Private foundations are attracting a lot of attention as far as international asset protection and estate planning are concerned.
The international terminology which is used to define a private foundation, however, is complex and even more confusing. But the foundations, fondations, fundaciones, fondazioni, Stiftungen, or stichtings, or whatever private foundations may be called internationally, have one thing in common, which is their basic structure. They all can be defined as a separate fund which is donated by a founder to serve a particular purpose, either public or private in nature. But this is also exactly where the common features end. Legal regimes vary and an entity that is regarded as a private foundation in one country may not qualify as a private foundation in another. Some entities which are called foundations do not even come close to the concept of a private foundation.
The foundation stone to the introduction of private foundations was laid as early as 1926 by the Principality of Liechtenstein, the first jurisdiction to introduce entirely private foundations in the sense of family foundations which stand in contrast to public and charitable foundations. The success of this European prototype has first encouraged other civil law countries overseas to introduce their private foundations, among them Panama in 1995, whose regulation of the foundation was inspired by the Liechtenstein foundation law. Despite the fact that a foundation is difficult to classify under Anglo-Saxon law, common law jurisdictions soon followed suit and began to introduce their own foundation concepts, with St. Kitts in 2003 and The Bahamas in 2004, being the first. As of today the foundation landscape encompasses 22 main jurisdictions, among them civil as well as common law jurisdictions, including Jersey, Guernsey, and the Isle of Man. The adoption by predominantly trust-oriented common law jurisdictions of a civil law concept presents several challenges, such as the ones discussed in the following paragraphs, and it is noticeable that the features of the different laws vary considerably, although one factor common to both the civil law and common law jurisdictions is that the private foundation enjoys separate legal personality.
A question that is closely related to this legal personality and thus the international recognition of private foundations is the question which precedents will be applied to foundation cases. Established foundation jurisdictions like Liechtenstein and Panama dispose of jurisprudence with a view to private foundations but this is not yet the case in common law jurisdictions where the versatility of private foundations first needs to be tested by the courts. The basic problem with the introduction of foundations in common law jurisdictions after all lies in the fact that they are introducing a concept that originally stems from civil, indeed Roman law. This reception of the private foundation in common law jurisdictions has thus undeniably led to a mix between bestowing legal personality on common law private foundations together with certain corporate aspects as well as with features of Anglo-Saxon trust law thereby varying the original legal concept. Concepts thus either reflect common law approaches that bring aspects of the common law trust into the definition of a private foundation or civil law approaches that distinguish between legal persons that have members and others that have not. As a consequence of this it is thus unclear whether the courts in common law jurisdictions will apply trust precedents to private foundations or whether they will treat them as a concept similar but clearly distinctive from trusts. This question is rendered even more complicated as new versions of private foundations, like private purpose foundations, that more resemble a company than a classic private foundation, have begun to appear on the scene. In addition, many of the newer foundation jurisdictions have endeavoured to create a legal entity that is neither a trust in corporate form, nor a company endowed with fiduciary characteristics.
As a consequence of its enveloping international use, the international private foundation of today clearly fulfils the same role that has been occupied for many years by the well-established and long-favoured common law trust. It goes without saying that both trusts and private foundations are legitimate vehicles for asset protection and estate planning and that both, if set up correctly, generally provide sufficient separation of ownership. There is certainly no easy solution as to the choice between a trust or a private foundation. Each case depends upon its own facts. This said, the private foundation should nevertheless be looked at by the common law advisor as a serious alternative to a trust.
Dr Johanna Niegel joined Allgemeines Treuunternehmen (ATU), Vaduz, Liechtenstein, in 1999 and has ever since specialized in the comparative analysis of international private foundations and trusts. She has been editing the foundation issue of the Trusts & Trustees journal called Private Foundations: A World Review since its inception in 2004 and is now also an editor to the survey book entitled Private Foundations World Survey, that was published by Oxford University Press in August 2013. She currently serves as Chairman of the Vaduz Centre of STEP Switzerland & Liechtenstein.
Image credit: Flag of Liechtenstein. By creisinger, via iStockphoto.