A Jersey foundation can be tailored to the founder’s precise wishes, giving the founder the greatest possible freedom of choice.
This flexibility requires a clear understanding by planners of their client's requirements to design a structure that is robust and allows for efficient administration, consistent with good management and regulatory obligations. Jersey foundations have a legal and regulatory background of checks and balances, internal and external supervision, freedom under the Foundations (Jersey) Law 2009 backed up by proper regulation and stability.
A Jersey foundation may have perpetual existence and a distinguishing feature is flexibility as to the precise bespoke terms of each foundation. Jersey imposes only certain core requirements on the content of the foundation's regulations, but leaves it to the founder to decide the detail of regulations and the exercise of power. A Jersey foundation has no owners. That in itself gives it certain advantages. Broadly, it can exercise all the functions of an incorporated body including commercial trading activities, provided they are incidental to the attainment of its objects.
Uses of a Jersey foundation
Unlike a trust, there are no beneficiaries who have an interest in the foundation's assets or are owed any fiduciary duties. Except perhaps in relation to some areas of specialist UK tax planning, there is no obvious limit to the uses of a Jersey foundation.
Generally, they can be used in most situations where a trust or company might otherwise be set up. In some cases a foundation may be preferred - for example, as the owner of shares in a private trust company in place of a non-charitable purpose trust, since there is then no possible attack on the validity of the purpose. Foundations may be more attractive than trusts when holding businesses or non-income producing assets, or assets that are depreciating or high risk, because there are no duties to beneficiaries and because there is no requirement to diversify.
Care is needed in the governance arrangements. The council of every Jersey foundation must have a "qualified member" (i.e. regulated under the Financial Services (Jersey) Law 1998) whose business address in Jersey becomes that of the foundation. The application of Jersey's Anti-Money Laundering Regulations is ensured by the qualified member requirement and because only a qualified person may incorporate a foundation.
Additionally, every Jersey foundation must have a guardian to oversee the carrying out of the council's functions and who can call the council to account. As such, the guardian's role is similar to the enforcer of a purpose trust, but guardians can also have a much wider, quasi-executive role.
The founder too can have executive power. He or she can have such rights (if any) over the foundation and its assets as are provided in its charter and regulations, which can allow those rights to be assigned to other persons or passed by Will or Codicil.
The founder can be both a member of the council and its guardian, such that a very high degree of control is possible, if that is appropriate, given local tax and other legal issues. The guardian can be a council member, but only if he or she is also a founder or the qualified member. Because powers can be reserved to the guardian, he can have an executive role in ensuring that the council carries out the foundation's objectives.
Given that the council is an executive body, rather like the directors of a company, made up of one or more members and that apart from the qualified member rule, there is total flexibility as to the residency of the membership and organisation of the council. There is also a clear need for care in the design of governance and administrative arrangements as is apparent from the case of Dalemont Limited v Senatorov and others.
The Jersey qualified member should not allow himself to be an isolated minority with no control over the decisions of other council members, limited or no access to information and no direct control over the foundation's assets. More generally, the council is responsible for administering the assets of the foundation and for carrying out its objects, acting in accordance with the charter and regulations. The council members - which may simply be one or more - are required to act honestly and in good faith with a view to the best interests of the foundation and to exercise the care, diligence and skill of reasonably prudent persons in similar circumstance.
A special feature of the Jersey foundation is that it can be established solely for a particular purpose and need not have any beneficiaries at all. Where there are beneficiaries, subject to contrary provisions in the charter or regulations, they have no interest in the assets of the foundation, nor any rights to any information. They are not owed any fiduciary or similar duty by the foundation, the guardian or by the council.
Jersey foundations are of course attractive to Middle Eastern, Asian and continental European clients for whom the concept of a trust is less familiar, but they are also of increasing interest to clients from a common law background.
Also, a Jersey foundation, as a distinct legal entity and able to exist indefinitely, is attractive to wealthy clients and for dynastic structures. There are obvious attractions in wealth management, particularly as extensive rights can be kept by the founder and, if there are any beneficiaries, their rights can be much more restricted than with trusts.
