Foundations as a separate legal entity

Most experienced persons in the business world know the business structures. They are sole trader ships, partnerships, and companies. They are very common profit-making legal structures.

But there are other options. They include trusts and our focus here and now, the foundation.

Since the fifteenth century, civil law jurisdictions have used foundations.

For common law jurisdictions, the UK, etc., the idea of a foundation is new. Trusts are more common vehicles for wealth structuring and succession planning

Foundations are separate legal entities/personalities. They are not trusts or companies but often have some features of both. There are no shareholders (members) or directors in a foundation. Instead, there are founders and council members who have usually less onerous duties. Foundations, often, such as in Jersey, can operate without designated beneficiaries. Such is helpful for the founder. Other times, foundations can have designated beneficiaries. This is the case in Panama, where foundations must operate for a specific purpose. 

Foundations can have charitable as well as non-charitable purposes. A foundation separates assets from the personal wealth of an individual. They generally reduce inheritance tax liability.


Foundations are available in many jurisdictions

Foundations are often associated with the mega-rich such as Jeff Bezos. The billionaire set up the Bezos Family Foundation and Bezos Earth Fund. The general public supports foundations.

Being among the super-wealthy in the United States and the world, Bezos was not the first to set up a foundation. Bill Gates, the co-founder of Microsoft, with his former wife, also operates foundations. 

A notable foundation of theirs is the Bill and Melinda Gates Foundation.  

But the establishment of foundations is not a business strategy confined to the US only. Many offshore jurisdictions have a favourable legal environment to set up foundations. These include Jersey, Panama, Seychelles, Cook Islands, Nevis, and others. 

There are some specific legal advantages that are often relevant.


1. Low initial funding

Mostly, foundations can be set up with very low initial funding. In Panama, one needs $1 for a foundation. In contrast, trusts will need some identifiable trust property identified on establishment. It means a person can establish a foundation a lower initial outlay than a trust.


2. Privacy

In most cases, a foundation document, known as a charter, will be a public document. Yet, the charter will often not reveal the founder, guardian or beneficiaries’ identities. The charter contains limited information. The foundations regulations contain the most important detail about the foundation’s operations. These regulations are not public. 

In Cook Island, and other popular offshore destinations, the law guarantees privacy on foundations. Key information is not available to the public.


3. More power to the founder 

Persons operating foundations generally do not have to provide beneficiaries with certain information. This is different from trusts. Trusts have more onerous information requirements.

Persons receiving benefits from a foundation do not have a beneficial interest or entitlement. This is unless provided for in the regulations. The power stays closer to the founder in foundations. So it is different from the settlor and trustees in trusts, who have more fixed legal duties owed to beneficiaries.

In other words, the fiduciary obligation of a founder is almost always less than that of a trustee. This means that a foundation is a lower-risk option.


4. Reduce exposure to liability 

A company is a separate entity from its shareholders. The famous case is Salomon v Salomon.  A foundation is also separate from its founder. A third party can sue a foundation in its name. A foundation can make contracts in its own name. The separate legal entity protects the individual assets of the founder. These can include the family home. Such offsets and protections are vital for wealth management in a litigious world. 

In Seychelles, the names of council members are not available in public records. This makes it harder for third parties to affect these persons.

Each foundation has a guardian (or protector), which could be the founder or a trusted friend. The guardian of a foundation has less onerous leadership requirements. A trustee or a company CEO has more onerous duties. The guardian can have far-reaching powers provided for in the foundation’s regulations. He/She can approve an otherwise disallowed activity. The guardian can also veto various decisions of the foundation.


5. Avoiding Nuisance Third Parties

Some business entities are targets of disparagement. Other suffer from financial and public relations attacks. Third-parties might feel entitled to grants. This persons may disparage a company for not supporting them. 

Such instances can create a schism between customers and the organization. And this can lead to brand damage. 

But, privacy protects foundations when handling unsolicited requests from random people. Councils operate foundations. These groups convene to discuss any grant provision. 

Foundations must discuss the purpose for grants provided before releasing any finances. This means that the platform protects members from unnecessary judgments. Such judgement might occur if the deciding body rejects particular projects. 

