The advantages of private foundations

The advantages of private foundations

A private foundation is a corporate entity with separate legal personality, but which has no owners, and therefore does not issue shares or other ownership interests. It is established by a founder who contributes initial funds or assets to the foundation.

The foundation is governed by its constitutional documents, which typically consist of a charter and bylaws, and a governing body called directors or council members. There will typically also be a guardian or enforcer who is empowered to supervise the directors to ensure they are complying with the foundation charter and bylaws, and with their duties as directors under applicable law.

The foundation’s charter or (more likely) bylaws will identify the foundation’s beneficiaries, if any, or its purpose, along with all other rules by which the foundation and its directors are to be governed. Those rules may include, for example, guidance as to how the foundation is to invest and manage its assets, how it is to distribute them to beneficiaries through generations or otherwise use them towards the foundation’s stated purpose, and how decisions are to be made by the foundation’s directors, among other things.

Private foundations have a long history in the civil law world as useful vehicles for family wealth management, estate planning and asset protection across multiple generations. They are used for many of the same purposes as trusts in the common law world, and are indeed sometimes viewed as trust substitutes.

A private foundation offers certain advantages over a trust structure which make them very useful in the context of wealth and succession planning, which include:

  • A foundation is a corporate entity with legal personality, which can own its own assets, contract in its own name, and which enjoys limited liability, but can carry out the functions of a trust, including a purpose trust. In order for a trust structure to achieve a similar result, a holding company is required in addition to the trust itself, resulting in a greater administration burden.
  • Foundations are more readily recognized and accepted by financial institutions, asset registries (land registries), and contractual counterparties in many more parts of the world than trusts (including Europe, Asia and the Middle East). There is also growing formal recognition of private foundations in common law jurisdictions, some of which have introduced their own foundation laws.
  • Beneficiaries are not required to have rights to receive information from the foundation, allowing for much greater confidentiality than a typical trust structure.
  • There is very limited, and sometimes no, publicly available information regarding a private foundation. The foundation’s bylaws typically contain the detailed terms governing the foundation, and the bylaws need not be filed with any regulatory body.
  • Foundations are not burdened by the often antiquated and seemingly arbitrary legacy of common law rules that afflict trusts, such as the rule against perpetuities or the right of beneficiaries to collapse a trust under what is known as “the rule in Saunders v. Vautier”.
  • The directors of the foundation are not subject to the equitable common law duties to which trustees are bound. They owe no fiduciary obligation to beneficiaries, only to the foundation itself. Similarly, beneficiaries need not be given any standing to enforce the terms of the foundation, and need not have any rights or entitlements from the foundation whatsoever.

Because of their corporate status and limited liability, foundations are useful for holding higher risk assets which may attract claims. A trustee, by contrast, may be wary about accepting such assets or may charge greater fees to hold and manage them.

Foundations offer the same, or potentially greater, asset protection benefits as trusts. Since claims must be made against the foundation itself (as opposed to a trustee), there is less direct concern around liability of directors (as opposed to trustees who do have that concern).  Also, civil law jurisdictions may not recognize the existence of a trust and simply attribute trust assets to the settlor for purposes of, for example, a divorce settlement.

Foreign private foundations for Canadians

In view of the above, a Canadian may wish to consider a private foundation where there is a desire not to extend information and enforcement rights to beneficiaries, minimize potential for claims, where the foundation will be investing, banking, or holding assets outside of the common law world, or where a founder and founder’s family resides in a civil law jurisdiction.  As discussed below, a foundation may also be useful in a tax planning context.

While the benefits of private foundations are compelling in the right circumstances, it is important to consider how the Canadian courts view foreign private foundations, and consequentially how they are viewed from a Canadian tax perspective. As noted, private foundations do not exist in Canadian law.

The approach taken by the Canadian courts when faced with a foreign legal entity which does not exist under Canadian law is a two-step approach, whereby it first examines the characteristics of the entity as defined under the applicable foreign laws and the entity’s own constitutional documents, and then compares those characteristics with those of entities recognized under Canadian law. The foreign entity will be treated as the type of Canadian entity it most closely resembles. Using that type of analysis, a Canadian court will treat a foreign private foundation as either a corporation or a trust.

