Isle of Man Foundations
On 1st January 2012 the Isle of Man's Foundation Act became law adding a further sophisticated product to the already healthy array of offerings available on the island.
A Foundation has often been described as an ideal combination of a trust and a company and indeed it does have some of the characteristics of both. Some of those characteristics and advantages of a Foundation are discussed below.
Uses of Foundations
A Foundation can be akin to a family trust in order to benefit successive generations of family members, allowing the Foundation's founder to benefit his children and grandchildren in a controlled way, both during his life and long after his death.
Foundations will undoubtedly appeal to clients who are more comfortable with civil law. Of course, clients familiar with common law concepts are also able to take advantage of the flexibility that Foundations can offer.
Foundations are allowed to be set up for a specified purpose, along the same lines as a purpose trust. For instance, a Foundation could have the purpose of improving sporting facilities for U-21 year olds in London as its prime object.
Charitable Foundations are permitted for charitable objects and are already being widely used to benefit a wide range of charities. Once those charitable purposes are set out in the Foundation's instrument, the Foundation cannot then alter those purposes so care needs to be taken at the outset. Mixed charitable and non charitable purposes are permitted.
A Foundation's rules are confidential (though the Foundation's founding instrument is a matter of public record). The Bill also expressly says that the Rules may specifically deny the provision of any information to the beneficiaries. In this way, the Council (and Enforcer) may go about their business for the benefit of the Foundation without interruption and undue influence from the beneficiaries.
The Bill also says that individual beneficiaries do not have an interest in the Foundation or its assets. This may be used to refute any claim by the tax authorities that the beneficiary has a taxable interest in the Foundation.
A Foundation is able to exercise all the rights and powers of an individual, subject to some limited exceptions in the legislation. As it is a legal entity and has legal capacity, it can contract, sue and be sued and make and accept donations. It can commercially trade, but only if that trading is incidental to attaining its objects.
Comparisons with Trusts and Companies
Unlike a trust, a Foundation's instrument is a matter of public record and it would be relatively simple for a member of the public to learn of the Foundation's existence. However any private matters that the founder wishes to provide for can simply be added to the Foundation's rules (that are not made public) rather than the instrument.
The beneficiaries of a Foundation are the people that benefit from distributions of assets, and not, in comparison with a company, its members.
A Foundation legally and beneficially owns its assets unlike a trust which holds legal title only (the beneficial interest belonging to the beneficiaries).
A Foundation is governed by a Council. At the outset, the Council is composed of the people as appointed by the Founder, and act in a similar way to a company's board of directors or the trustees of a trust. However the liability of a Council member is more akin to that of a director, rather than the strict liability of a trustee.
As with an Isle of Man 2006 Act company, a Manx licensed Registered Agent is required to apply for the incorporation/establishment of the Foundation. The address of the Registered Agent will act as the business address of the Foundation.
Thus a Foundation may well be preferred to a Trust in the following circumstances:
- When the proposed assets are of a risky or depreciating nature
- To hold "orphaned" assets with no obvious ownership structure special purpose vehicles being a good example
- Where the client is more familiar, and hence comfortable, with civil law concepts
- For certain tax purposes where the proposed beneficiaries may otherwise be held to have an interest in a trust.
A Foundation is constituted by its Instrument and its Rules.
Similar to a company's memorandum, the Instrument will contain the Foundation's name (which must include the suffix "Foundation"), the business address, the objects for which it is formed and the names and addresses of the initial Council members.
As the instrument is available to the public, care should be taken that matters which the founder would rather remain private, form part of the Rules. Care should also be taken whilst drafting the Foundation's purposes as later changes are not always possible.
The Rules will typically include, but not be restricted to the following:
- The establishment and proceedings of the Council
- The processes of decision making, and what decisions if any, are subject to approval of an "Enforcer"
- Method of appointment, retirement, removal and payment of the Registered Agent and council members
- Rules regarding payments and transfer of the Foundation's assets
- Provisions for winding up the Foundation.
The objects must be specific in what the Foundation is trying to achieve. The objects may be charitable, non-charitable or a mixture of both. They may be to benefit a person or persons or to carry out a specific purpose.
The objects clause may state that persons to be decided under the rules of the Foundation will be beneficiaries and in this way, the identities of proposed beneficiaries are not publicly available.
If one of the objects of the Foundation is a specified purpose, and that purpose is not a charitable one, then there must be an Enforcer in respect of that object.
Services that We Can Provide
An Isle of Man Class 4 licence-holder is required to incorporate / establish the Foundation at its outset and also to act as the ongoing Registered Agent. The Agent must carry out suitable due diligence and 'know your client' checks on the Founder and any other bodies making transfers of value into the Foundation. The Agent must retain copies of the rules and provide the business address of the Foundation. Corporate Options Limited holds the relevant licence in this regard.
Corporate Options Limited is able to provide members to the Foundation's council or act alone should this be the Founder's wish. The Council owes it duties to the Foundation. Corporate Options Limited would carefully govern the Foundation in accordance with its instrument and rules and ensure that sufficient records are correctly maintained at the Foundation's business address.
Similar to a Trust's protector, the Enforcer will have specific duties, usually to approve or veto the decisions of the Council in certain circumstances, as decided by the founder and set out in the rules.
A Manx corporate service provider can act as a council member, an enforcer and a registered agent, however acting in the dual capacity of Enforcer and Council member is not permitted.
Corporate Options is able to provide full administrative services enabling a Foundation to perform including the preparation of financial statements, bookkeeping, the completion and filing of tax returns and the opening and maintaining of bank and stockbroker accounts.
For more information please feel free to email Lee Murphy or call 00 44 (0) 1624 612888 / Skype: corporateoptions