Misunderstood in some jurisdictions, Guernsey foundations have their benefits. Russell Clark examines what they can offer private client lawyers and their clients

Guernsey's much-heralded Foundations Law came into force last month. Lawyers dealing with an international client base of private clients now have another string to the bow of tools available to help with structuring for wealth preservation and generation.

At midnight on 8 January, the registrar of foundations in Guernsey accepted the first registration of foundations to be established pursuant to the Foundations (Guernsey) Law 2012.

Those incorporated on the first day included foundations established for purely philanthropic purposes, as well as those with private wealth management objectives.

The States of Deliberation, Guernsey's parliament, first approved the notion of introducing foundations into Guernsey law in December 2006 after wide consultation.

International private client advisers had, for some time, been saying that there was a demand for a foundation solution but one centred in a well-regulated jurisdiction with proven service providers and a judicial system with which those advisers are familiar and comfortable. 

Despite being one of the first Crown dependencies to seriously consider introducing foundations into domestic law, Guernsey was the last to do so. But the Guernsey foundation is quite different from the foundation model on offer in the other Crown dependencies.

Being a creature of civil law, foundations are not well understood in common law jurisdictions and, just as civil lawyers regard the trust with deep suspicion, foundations are often dismissed in the Anglo-Saxon world as something offered in sunny places to shady people.

For some, the institution is tainted by association. But to dismiss the foundation as irrelevant or somehow inferior to trusts is to ignore an institution well-understood and well-used around the globe.

The trust, on the other hand, relies upon a distinction between legal and equitable property rights that often bewilders clients from civil law jurisdictions.

The private client adviser with an international client base or an aspiration for such a client base – who does not consider whether a foundation might be an appropriate solution to his client's requirements – will, at best, be regarded as myopic. 

What is a foundation?

Foundations have some characteristics that are similar to those of a company. It has a separate legal personality and has a management board known as a council.

Like company directors, and unlike trustees, the council members do not contract in their own names, but on behalf of the foundation itself.

The foundation may sue and be sued. The assets of the foundation are owned by the foundation.

There is no concept of beneficiaries of a foundation having equitable property rights in the assets of the foundation in the same way that the assets of a company are not the assets of its shareholders.

The beneficiaries have the rights afforded to them by the constitution of the foundation and the law – nothing else. But unlike a company, a foundation is entirely independent, has no shares, no members and no concept of share capital.

In other ways, a foundation may be compared to a trust, as assets are held for the benefit of others or for a specific purpose, although trusts have no separate legal personality.

Both foundations and trusts can be used to hold assets in "orphan" structures, legally separated from the original owners of those assets. 

Whereas every person who donates assets gratuitously to trustees (to be held upon trust) becomes an economic settlor with a foundation, there can only be the initial founders.

Persons donating assets to the foundation after its establishment do not thereby incur founder's rights. Although there are similarities, a foundation is neither a company nor a trust.

In addition, trusts and companies are not two ends of a spectrum with foundations somewhere in the middle. They are three distinct and different legal structures which have evolved in their own way to serve different purposes and to work in different environments.

The Guernsey law

The Guernsey law is intended to reflect accepted civil law characteristics of foundations, but is not a replica of those foundation laws of other common-law jurisdictions that have also recently introduced foundations.

The draftsman has considered market needs, civil law principles and has looked to create something bespoke that should be well suited to meet the requirements of the island's clients.

The law is separated into three parts: the substantive law and two schedules. This was done deliberately to mirror the civil law tradition of having a short law with clarification coming in the form of regulations.

The first schedule deals with administrative matters such as the establishment of foundations and their registration. The second schedule deals with migration of foundations, their revocation, dissolution and termination.

The migration provisions are helpful as it is understood that there are a number of existing foreign foundations that would welcome a chance to relocate to somewhere with greater administrative capability and international reputation.

The law itself is more thorough than the foundation laws elsewhere to give clients and their advisers a great deal of certainty. In trust jurisdictions, it is common for the courts to have supervisory functions enabling trustees to seek the directions of the court.

That function is rarely present in civil law jurisdictions where the courts exist to determine culpability after the fact. 

The Guernsey law imports that chancery-type jurisdiction so that the courts will have the same power to help those administering foundations as they do trustees.

The constitution of a foundation

The core document by which a foundation is established is its constitution. This comprises two parts: the charter and the rules. The charter must contain the name and purpose of the foundation, a description of its initial capital or endowment and, if it is a foundation with a limited duration, that duration must be stated.

It may contain anything else that the founder wants to include. A foundation must have a purpose and may be established for any purpose save that it cannot carry out any commercial activities except those necessary for, and ancillary to, its purpose.

Although a foundation is not itself intended to be a trading vehicle, there is no prohibition on the foundation owning shares in a trading company.

The rules set out the operative provisions of the foundation. As such, the rules detail the functions of the councillors, deal with the procedures for the appointment, retirement and remuneration of councillors and any guardian, and identify the default beneficiary.

The rules may also specify other matters, such as how the assets of the foundation should be applied and how beneficiaries may be added or excluded.