There are many potential factors that will influence a court’s and the Canada Revenue Agency’s (CRA) determination that any particular foreign private foundation is more analogous to a corporation or a trust. These include such things as how the foundation is controlled, any rights reserved by the founder, who can enforce the foundation’s terms, the nature of beneficiary rights, duties of directors, how the foundation is described under local laws, and how the foundation actually functions in practice.

The CRA has stated expressly that the most important attributes to consider are the nature of the relationship between the various parties and the rights and obligations of the parties under applicable law and the foundation’s constitutional documents. The Canadian courts, in the very limited jurisprudence that exists on the subject, have also focused on the nature of the relationships and the respective rights and duties among the parties to the foundation in order to arrive at their determination.

The hallmarks of a trust relationship will include such things as a trustee’s fiduciary duty towards beneficiaries, the existence of beneficiary rights, and a beneficiary’s ability to enforce its rights against the trustee (among other things).

A foreign private foundation can be structured in a manner that creates similar relationships to a trust, or in a manner that does not. Since it will be a case-by-case analysis, it is not possible to achieve absolute certainty as to whether any particular foreign private foundation will be treated as a corporation or a trust by a Canadian court (or the CRA).

The analysis, however, can be predictably and materially influenced by how the foundation is structured. The Canadian legal and tax treatment of a foreign corporation (and a Canadian shareholder) is materially different from the legal and tax treatment of a foreign trust (and a Canadian beneficiary).  Therefore, thoughtful structuring of the foundation is key from a Canadian planning perspective.

With the right planning at the outset, a foreign private foundation can be part of a stable, efficient and effective wealth management, protection, and succession plan for Canadians. Private foundations are available under the laws of several jurisdictions worldwide, including notably Liechtenstein, The Netherlands, The Cayman Islands, Panama and the UAE. Specialist advice is essential.

Source article

If you would like to discuss whether a private foundation structure is right for you, please contact us. 

private foundation

James Bowden

Afridi & Angell
How to protect and spread your wealth optimally

How to protect and spread your wealth optimally

Showing ways and solutions to the High Net Worth Individuals to protect and optimise their assets. Wealthy people – the so called High Net Worth Individuals – keeping their property on a foreign account are currently under a general suspicion of tax evasion. The case involving Uli Hoeneß appears to prove the opinion of all those who see a close correlation between a growing bank account and declining moral standards.

Protecting and spreading the wealth in an optimum manner within the framework of legal regulations

There are several substantial reasons for having one or more accounts abroad. Risk-diversification spreading of wealth, corporate and financing strategies, holding companies, family or succession planning, alternative life planning are aspects that are equally as valid as the differing taxation in the various countries. And last but not least: keeping costs as low as possible is the main aim of most companies. This also applies to the building up of wealth. More precisely this point includes the minimising of tax burdens within the statutory framework and making use of admissible forms of creative leeway.

The current debate

The current debate does not consider the fact that, in all countries outside of Germany, the taxes paid are those required by the corresponding state. For example, a person buying an apartment in New York may have the transaction processed via a US company with its headquarter in the Cayman Islands. This case the purchase money is invested legally and in an optimum manner from a tax perspective and future rental income fed into the fiscal cycle.

People buying a ship with taxed money may possibly operate it under a foreign flag – e.g. Malta or Cayman Islands –and channel the purchasing price and the operating costs via these countries, as social insurance charges, taxes etc. are cheaper under these flags than with a German or Swiss flag. Do you know of a cruise ship operating under a German flag?

In the same way as every citizen looks for favourable purchasing prices in the internet, internationally operating companies utilise competition between tax systems. This means tax optimisation within the limits of applicable law.

Also allowed is complying with one’s own wish for discretion and investing one’s money outside Germany. People living in small towns who have built up wealth or acquired wealth through the sale of their company, do not necessarily wish to keep the whole of the large amount with the local savings bank. Keeping one’s private old-age provision from taxed assets in countries with lower taxes than in Germany is likewise a rational approach. Additionally, the euro is no longer the first choice currency of many people with respect to long-term investments. Diversification is the solution.

People should also give consideration to controls on capital transactions. In Europe, nobody must reckon with a repetition of the common practice of the 1950’s to 1980’s. Capital interrelations are too strong to allow this. Nevertheless, measures aimed at limiting the daily amounts of money available at cash dispensers or for bank transfers can no longer be fully excluded. The only protection in such cases is an internationally diversified portfolio.

