Foundations in Jersey II - Potential Uses

Subject to Privy Council approval of the Jersey Foundations Law, Foundations will be available in Jersey alongside existing vehicles such as companies, trusts and limited partnerships, from Spring 2009.

We anticipate that the Foundation vehicle will

• appeal to clients based in civil law territories where they are less familiar with the trust concept; and

• be an effective financial planning tool for those clients who want to maintain more personal control of the assets.

Foundations have some of the attractions of a trust vehicle and some of the benefits of a company structure, including separate legal status.

THE KEY CHARACTERISTICS

The Founder

Is the person or corporate body specified as such by the Foundation’s Charter or Regulations? It is not necessarily the person providing the assets; an initial endowment is not essential.

Council – similar to a Company’s Board of Directors

Unlike a trust a Foundation is a distinct legal entity similar to a company, although it has no shareholders.

The Council is the body that administers the Foundation’s assets in accordance with the terms of the Charter and Regulations. At least one Council member must be registered under the Financial Services (Jersey) Law 1998 to conduct Foundation services business of this type (the “Qualified Member”).

Charter and Regulations

The foundation’s charter will be required to contain certain minimal information about the foundation and like a Company’s Memorandum and Articles of association will be a publicly available document.

The regulations however, will generally remain private unless, in the case of a foundation established for wholly charitable purposes, there is a desire to make the regulations available to the public.

Guardian

A Jersey Foundation must also have a Guardian. The main job of the Guardian is to oversee the work of the Council and to ensure that the Council carries out its functions.

It will be possible for a Founder or the Qualified Member to be both a Council Member and the Guardian.

Beneficiaries

Foundations are vehicles for holding assets, as such they must be established with one or more objects. The objects can be charitable, non-charitable or a mixture of both.

Permissible objects might include, benefiting a particular person or class of persons or carrying out a specific purpose or holding a particular asset.

If there are beneficiaries, those beneficiaries are not owed duties either by the Council or the Foundation itself. The protection for beneficiaries provided by the Jersey Law comes through the requirement for a Qualified Member and the role of the Guardian.

POTENTIAL USES

The holding of assets which are “wasting” or subject to volatility in value

In traditional trust structures, careful drafting of the trust instrument is often necessary where the purpose of the trust is to hold a single asset such as a business, artwork, an aeroplane or a boat. Given the trustee’s duty to diversify, act prudently, and in the best (financial) interests of the beneficiaries, trustees are often nervous about holding such assets. Foundations may become the preferred vehicle for such assets. It will be possible to establish a Foundation specifically to hold such an asset and the Council will not be subject to the same duties as trustees.

The Council’s duty (and ultimately the Guardian’s) will be to ensure the object of the Foundation (namely the holding of the asset) is achieved.

Discrete structures for high net worth clients

Currently where a family establishes a private trust company (“PTC”) to act as trustee to a number of trusts, the shares of the PTC will typically be owned by a non charitable purpose trust or by a company limited by guarantee. It will be possible for a Foundation to be the owner of the PTC shares.

Subject to the creation of a new exemption under the Financial Services (Jersey) Law 1998, it will also be possible for the Foundation to replace the PTC and to act as trustee of the underlying trusts.

Just as Foundations could be used to own PTC shares, the Foundation could be equally useful to own shares of any corporate protector or enforcer. The attraction of the PTC is that family members or family advisers are able to be directors of the PTC. Equally those individuals will be able to be Council Members of a Foundation.

A Foundation for Discretionary Distributions

Clients may want to incorporate the type of appointment and advancement provisions which are typically found in discretionary trusts into a Foundation. Accordingly, the Regulations would be drafted on the basis that the Foundation’s assets were to be held for the benefit of a class of beneficiaries, with the Council (or the Guardian or some other third party such as the Founder) having the power to select from within the class (or indeed to add to or exclude from the class) who and when benefits might be provided.

A Foundation for Charitable and Non-Charitable Purposes

In certain jurisdictions, it is common for high net worth clients to use Foundations for their charitable giving. Given that Foundations under Jersey law can be created for both charitable and non-charitable purposes (and the flexibility the Law allows
in respect of the drafting of the Charter and Regulations), it is apparent that Jersey has the opportunity to market its Foundation to clients in a wide variety of jurisdictions.

Reservation of Powers

Frequently trust deeds will be drafted with an express reservation of powers in the hands of the settlor of the Trust (or a third party of his choice), the most common power to be reserved being that of investment. It will be possible for powers to be reserved to a Founder of a Foundation as well. Alternatively, powers can be reserved to the Guardian or indeed any other person depending on the Founder’s preference. The attraction to using a Foundation as opposed to a trust where the power to direct investments is to be reserved is that the overriding duty to monitor the performance of the investment to which a trustee is subject is not one to which the Council of a Foundation will be subject.

An Executive or Supervisory Role for the Guardian

As stated, each Foundation must have a Council containing a Qualified Member and a Guardian. The Guardian’s role is to ensure that the Council is carrying out the objects of the Foundation. However, it would be possible to limit the powers of the Council and to reserve to the Guardian the most significant powers. In this way, the Guardian would have an executive role. An attraction for potential clients is that the Founder (or his appointee) could be the Guardian. Alternatively, the Foundation can be structured in a way in which the family, through a corporate Guardian, would have a supervisory role only, whereby they can oversee the actions of the Council; this could be achieved by requiring the Council to obtain the Guardian’s consent before exercising a particular power.