Introduction

In the intricate world of asset management and estate planning, the choice of legal entity plays a pivotal role in securing and optimising wealth across generations. While trusts have been the mainstay in common law jurisdictions, the emergence of foundations has introduced a novel and dynamic alternative.

This article delves into the concept of foundations, a legal entity that combines the characteristics of both corporations and trusts yet stands distinct in its functionality and purpose. We explore the foundations’ unique role in wealth structuring and succession planning, their advantages in international estate planning, and consider the specific case of Samoa foundations, offering a fresh perspective on asset management and legacy planning in today’s globalised world.

What are Foundations?

Foundations represent a relatively novel concept in common law jurisdictions, which have traditionally relied on trusts for asset holding and succession planning. In contrast, civil law jurisdictions have utilised foundations for similar purposes since the Middle Ages.

A foundation is an incorporated legal entity that serves various functions in wealth structuring and succession planning. It stands distinct from a company or a trust, though it shares characteristics with both. Notably, foundations lack shareholders or ‘owners’ and do not necessarily require beneficiaries. This unique aspect has led to an increasing trend of using foundations as ultimate holding vehicles. They effectively separate underlying assets from an individual’s personal wealth, thereby excluding these assets from the individual’s estate for inheritance tax purposes.

Foundations are considered ‘orphan structures’, making them particularly useful in scenarios where charitable trusts, purpose trusts, or companies limited by guarantee might have been preferred. They are versatile, suited for both charitable and non-charitable objectives, such as enabling wealthy families to engage in succession planning through the divestment of assets. These assets are then held by the foundation for the benefit of its designated beneficiaries.

Incorporated as separate legal entities, foundations possess their own distinct attributes and legal personality, similar to companies but without shareholders. They hold assets and liability in their name for beneficiaries and must be established with one or more lawful objectives. While foundations are not permitted to engage in commercial activities, except those necessary and incidental to their objectives, any corporate entity held by the foundation can conduct its activities.

The process of establishing a foundation begins with a “Founder” transferring assets, which then become the property of the foundation. Unlike trusts, foundations offer a structure that allows the Founder to maintain control over the foundation. This control mechanism continues even after the Founder’s death, ensuring the foundation’s perpetual existence.

Setting up a foundation can be instrumental in asset preservation, particularly in the context of succession. It provides a structured approach to managing assets, which can be pivotal in preventing family conflicts and ensuring a smooth transition of wealth across generations.

How are Foundations Different from Trusts and Other Legal Entities?

Foundations distinguish themselves from other legal entities like corporations and trusts in several notable ways. These differences encompass their purpose, method of control, funding mechanisms, and tax implications.

• Purpose: The primary purpose of these entities varies significantly. Corporations are usually established for business objectives, aiming to generate profits for shareholders. Trusts are set up with the goal of managing assets for the benefit of a designated beneficiary or beneficiaries. Foundations, in contrast, are typically created for charitable or philanthropic reasons, focusing on supporting various causes or societal needs.
• Control: The control structure of these entities also differs. Foundations are managed by a board of directors or trustees. In the case of corporations, a board of directors along with officers are responsible for governance and operational decisions. Trusts are overseen by a trustee, who is charged with managing the trust’s assets in accordance with the trust agreement and for the benefit of the beneficiaries.
• Funding: The funding sources for these entities are distinct. Corporations may raise capital through the issuance of stocks or other securities. Foundations are generally funded by donations from their founders or other donors, and they may also receive grants from other entities. Trusts, meanwhile, are funded by the transfer of assets into the trust by the trust’s settlor.
• Taxation: Tax treatment also varies among these entities. Corporations are typically subject to corporate income tax. Trusts may be liable for income or estate taxes depending on their structure and the nature of the assets they hold. Foundations, on the other hand, may enjoy tax-exempt status for certain activities, particularly those related to their charitable or philanthropic objectives.

In summary, foundations represent a unique kind of legal entity that provides individuals and families with a means to support causes important to them. Beyond their philanthropic appeal, foundations offer potential tax benefits and asset protection advantages, distinguishing them from corporations and trusts in their purpose, governance, funding, and tax treatment.

Benefits of Using Foundations for International Estate Planning

Foundations can offer significant benefits for International Estate Planning, particularly in aspects such as privacy, succession planning, asset protection, and tax planning. Here are some of the key advantages:

• Privacy: One of the primary benefits of using a foundation for estate planning is privacy. The wishes of the founder are not required to be publicly registered, which allows for a higher degree of confidentiality regarding the distribution and management of assets.
• Forced Heirship Rules and Foreign Law: In jurisdictions like the UAE, the courts do not recognise heirship rights conferred by foreign law in relation to the property of a living person. This means that the foundation can provide a level of protection against foreign claims on the estate.
• Estate Planning and Perpetuity: Foundations are an excellent tool for long-term estate planning. They are designed to continue even after the death of the founder, ensuring that provisions for family members or other designated individuals are maintained according to the founder’s wishes.
• Succession Planning: Foundations are particularly useful for succession planning, especially for personal estates, business ownership, and assets. They provide a structured approach to ensure a smooth transition of assets and control according to the founder’s plans.
• Reducing Personal Net Worth for Legal Protection: By transferring assets to a foundation, an individual can effectively reduce their personal net worth. This can be a strategic move to minimise legal damages or compensation risks, as the assets would no longer be in the individual’s direct possession.
• Accumulating Portfolio Income: Foundations can be used to accumulate various forms of portfolio income such as annuities, interest, royalties, dividends, and other returns. This can be advantageous for wealth growth and management.
• Recognition in Multiple Jurisdictions: Foundations are recognised legal entities in both common and civil law jurisdictions, making them a versatile tool for international estate planning.
• Inheritance Tax Planning: Foundations can be an effective means to plan for inheritance taxes. By holding assets within a foundation, they may be structured in a way to minimise the impact of inheritance taxes.
• Separation of Voting and Economic Benefits: Foundations allow for the separation of voting rights and economic benefits, which can be crucial in managing family businesses or large estates where control and financial benefits need to be distributed differently among various parties.
• Wealth Protection: Overall, foundations offer a robust mechanism for wealth protection. They ensure that the assets are safeguarded from external claims and are managed according to the founder’s intentions, providing peace of mind and security for future generations.
• Consolidation of Global Assets: For those looking to consolidate the ownership of assets located across the world into one entity, a foundation serves as an effective centralising structure. This is particularly useful for simplifying management and ensuring cohesive governance of diverse assets spread over multiple jurisdictions.
• Protection Against Uncertainty: Foundations also offer a means to preserve wealth against various forms of uncertainty, be it political, economic, or family-related. The stability and legal protection provided by a foundation can be invaluable in safeguarding assets against unpredictable external factors.

