Now Guernsey will join their ranks with the likely passage of its foundations law this fall. Glen D’Arcy, Guernsey-based business development manager at Intertrust, spoke to China Offshore Quarterly about the differences between a trust and a foundation, how each jurisdiction’s laws vary and why a Chinese investor might choose to establish a foundation.
What is a foundation? How does it differ from a trust?
A foundation has its separate personality which is just like a company and that is where it is unlike a trust. A foundation will own its own assets, also just like a company and unlike a trust (in which a trustee owns the assets). Additionally, just like you have a companies register, you have a foundations register and that once again is unlike a trust because trusts are private agreements. Those first three points – personality, owning assets and the registration – are unique, are like companies but are not the same as trusts.
Why set up a foundation rather than a trust?
One might argue, why in a common law jurisdiction like Guernsey would we want to introduce foundations law when we’ve got the tried and tested vehicle called a trust? The answer is simple really: There’s 50% of the world out there where the trust is very, very difficult to understand, particularly for people with a civil law background. The idea of you giving your assets to trustees and you no longer own them is something that they do not like. (Countries with civil law legal systems include many in Continental Europe and South America, while common law is generally used in countries with a historic British influence.)
How does a foundation operate in practice?
It’s just like a trust, there has to be a founder, i.e. the person who provides the initial funds or endowments to the foundation. This is where then, similar to a trust, the foundation will have beneficiaries, and in addition to that it should have a purpose. Trusts have a trust deed, and a foundation has a constitution like a company. The foundation then would be run by a council according to the constitution, also just like a company.
What is the advantage for Guernsey, Jersey and the Isle of Man to offer foundations?
It’s a definite plus for us in the sense that we can administer these foundations and use the same administration techniques as we have with trusts. So you have a properly run foundation whereby we will produce accounts, etc. We believe for the areas where we don’t really extensively market, for example South America, with its civil law jurisdictions, there’s going to be a market for that.
How does the Guernsey law compare to those of Jersey and the Isle of Man?
They are very similar. We think we’ve tweaked it well and we’ve learned from our colleagues in Jersey and the Isle of Man. I think our registration process might be a bit easier than Jersey’s. When I say easier, the formalities still need to be done, but I don’t think it’s as stringent. I think it would be wrong to say that Jersey and Isle of Man foundations laws are in any way flawed. As to whether clients prefer Guernsey or Jersey, ultimately it’s down to preference.
How have foundations laws fared in Jersey and Isle of Man where they’re already on the books?
The Isle of Man I can’t speak for, I haven’t read much about it, but certainly since Jersey brought in the law, for them it’s been a success. I think they’ve been very happy with the results, a steady growth in inquiries, which was I suppose the reasoning behind it.
Is there any reason a foundation might appeal to a wealthy Chinese individual in particular?
Each case will be different. For the Chinese individual, what does he want to achieve? Is it for private purposes or for commercial purposes? We would see what he wants to do and then decide what would be the best avenue to follow. Now, once again that might go down to the question of the trust, which might not be palatable to a very wealthy Chinese individual, whereas the foundation might be because it’s more of a corporate structure, which is probably something that he’s more familiar with.
So the idea with both the trust and the foundation is mainly for asset protection?
Asset protection, succession planning, inheritance planning. You know wealth planning doesn’t differ from jurisdiction to jurisdiction, you get high net-worth individuals, they’ve all got one thing in common, i.e. they’ve got a lot of money. What happens to their assets and their family when they die? With a foundation and a trust you can plan as to who’s going to get assets afterward.