Succession and estate planning
Foundations are ideal vehicles for succession or estate planning to hold shares in private trust companies (or in place of them), as true orphan structures with no shareholders, no beneficiaries, and no need for any assets at the start. They can be set up for both charitable and non-charitable purposes, such that Jersey has become a prime jurisdiction for philanthropic giving through charitable and non-charitable foundations.
Jersey or Guernsey?
Guernsey has taken a different approach to beneficiaries, distinguishing between enfranchised and disenfranchised beneficiaries - those with rights to information and those without rights, and with provision for the movement of beneficiaries between these classes. This may appeal to clients wishing to incorporate distinct beneficial class rights, but the Jersey foundation allows flexibility to give beneficiaries different rights under the private regulations, or to create different classes of beneficiaries. The founder's wishes can be followed without being restricted by the governing law.
In Guernsey there is no requirement for a fiduciary licence holder to be on the council. This may be attractive to entrepreneurs using a foundation wishing to hold an operating company, without external interference. However, if a Guernsey fiduciary is neither on the council nor a guardian, the foundation must appoint a "Resident Agent" who must be resident in Guernsey and who must hold a Guernsey fiduciary licence. The Registered Agent will have record keeping and AML compliance obligations and would presumably often, therefore, require to be on the council.
Other distinctions between the Jersey and Guernsey foundations are that Guernsey's reserved powers are limited to enabling the founder to amend, revoke, vary and terminate the foundation and are only available during the founder's lifetime or, where the founder is an entity, for 50 years. Nevertheless, the founder could still have control because Guernsey allows the council to delegate its wider powers to the founder - presumably ensuring that the extent of any delegation was appropriate and that the extent of control by the founder is not excessive in case there is any danger of the corporate veil being pierced.
Unlike a Jersey foundation where no fiduciary duties are owed to beneficiaries, in a Guernsey foundation the council and registered agent owe a duty to the foundation and the guardian owes duties to the founder and to any disenfranchised beneficiaries.
The Guernsey guardian's role really is more akin to the enforcer of a purpose trust since the guardian is only required where there is a purpose in respect of which there are no beneficiaries, or where there are disenfranchised beneficiaries.
In respect of other jurisdictions such as Liechtenstein, the Bahamas and Panama, there are again differences between the rights or otherwise of beneficiaries and there may also be distinctions in respect of forced heirship as between say Liechtenstein and Jersey - in the case of Jersey foundations, Jersey Law expressly prevails and overrides forced heirship rules of other jurisdictions.
Similarly to Jersey, the council of a Liechtenstein foundation must include one person in Liechtenstein who is resident there and who has the capability to administer the foundation. In a Jersey foundation its administration will be in Jersey through the qualified member. This may be contrasted with Panama whose foundations can be administered anywhere.
The Jersey foundation may not be the perfect answer. There is some controversy over the rights or otherwise of beneficiaries and over the extensive ability for powers to be reserved to the founder. It may even be considered by some to be too radical, and arguably it lacks the infinite flexibility and precision of which a well drawn trust is capable.
However, the Jersey foundation is an entity of great flexibility, which complements and offers an alternative to trusts and companies and has a valuable role to play in its own right. It represents an addition to Jersey's "tool box" of entities for wealth planning and commercial structuring and enhances Jersey's existing services of incorporating and managing foundations elsewhere, whilst through express provision attracting the migration of such entities to Jersey. The Jersey foundation offers a wider choice to clients from both civil and common law backgrounds. It is a bespoke vehicle that can be tailored to the founder's precise needs, offering privacy, discretion and with the founder having control over the allocation of powers. All of which is backed by the strength of Jersey's reputation of stability, excellence and expertise.
This briefing provides a brief overview of foundations. For more information, please get in touch with Julian Hayden.
Technical briefing: Understand the differences between Foundations vs. Trusts