If an organization seeks financial support from a foundation, a council member can explain that he or she has limited powers. to ascend once the council meets and decides on the requests tabled. Such a platform can deter hawkers, canvassers, and other nuisance persons.


6. Liberty to Hire Anyone 

Directors of companies observe certain measures. These measures include gender balance and avoiding nepotism during employment. 

The limitations can deny family members the opportunity to grow. They might not develop skills in areas of interest. 

Running a foundation gives the founder a mandate. The founder can choose the employees to work in various departments. 

For instance, the founder can hire her young inexperienced daughter. The daughter can be an executive director in her foundation. The platform can offer the younger person high-stakes opportunities. This can provide connections with experienced people.

The opportunity is vital for encouraging younger family members to become leading decision-makers.


7. Legacy Creation 

Most foundations’ have a perpetual existence. This makes them the best platforms for establishing a lasting legacy.

Private foundations linked to families are set up to last through generations. The generation in charge prepares the next one with the right skills. They also provide exposure. Knowledge is also a benefit of training different generations. 

People remember some foundations founders, such as Carnegie and Rockefeller. The world remembers them for their contribution to the steel and oil industries. Organisations are best remembered for the impact they have created. Donations and academic sponsorship can support people who need it. These offerings help people to understand the notion of legacy.


8. Using Expenses for Reimbursement

Foundations are not meant to deplete resources. When you incur expenses for the foundation’s business, a reimbursement is possible. Travel expenses and others thus become a write-off. 

Besides travel, foundations incur other various expenses for daily operations. Yet, foundations benefit because the expenses they incur. These expenses are part of a qualifying distribution to society. 

A foundation can benefit by the end of the year by counting expenses. It can count which are part of grants given to society. This is the case in the US. But in many instances (such as in Jersey and Panama), such is not required. Thus, foundations can cut expenses. They can also merge a fund for expansion. And they can buy more fixed assets for the foundation.


9. Managing taxation

Taxation minimisation is an important part of any wealth management strategy. Foundations are often a legal strategy. They are a suitable strategy to reduce liability for taxation. This is true for the local, state and federal-levels. 

Most offshore foundations offer significant tax deferral and tax reduction opportunities. Three examples are the Jersey, the Seychelles, and the Panama foundation. 

Offshore foundations pay 0% tax on gains or income occurring outside the nation. Setting up a foundation can mean lower taxation liability on profit. And that is one of the fundamental advantages. 

Foundations also can operate as nonprofits. In the US, they enjoy the IRS’s recognition as being “tax-exempt organisations.” The main benefit for founders often lies in tax status. Yet, foundations also have philanthropic benefits. 

The Tax Reform Act provides that private foundations are exempt from most taxes.  In exchange, they have accounting and annual pay-out requirements. This is currently 5% of the total endowment in the US. Tens of thousands of private foundations exist. The statistics show there are over 80,000.  

Public foundations, such as community foundations, will have more public involvement and oversight.


10. Tax Incentives in the US: Comparisons with other jurisdictions

There are also separate incentives.

It is possible to transfer one’s assets to a foundation. This will mean exemption from gift and estate taxes as long as the asset remains the person’s. The rule shows the avoiding unnecessary tax is possible. This happens by having your assets transferred to the foundation. 

Capital gains are usually considered for tax in organisations. But, foundations are exempted from such considerations, including low-basis stock held for years. The founders can thus donate their assets to the foundation and enjoy a tax deduction for the full fair market value.

The expenses of running a foundation are usually considered part of the minimum spending. 

In the US, foundations are at the luxury of considering deductions. Instead, the organisations must make a qualifying distribution of at least 5% of previous year’s assets. Although Nevis, Cook Island, and Panama do not have such requirements. A foundation enjoys the leisure of not paying taxes or giving grants in its first year of operation. 

Unlike other organisations, foundations enjoy streamlining activities before giving away anything.


How do you enjoy such incentives? 

Income Tax Deductions. the law offers an incentive where a donor may get up to 30% of their adjusted gross income deducted for tax returns. You can also get deductions for the value of the appreciated property. 

Tax-Free Asset Growth. any return on investment always remains free. The government will not tax you for interests. They will not tax you for dividends. They will not tax for capital gains. 

No Gift or Estate Taxes. the tax system usually taxes one gift you get. That is not the case with assets transferred to family foundations. 