Spread the wealth in an optimum manner

Of course, there will always be those who wish to avoid the charges completely and who therefore evade tax. This has always been the case and this is clearly not our aim. However, the overwhelming majority aims to use the above perspectives to spread their wealth in an optimum manner, protect it and ensure their liquidity. They pay tax on their wealth but reduce the tax burden with the approval of the legislators. As long as there is competition between tax systems, as long as global income is not recorded and taxed everywhere, it will be legal and correct to apply the rulings created by the law and to diversify. That too is globalisation. https://www.heuking.de

Dirk W. Kolvenbach is a German attorney at law and Senior Partner with HEUKING KÜHN LÜER WOJTEK in Zurich and Dusseldorf. Further, he is the head of the Practice Group “Private Clients” and a renowned specialist in all Private Clients matters (e.g. succession, asset protection and transaction).

Dirk W. Kolvenbach

Dirk W. Kolvenbach

Heuking Kühn Lüer Wojtek

heuking.de

private foundation

Gerd D. Kostrzewa

Heuking Kühn Lüer Wojtek

heuking.de

Family Offices – What investors should know about them

Family Offices – What investors should know about them

The Family Office can help if the private wealth has become extensive and complex. Finding a suitable partner is essential. To enable successful, i.e. profitable, management of assets, Family Offices must meet specific quality requirements such as personal integrity, high professional standards and service orientation. Due to increasing complexity and internationalization, advice from independent external legal advisors is indispensable in order to guarantee high-level expertise. Mandating large law firms can be advantageous for liability reasons.

The Family Office concept

Depending on the context in which it is used, the term “Family Office” can have very different meanings. Some talk of it in a quite derogatory manner as “butler of the rich”, others as “high-level secretarial services”.  It is true that Family Office services are rendered in the context of mostly large fortunes. Here, the term Family Office should be understood as an organizational unit in which all services relating to the management of private wealth will be managed externally in a business structure.

Nowadays, Family Offices are in operation all around the world. Previously, Family Offices were common particularly in the United States and Europe. Today, Family Offices are also gaining increasing importance in Asia (Hong Kong, Singapore). In Europe, Switzerland must be regarded as the centre of Family Offices alongside London. Although there are no precise figures, 300 to 500 Family Offices are supposedly engaged in the Family Office business in Switzerland.

One assumes that all over Europe there are about 4,000 firms each with assets of at least 100 million USD under management. Of these, approximately 750 are organized as Single Family Offices, i.e. as corporations set up to render services for one particular family. The remainder are so-called Multi Family Offices, i.e. units in which the services are bundled for the assets of several individuals.

Where does the concept of Family Offices come from?

The stewardship itself is not a phenomenon of modernity. Rather, the roots date back to the 6th century when the major-domo took over the management of the assets for his dominion. The modern concept of Family Offices was developed in the 19th century. In 1838, the family JP Morgan founded the House of Morgan for the administration of the family’s assets. In 1882, the Rockefeller family set up a comparable entity.

Why have Family Offices enjoyed such a boom in recent years?

A major reason for this is the general increase in the concentration of wealth, followed by all needs arising from this in terms of the protection and growth of a large fortune.

At the same time, many wealthy investors had very negative experience with conventional investment advice from their banks during the last financial crisis. Consequently, they have been looking for independent investment advice and have found an option in the concept of Family Offices.

Additionally, this form of organization meets the increasing need of most investors for discretion. Not only externally, but also vis-à-vis the banks involved and investment providers, they do not want to disclose their financial circumstances fully and in detail. Here, a Family Office offers a shielding or at least filtering effect.

Finally, the legal and administrative requirements for investors have increased enormously in recent years. Firstly, because investors are increasingly focusing on real assets whose management is more complex than the mere holding of an indirect investment through a financial product. Secondly, this is a consequence of the generally increasing internationalization of investments.

What services offered by Family Offices can investors benefit from?

Classically, professional Family Office services include aspects such as asset planning, asset management, asset controlling, asset protection as well as legal and tax compliance.

The range of possible supplementary services is extremely wide and limited only by the individual needs of the asset owners. Such services can comprise administrative support, providing personnel, managing selective private matters, through to the complete lifestyle management of the asset holder.

