but not the civil law culture” argument in part because my experience of more than 25 years of teaching law to US law students and interaction with American lawyers from a variety of states is that few US lawyers and even fewer non-lawyer Americans know even the basics of trust law.[xiv] I expect many Americans would have a similar reaction to the suggestion that they turn over the legal ownership of their assets to a total stranger as does the average German or Saudi.[xv] Nonetheless, foundations’ separate legal status and potential for significant founder rights may make foundations highly attractive to potential clients who lack ‘cultural knowledge’ of trusts and so are reluctant to sign over legal title to their wealth.
Second, and more importantly, foundations’ status as entities with legal personality—potentially with trust-like tax status—make them a potential complement to the widely popular LLC. Like that entity, foundations offer considerable flexibility in structure.[xvi] Just as the LLC caught on—to the surprise of most commentators—because it combined limited liability and pass through tax status and so was superior to the corporation for many purposes, the foundation may catch fire because it offers legal segregation of assets together with greater opportunities for founder control than the trust offers settlors in many jurisdictions.
While there will still be some stumbling blocks over terminology – as Paolo Panico notes in his treatise, the terms in the statutes “vary from one common law jurisdiction to another to the point that sometimes the same English term is associated with two different concepts under the statutes of two different English-speaking jurisdictions”[xvii] – there is likely to be enough agreement on the essentials to get a conversation started. However, I predict the common law private foundation will diverge significantly from its civilian ancestor due to two factors. First, Liechtenstein foundation law is influenced by (and influences) Austrian foundation law and, as noted above, the language barrier is likely to severely limit the influence of the European jurisdictions on common law developments. Second, by 2030 there should begin to be a reasonable body of case law in the common law jurisdictions interpreting their foundation statutes. The precedents that emerge will be heavily influenced by the judges’ understanding of trust law. That influence may range from relatively minor (in the case of an elected Wyoming judge who sees few trust cases) to significant (in the case of an appointed Guernsey judge who regularly rules on complex trust matters). Even where the judge in question knows relatively little about trusts, both the judge and the lawyers involved are likely to rely heavily on trust precedent in analysing foundation cases. (A similar phenomenon occurred with LLCs, where corporate precedents played a significant role in early discussions of veil piercing in the context of LLCs.) Over time, common law lawyers’ discussion of foundations is thus likely to sound to the Liechtensteiner more like a “Foundation-based creole” than pure civil law “Foundationese”.
The adoption of private foundation laws by common law jurisdictions is a development likely to succeed. Just as the LLC spread from relatively unknown beginnings in Wyoming, so the common law foundation will continue to spread from the initial adoptions in St. Kitts and Liberia. However, it is likely to diverge from its civil law progenitors as it will develop in the shadow of trust under the guidance of judiciaries more accustomed to active roles in shaping the law than civilian courts.
[i] See Andrew P. Morriss & Charlotte Ku, IFCs: Pioneers in Transmission of Legal Innovation, IFC Review (Jan. 14, 2021).
[ii] Indeed, economists have argued that difference is the explanation for the superior post-colonial economic experience of former British colonies over colonies of civilian powers, a claim which likely overstates the commonalities among the members of the two legal families and overstates the differences between developed and developing economies. For a sceptical analysis of this claim, see Nuno Garoupa & Andrew P. Morriss, The Fable of the Codes: The Efficiency of the Common Law, Legal Origins, and Codification Movements, 2012 U. Ill. L. Rev. 1443 (2012) available at: https://scholarship.law.tamu.edu/facscholar/316.
[iii] Alan Watson, The English Common Law, in The Evolution of Western Private Law 234 (Baltimore: Johns Hopkins University Press, 2001).
[iv] See, e.g., Paolo Panico, Private Foundations: Law and Practice (Oxford University Press 2014) at 1 (“Foundations are a civil law concept that dates back to the Middle Ages, where they originally developed to serve the same purposes as the English charitable trust.”)