Double Capital Gains Benefits: Donors enjoy deductions from the market value. The government will not tax you for any appreciation on any investment. That is actual double capital gains. 


11. Impact Investing

Philanthropic giving continues to increase. In 2017, foundations were found to have given over $410 billion back to society.  Foundations unify across the spectrum. They include civil society and the political class, through philanthropy.

With a foundation, you have giving options. In other words, how and to whom to give?

The options are wide. Individuals or companies cannot claim tax deductions. But in the US, for example, section 501(c) (3) organisations can.  A similar set of circumstances can be noted in offshore foundation options. So, you can make grants to charities and have a wider net of recipients. That is so because of their tax-exempt status. When you are exempted from paying taxes, it is easier for you to have more money on you to give. Besides, foundations will have untaxed resources as they engage in impact investing.


12. Appreciated Securities

When you invest in appreciated securities, foundations leverage wealth managers. Also, the foundation accesses waivers when given appreciated stocks as capital gains is not payable. Donations are not taxed. Thus, in the case of a not-for-profit, you will have the opportunity to have 100% value of your capital going towards a designated purpose. 


13. Running Extra Projects/Programs

Private foundations are almost always allowed to run projects besides their initial purpose. This offers the founder significant flexibility. They can decide which parts of the foundation will be related to for-profit roles. And they can decide which parts will have a philanthropic role. 

Some philanthropists need help to be comfortable with giving grants. Such individuals can set charitable programs. They can also and contribute to the welfare of their targeted population. 

Foundations can support soccer teams. They can also support learning programs. They also can support ailing communities using their programs to run.


14. Directing Resources to Help Areas of their Interes

Foundations can take advantage of the exempted tax. With this, they direct the amount to certain groups of people. They choose who they feel will benefit the most and add value to society. 

International donations are also not limited. Private foundations have the liberty to donate to foreigners. They can do this without consulting the legal system in their country. 

Various private foundations donated resources to foreign charitable organisations during the Covid-19 crisis. Such organisations enjoy tax-exemption. They could also run parallel charitable programs to assist the less fortunate. The input of private foundations in spurring progress by rewarding performance. They can also support activities for innovation. The flexibility of choosing makes foundations better organisations to run for philanthropists. 

In the US, the IRS allows foundations to run scholarship programs to support strong performers. These persons might not have the resources by themselves to achieve their goals.


15. Liberty to Choose Loans over Grants

Private foundations can decide how to use the money enjoyed after becoming tax-exempt. 

Foundations can observe how projects operate in different locations and their viability. 

They can loan certain institutions for a minimal interest to support them. Foundations benefit because the loaned amount becomes an investment that returns with interest. 


16. Decentralised Autonomous Foundations (DAOs)

If you work in the blockchain space, this point should not come as a surprise. Offshore foundations are necessary for establishment of DAOs. Famous solutions like Ethereum, Uniswap and even more recently SushiSwap, all operate via Foundations. The particular feature of the Private Foundations is the ability to appoint beneficiaries without the need to identify their identity. 

Having a Private Foundation to run a DAO is a bit of having the best of both worlds. The Foundation can own assets and offer protection to his members. The DAO, can still be run as per usual. 

There are few experiments coming up with different solutions such as the Purpose Trust in Jersey, the famous DAO LLC in Wyoming or the latest, DAO LLC in Marshall Islands. It is understandable for a country to push a new solutions. However, on this front, the best locations remain: Switzerland, Cayman and Panama


Final Considerations

There are many things worth considering.

  • Do you have a large exposure to inheritance tax liability? (This will be persons in Europe, the US, Japan, or Korea)
  • Do you have a large exposure to capital gain tax liability? (This will be persons with appreciating assets in Australia, Canada, India, and Israel)
  • Do you have children or trusted juniors you would like to give management experience?
  • Do you want to support a cause without having to support specific individuals?
  • Do you want to use a foundation for public relations purposes?
  • Is your business a target of nuisance attacks by third parties?
  • Do you want to start a DAO or launch a governance token?
  • Do you want to protect the members of your existing community with a proper legal structure?

If you have answered yes to any of these questions, you might want to have a chat with us. Alternatively, if you wish to take a bit more time you might want to learn more about Panama click this link. 


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