At what point does a Family Office make sense?

In simple terms, working with a Family Office is always worthwhile if the private wealth has become so large and complex that neither the time nor the know-how for its self- administration are available.

However, the operational costs of running a Family Office can be significant. The reason is that the team of specialists is kept exclusively for the purpose of the asset owner. Therefore, as a general rule, the establishment of a Family Office only makes sense economically for really large fortunes. Fixed limits can hardly be defined, since the individual needs of the asset holder and the individual demands resulting from the asset structure vary to a large extent. As a basic rule, however, one can say that in Switzerland a fortune of between 400 and 500 million CHF is considered to be the minimum amount for setting up a Single Family Office.

But even without the full exclusivity of (and control over) a Single Family Office, wealthy investors can benefit from Family Office services by pooling their interests in Multi Family Offices. This form of pooling may include benchmarking, better investment terms or access to investment opportunities / high-profiling networks through higher investment volumes. In Europe, Multi Family Offices serve an average of 10 to 15 clients with total assets under management of some 25 to 50 million USD.

However, the success of this type of bundling depends to a crucial extent on the assumption that the specific client profiles are comparable to each other. Managing assets that are mainly invested in Asian financial market instruments will hardly generate synergies for managing European real assets.

Success factors – what makes a Family Office a good Family Office?

The decision in favour of a Family Office – whether a Single or a Multi Family Office – is a significant and mostly far-reaching decision. There are numerous companies that offer Family Office services. The problem is that “Family Office” is not a protected term and thus anyone can offer Family Office services without having any specific qualification or experience.

Based on the demands in terms of the successful, i.e. profitable, management of larger assets, the following skills are of particular importance.

  • Personal Integrity: A Family Office is not only an asset manager but also a close intimate of the client with a deep insight into highly personal matters. Thus, personal integrity and confidentiality are indispensable.
  • High Professional Standards and Expertise: Decisive for the quality of the consulting services is a high level of competence on the part of the Family Office employees such as attorneys, tax consultants, asset managers etc.
  • Service Orientation: One of the major reasons for holders of considerable assets to mandate a Family Office is severe time restraints. Given this situation, they expect a very high degree of flexibility from their advisors. Whether or not the collaboration turns out to be successful depends very much on each advisor’s ability to comply with the client’s needs and preferences.
  • Network: The quality of the services rendered also depends on how well the Family Office is networked to experts advising within comparable settings. Consequently, it is most helpful to have a network comprising advisors of other Family Offices, thus enabling the advisors to benefit from each other’s expertise or networks.
  • External Expertise: Mainly because of the increasing complexity and internationalization of investments, it is important that the Family Office consultants realize when it is advantageous or even necessary to mandate an external consultant. Smaller entities in particular cannot afford to employ several specialists within the same department.  In legal departments, for example, it would be very difficult for one single person to constantly monitor legal changes in all relevant fields and to react proactively to future changes. Here, large law firms that provide highly specialized services can be of assistance, especially those focused on private clients. These teams can offer all required legal advice on civil law, corporate law, tax planning, asset protection etc. They can contribute not only high-level expertise but are also very familiar with this market segment and its specific rules. Most effectively, they can provide solutions they have already developed for other clients in comparable situations and that turned out to be helpful. Finally, the advice of a large external law firm can be advantageous for liability reasons as well, since such law firms tend to have higher levels of insurance cover. http://www.heuking.de

Dirk W. Kolvenbach is a German attorney at law and Senior Partner with HEUKING KÜHN LÜER WOJTEK in Zurich and Dusseldorf. Further, he is the head of the Practice Group “Private Clients” and a renowned specialist in all Private Clients matters (e.g. succession, asset protection and transaction).

Dirk W. Kolvenbach

Dirk W. Kolvenbach

Heuking Kühn Lüer Wojtek
What happens to your digital assets upon death?

What happens to your digital assets upon death?

What happens to your digital assets upon death?

What happens to one’s digital assets upon death? A brief summary of the rules in the U.S.A. that determine how much of our digital information is available to our fiduciaries upon death.