They may also impose obligations on a beneficiary, such as a condition of benefitting or contain protective measures to terminate a beneficiary's interest, for example, if he becomes insolvent or otherwise.

Neither the charter nor the rules are available for public inspection, although the charter is delivered to the registrar upon establishment.

The only information available for public inspection are the name and registered number of the foundation, the name and address of the councillors appointed to act, the name and address of the guardian (if there is one), and the details of the registered office.

In addition, the registrar shall maintain a non-public part of the register which shall include all declarations and other documents filed with the Registrar pursuant to the law. These documents can be disclosed only by order of the Royal Court.

Dramatis personnae

A Guernsey foundation will be managed by a council comprised of at least two councillors, unless the constitution permits a single councillor.

If none of the foundation officials is a Guernsey-licensed fiduciary, then the foundation will require a Guernsey resident agent to hold the foundation's records within the jurisdiction. 

Although it is not necessary for the foundation to be administered by professional fiduciaries in Guernsey, there is a need for all of the foundation's records to be available at the registered office.

This includes all documents filed with the registrar, the constitution (charter and rules), the accounting records and all documents required to be kept by the foundation in accordance with any enactment.

Accounting records include all underlying documentation, such as invoices, receipts and contracts, and details of property endowed upon the foundation (including the name and address of the person who endowed the property). 

The accounting records must be sufficient to show and explain the foundation's transactions, such as to disclose with reasonable accuracy the foundation's financial position at any time. 

These fairly onerous record-keeping requirements are to ensure that the Guernsey-based professionals involved are able to ensure that the foundation's activities are being undertaken in accordance with applicable law and to ensure that all foundations are subject to Guernsey's robust anti-money laundering and counter-terrorist financing framework.

Role of councillors

The councillors have a duty – owed to the foundation itself rather than to any beneficiaries – to act in good faith and en bon pere de famille (as would a prudent administrator of family wealth).

The councillors also have a duty not to profit (otherwise than as permitted by the constitution), to preserve the foundation property, to give information to the guardian (if any) and enfranchised beneficiaries, to maintain accounting records, to act together with their fellow council members and to be impartial.

The founder of a Guernsey foundation will determine the purpose of the foundation, craft the foundation's constitution and endow it with its initial capital.

The founder (or his agent) must also subscribe his name, as the founder, to the constitution of the foundation by signing it.

It is also the founder's role to appoint the initial councillors and any guardian, and to seek to have it registered. The founder can either be a councillor or a guardian (but not both simultaneously) in addition to being a beneficiary.

Beneficiaries must be identified by name or be ascertainable as a member of a class or by their relationship to another person. In the conventional model of civil law foundations, the beneficiaries are able to ensure that their rights are respected by the council.

In contrast, the laws of some common-law jurisdictions, that have recently adopted foundation-type legislation, stipulate that beneficiaries have no rights to information. The Guernsey draftsman considered it important that the council was properly accountable for its actions. 

Equally, however, it was recognised that in certain circumstances it might be appropriate to deny information to some beneficiaries.

An example, often raised by concerned parents, is of the young beneficiary for whom knowledge of substantial wealth may, if acquired too early, have corrosive effects. Guernsey's innovative solution to this dilemma – so as to ensure accountability on the one hand and that information can be denied to certain beneficiaries on the other – is to have two types of beneficiary:

• Enfranchised beneficiaries who are entitled to be provided with the accounts of the foundation and have standing to bring certain applications to court in relation to the foundation; and

• Disenfranchised beneficiaries who are not entitled to any information relating to the foundation, but who are still entitled to benefit to the extent set out in the constitution. 

In instances where there are disenfranchised beneficiaries, or the foundation is established for a purpose for which there are no beneficiaries, an independent guardian must be appointed. The guardian has the task of ensuring that the council discharges its duties in accordance with the constitution.

The guardian also owes the beneficiaries a duty of care in the discharge of his duties, thereby ensuring that the council remains accountable while shielding the disenfranchised beneficiaries from information which might be damaging to them. 

The constitution may include provisions enabling a disenfranchised beneficiary to become an enfranchised beneficiary or vice versa. Thus, the minor beneficiary may become entitled to information when he attains a certain age, qualification or whatever other trigger is the concern of the founder.

There is perhaps little that can be done with a foundation that cannot be done with a trust and vice versa. It is not a question of whether one is better than the other. In some parts of the world, the trust is well understood and the foundation is not.

The UK is one such jurisdiction. Guernsey foundations were not intended for use in the UK given the uncertainty as to how HM Revenue and Customs will tax them.

In other parts of the world, the foundation reigns supreme and is readily understood. All trust lawyers and advisers have come across clients from other jurisdictions who simply cannot understand how a trust functions.

To create a trust for such a client is a risky business. A foundation may in such circumstances be more appropriate. It's horses for courses.

Although established on different principles than trusts, the foundation has, at its heart, the prudent administration of assets for the benefit of others – something that Guernsey has specialised in doing with skill and integrity for decades. 

Russell Clark (pictured) is a partner and head of the Guernsey fiduciary team at Carey Olsen.