[v] David Beattie, Liechtenstein: A Modern History 72 (London: I.B. Tauris, 2004). The plan involved three laws: the Taxation Act of 1923, the Persons and Companies Act of 1926, and the Trust Enterprises Law of 1928. Id. The number of holding and domiciliary companies grew from under 100 before 1925 to 747 in 1930, helping more than double the principality’s income between 1925 and 1930. Id. at 72-73. Quite quickly, Liechtenstein’s customers grew to include British and American firms seeking tax advantages. Id.
[vi] Id. at 73.
[vii] See Alexander A. Bove, Jr., Building a Better Private Foundation: Wyoming’s Gamble, LISI Estate Planning Newsletter #2743 (August 21, 2019) at http://leimbergservices.com/all/LISIBovePDF8_21_2019%20.pdf
[viii] Wy. Stat. 17-30-701(b) (“After the death of the last founder of a statutory foundation and if there is no protector, the foundation shall provide all information requested by a beneficiary within a reasonable time, upon written request by a beneficiary.”). This section of the Wyoming statute initially provided that the information had to be provided to the beneficiary if there was no protector or the last founder had died, which appears to be a broader exception, requiring furnishing information on request by a beneficiary prior to the death of the last founder when there is no protector. 2021 Wy. Laws Ch. 98 (H.B. 68) (April 5, 2021).
[ix] Foundations (Guernsey) Law §33.
[x] St. Kitts Foundation Act (rev. ed. 2019) §5.
[xi] For a thorough discussion of information rights of foundation beneficiaries under Liechtenstein law, see Johannes Gasser, Information rights in Liechtenstein foundations, reloaded: back to the future? 22(7) Trusts & Trustees 767 (2016).
[xii] Paolo Panico, Private Foundations: Law and Practice (Oxford University Press 2014); Private Foundations: World Survey (Johanna Niegel and Richard Pease, eds.) (Oxford: Oxford University Press 2013).
[xiii] Withersworldwide, Building a Foundation – The New Hampshire Foundation Act, available at https://www.withersworldwide.com/en-gb/insight/building-a-foundation-the-new-hampshire-foundation-act (16 Nov. 2018).
[xiv] STEP’s website says about 6 per cent of its 21,000 or so members are in the United States. Taking that as a reasonable indicator of proficiency in trust law, that would make fewer than 0.09 per cent of the total of 1,352,027 licensed US lawyers (as of 2020) experts in trust law. Even if we assumed that only 1 in 10 knowledgeable US trust lawyers belonged to STEP – a heroic assumption, even given STEP’s rigorous membership criteria, since STEP is a significant channel for knowledge about trust law – that would still be under 1 per cent of US lawyers who could be considered experts in trust law. Philip Baker suggests a different reason for scepticism of this argument. He notes that his “experience with potential settlors of trusts is that most people contemplating setting up a trust are not that unsophisticated. I bear in mind a particular experience recently in establishing two extremely complicated structures on behalf of settlors, both of whom came from civil law traditions, but who were very comfortable with the trust concept. I wonder whether high-net-worth individuals these days really are that uncomfortable with the trust structure. I think sometimes they may be rather more uncomfortable with the trustees rather than with the trust structure ….” Philip Baker, Beneficiaries of Trusts and Foundations, 6(2) GITC Review 1, 4-5 (June 2007).
[xv] The exception to this may be among HNWIs whose family wealth is already in trust structures. Familiarity from personal experience does not seem likely to track the legal family of one’s home jurisdiction, however.
[xvi] See Larry Ribstein, The Rise of the Uncorporation (Oxford 2009), describing rise of non-corporate entities.
[xvii] Panico, supra note 13, at 9.
Andrew Morriss is Professor of the Bush School of Government & Public Service and School of Law at Texas A&M University. Prior to this position, he was the Dean of the Texas A&M School of Innovation, the Dean of the Texas A&M School of Law, the D. Paul Jones & Charlene A. Jones Chairholder in Law at the University of Alabama, the Ross & Helen Workman Professor of Law at the University of Illinois, and the Galen J. Roush Chair in Law at Case Western Reserve University.