While technology is constantly advancing in an attempt to improve our lives, a concession that we make is our privacy. Just how much of our information are we willing to share, with whom and when? Since much of what we do on our phones, laptops and computers is in the digital realm, the legislature and the courts in the US are now grappling with a new challenge: what happens to one’s digital assets on death?

In an effort to protect the privacy of the user, many tech companies are struggling with just how much information should be shared with the fiduciaries of a decedent.

Legislative Approach

So far, 41 US states have adopted the Revised Uniform Fiduciary Access to Digital Assets Act (the Uniform Law). In September 2016, New York added art.13-A to its Estates, Powers and Trusts Law (the Estates Law). This is largely based on the Uniform Law.

Despite the enactment of the Estates Law, which addresses the ability of a fiduciary to access digital assets, tech companies are still seeking court orders before releasing digital information to fiduciaries. At the time of writing, there have been at least four reported cases that address the access to digital assets of a decedent: three in New York, and another currently ongoing in Massachusetts.

These cases address ‘electronic communication’. If a digital asset is classified as an electronic communication, the fiduciary will need to provide proof of a user’s consent (usually in a will) or a court order in order to obtain access.

However, if the will is silent, what kind of digital assets should fiduciaries have access to? Currently, everything except the content of electronic communications, unless there is a terms of service agreement that provides otherwise.

Recent Case Law

In 2019, in Matter of Swezey, the petitioner sought access to photographs stored in his deceased spouse’s Apple iCloud account after the decedent died unexpectedly at the age of 45 with two surviving minors. The New York County Surrogate’s Court (the Court) held that the photographs were not electronic communications and that no lawful consent was required for disclosure under the Estates Law.

Interestingly, before applying the Estates Law, the Court explored the relationship between the petitioner and the decedent, stating that: their computers were adjacent to each other at home; they did not attempt to shield access to digital assets from one another; the petitioner viewed the images on the decedent’s computer; and together they used the photos to make holiday cards. Despite analysing their lifestyle, the Court ultimately held that the petitioner had the right to access the photos as a fiduciary because they were not electronic communications.

In 2017, the Court in Matter of Serrano ruled that if the information regarding the user’s contacts includes ‘information that identifies each person with which a user has had an electronic communication, the time and date of the communication, and the electronic address of the person’, it is a catalogue of electronic communication, and not electronic communication. Similarly, the Court determined that a calendar is not electronic communication because there is no transfer of information between parties.

Also in 2017, in Matter of White, the petitioner requested access to the decedent’s Gmail account to obtain information about assets that he needed to identify and administer. While the Suffolk County Surrogate’s Court in New York held that Google was required to disclose the decedent’s ‘contacts information stored and associated with the email account’, it erred on the side of privacy and held that greater access could be granted later, but only if warranted.

Avoiding Challenges

To address these new challenges, many companies have created online tools that allow trusted individuals to gain access to an account after the user dies, such as Facebook’s ‘legacy contact’ and Google’s Inactive Account Manager. While some companies have attempted to grant access to users’ accounts, not all companies provide such options.

US law may be starting to catch up to technology. However, discussions about access to and disposition of digital assets should be held early on during estate­-planning conversations with clients, and carried into the necessary documents, to ensure that fiduciaries and loved ones are granted the intended amount of control. https://www.duanemorris.com/

private foundation

Reshma Shah

Duane Morris
Declaration of foreign assets and income in Belgium

Declaration of foreign assets and income in Belgium

Already since tax year 1997, Belgian tax resident individuals have to declare the existence of foreign assets/accounts they hold with banks abroad. This declaration of foreign assets is to be made in the annual income tax declaration. This means that taxpayers have to “tick the box” to confirm that they hold a bank account abroad and that they have to mention the country where the bank account is held.

The tax administration can (subsequently) ask the taxpayer to provide her with all tax relevant information in relation to the declared bank account(s), allowing her to determine the amount of taxable income received on that bank account.

Declaration of foreign assets and income in Belgium

In practice, this legal obligation is not always known to Belgian resident individuals. Moreover, individuals who (recently) immigrated to Belgium in the past years are hardly ever aware of the compliance measure, while in particular these persons often hold bank accounts and have foreign assets in different countries following the international nature of their business and the location of their family and possible holiday houses. Nonetheless, these “international” individuals too have to comply with the Belgian reporting duties as soon as they settle as a Belgian tax resident.