Utilising foundations in international estate planning can therefore offer a comprehensive solution to protect assets, ensure privacy, manage succession effectively, and optimise tax implications, making them a highly beneficial tool for individuals with significant assets across multiple jurisdictions.

Drawbacks of Using Foundations for International Estate Planning

While foundations can be a powerful tool for International Estate Planning, they come with certain drawbacks that need to be carefully considered. Here are some of the potential disadvantages:

• High Setup Costs: Establishing a foundation can be a costly endeavour. It requires the expertise of legal and accounting professionals to set up and structure the foundation appropriately. The complexity of adhering to legal requirements in different jurisdictions can add to these initial expenses.
• Ongoing Expenses: Beyond the setup costs, foundations incur ongoing operational expenses. These can include annual filing fees, recurring legal and accounting fees, and other administrative costs necessary to maintain the foundation’s compliance and functionality. These expenses can be significant, especially for foundations with complex structures or international operations.
• Lack of Flexibility: Foundations are generally established with a specific purpose or for a charitable cause, which may limit their operational flexibility compared to other legal entities. Once set up, making significant changes to the foundation’s structure or objectives can be challenging and might require extensive legal processes.
• Public Disclosure Requirements: Depending on the jurisdiction, foundations may be subject to public disclosure requirements. This can include the disclosure of financial information, details about the beneficiaries, and the nature of the assets held. Such transparency can compromise the founder’s desire for privacy and confidentiality.
•  Limited Investment Options: Foundations often face restrictions regarding their investment activities. They are typically required to invest their assets in a manner that aligns with their mission and adheres to legal requirements. This can limit the range of investment options available and might affect the foundation’s ability to maximise its financial returns.

These drawbacks highlight the importance of thorough planning and consideration before opting for a foundation as a vehicle for International Estate Planning. It’s crucial for individuals to weigh these potential challenges against the benefits that a foundation offers, taking into account their specific needs, objectives, and the nature of their assets. Consulting with legal and financial experts specialised in foundations and International Estate Planning is advisable to make an informed decision.

Samoa Foundations for International Estate Planning

Samoa provides an innovative and effective framework for International Estate Planning through its foundations, as governed by the Foundations Act 2016. These foundations, a recent addition to the wealth management solutions offered by the Samoa International Finance Centre, are legal entities with their governance structure defined by Charters and Rules. To establish a Samoan Foundation, registration is required with the Registrar of International and Foreign Companies, in accordance with the International Companies Act 1988. In terms of ownership, the foundation holds the assets directly.

The operational management of a Samoan foundation is overseen by a Council, potentially under the supervision of a Supervisory Person, along with Officers who handle the day-to-day administrative tasks. A unique aspect of Samoan foundations is the requirement to have a licensed Samoan Trust Company as the Resident Agent. The purpose of these foundations can be varied, catering to individuals, charitable objectives, or other purposes. Samoa also accommodates special types of foundations, including Charitable Foundations and those combined with a Limited Partnership.

Regarding public accessibility, the Register of Foundations in Samoa is divided into Part A, which includes publicly available information, and Part B, comprising confidential information and documents filed under the Act. This bifurcation helps balance transparency with privacy.

One of the key features of Samoan foundations is their protection against foreign rules of succession. This ensures that the foundation’s assets are safeguarded and distributed according to the founder’s intentions, irrespective of external succession laws. Furthermore, Samoa offers an attractive provision for foundation migration, allowing overseas foundations to apply for recognition as Samoan foundations. This flexibility is particularly beneficial for those seeking a favourable jurisdiction for their estate planning needs.

Overall, Samoan foundations provide a comprehensive and flexible solution for individuals and families seeking sophisticated mechanisms for asset protection, succession planning, and wealth management in the international context.

Conclusion: Contact Us to Manage Your Assets Efficiently

As we have seen, foundations offer a compelling alternative to traditional legal entities for international estate planning, balancing privacy, flexibility, and robust asset protection. While they present unique benefits such as separation of control and beneficial interest, tax efficiency, and perpetual existence, potential founders must also navigate their complexities, including setup and maintenance costs, and jurisdictional legalities. For those considering a foundation as part of their estate planning strategy, seeking expert legal guidance is crucial. At PBL Law Group, we specialise in providing comprehensive advice and tailored solutions for your estate planning needs. Our team of experienced attorneys is well-versed in the intricacies of foundations and international estate planning. Let’s discuss how we can assist you in securing your legacy and ensuring the smooth transition of your wealth across generations.