The reporting duty applies regardless of the amounts held on the bank account and regardless of the fact whether the account generates income. Thus, also a small account (for instance an account held for the maintenance of the Chalet in Verbier) has to be reported. Self-evidently, the income received on the foreign bank account (i.e. usually dividend and interest income) also has to be declared in the income tax declaration.

Recently, the Belgian legislator moreover created two new legal obligations. Since tax year 2013, the taxpayer has to declare the existence of foreign life-insurance contracts abroad and starting from tax year 2014, the taxpayer will have to declare the existence of so called “private wealth structures” (trusts, foundations, off-shore companies,…) of which he is the founder or beneficiary.

Often the question arises, which legal consequences the taxpayer faces when he does not comply with his reporting duty (duties) and how non-reporting of foreign bank accounts ( and their foreign assets ) can be remedied as soon as the taxpayer becomes aware of the necessity thereof.

In general, non-complying with the reporting duty itself can only lead to an administrative fine of at most EUR 1.250,00. The tax administration may however perceive the non-declaration as a sign of tax evasion. In case foreign movable income has not been declared, the tax administration could claim tax increases up to 200%. When the tax administration retains tax evasion on behalf of the tax payer, the statute of limitations is moreover extended to 7 years. This means that non-declared income received in 2007 can still be taxed by the tax administration in 2014.

When the tax administration considers there is tax evasion on behalf of the taxpayer, she can also transfer the case to the public prosecutor. He could claim a criminal sanction following a violation of the income tax code with fraudulent intent. Moreover, he could claim a money-laundering offence on behalf of the taxpayer. Recent case law of the Belgian Constitutional Court (judgment April 3, 2014) however prohibits the culmination of administrative fines and criminal sanctions in tax cases. Nonetheless, it remains to be seen how the tax administration and the public prosecutor will apply this case law in practice.

Off-course, each individual should have the opportunity to remedy potential tax violations or mistakes for the past. In Belgium, this remedy existed under the form of a separate voluntary disclosure procedure which entered into force with a law of December, 27, 2005 and existed until the end of 2013. A voluntary disclosure demand had to be filed with a separate Voluntary Disclosure Unit.

In this procedure, non-declared income was finally subjected to the normal tax rate (as it should have applied when the income was immediately declared in the annual tax declaration), in some cases increased with an additional tax-fine varying between 5% and 20%, depending on the nature of the income that was declared. Upon payment of the voluntary disclosure imposition, the taxpayer received an attestation granting him tax and criminal immunity.

Since by the end of 2013 the existing voluntary disclosure procedure has been abolished, no special procedure currently exists for the regularization of undeclared assets. This obviously does not mean that the taxpayer should continue non-declaring the existence of his bank account or (movable) income he receives on this account.

First of all, the taxpayer could simply start with declaring the existence of his foreign bank account(s) as from his next tax declaration over tax year 2014. As from declaration, it will no longer be possible to state that the taxpayer wants to hide or conceal these assets to the tax administration. Thus, at least for the future, the taxpayer can no longer be deemed to act in a tax fraudulent way. For the past, it remains to be seen whether the tax administration decides to further investigate the taxpayer. This can never be excluded, but practice shows that declaring the existence of a foreign bank account does not automatically lead to investigative measures.

Besides this approach, the taxpayer can opt to spontaneously contact his local tax administration in order to rectify tax breaches committed in the past. As opposed to the regime under the higher mentioned abolished voluntary disclosure regime, no clear legal basis exists for such approach. The tax administration did confirm this possibility in a tax circular of April, 1, 2010 and continues to allow it in practice. This approach nonetheless entails negotiations with the tax inspector regarding the number of tax years to be rectified, the applicable tax increase, interests for late payment,…and the result may vary depending on the location.

In any event, it is advised that taxpayers who hold undeclared assets on a foreign bank account, seek legal advice in this respect timely. International exchange of banking information is increasing rapidly and Belgium more and more approaches the prosecution of undeclared assets from a criminal point of view. Settling possible tax evasion committed in the past, is moreover necessary in case of further wealth planning of these (foreign) assets and to preclude that heirs or beneficiaries are confronted with a tax or criminal investigation in the future. https://www.tiberghien.com/

private foundation

Gerd D. Goyvaerts

Tiberghien