Private Foundation—the Superb Planning Tool
The use of private foundations in international wealth planning is becoming widespread as never before, especially amongst families and investors from Asia and Latin America. For over 800 years, the concept of a trust, another substitute for a private foundation, has been established and widely used in England and other common-law-based countries to protect assets against future creditors and to plan how the family patrimony will be distributed amongst family members. However, despite its many advantages, the concept of a trust never gained a foothold in certain regions of the world such as Latin America.
The three main reasons for this are:
1.The concept of entrusting a non-family-member or third party (trustee) with the control over part of the family patrimony does not fit well into certain cultures.
2. For a trust to be effective, the one that settles the assets in the trust (the Settlor) cannot maintain and exercise control over the Trustee, the one that manages and controls the trust fund.
3. The concept of a trust is a common-law concept, also known as an English law legal concept, whereas many parts of the world, such as Latin American a civil law legal system applies.
However, a long-standing resistance to creating a trust is changing, mainly due to the availability of the private foundation and as a side effect of the global economy.
There are certain key players in the creation and functioning of a private foundation and these are:
1. Founder: The Founder is the one who forms and donate assets to the private foundation.
2. Council: The Council is the party who administers the assets of the private foundation.
3. Supervisory Board: The Supervisory Board exercise control over the Council, to ensure that the assets of the private foundation are properly managed. Typically we see that in cases where no Supervisory Board has been appointed, the Founder assumes the role and authorities of the Supervisory Board.
4. Beneficiaries: The Beneficiaries are the ones that are entitled to receive a distribution from the assets of the private foundation. Typically, the Beneficiaries are the Founder and his direct family members.
Conceptually, a private foundation may be described as the endowment of a patrimony for a specific purpose (object) determined in the document whereby the foundation is created and internally organized in a legal framework known as the Articles of Incorporation. An appointed body known as the Foundation Council is entrusted to manage and pursuit the objects of the private foundation. The person(s) who creates the endowment is known as the Founder and the persons who benefit from the endowment are known as the Beneficiaries. Traditionally (or often times), the Founder and members of his family are known as the Beneficiaries.
A properly structured private foundation allows for the family (or Settlor) to retain and exercise a degree of control over the assets in the foundation while not adversely affecting its core benefits. Many believe this retention of control to be one of the main drivers for the popularity of creating a private foundation.
The main benefits of the private foundation are:
1. Asset Protection: Assets placed in a private foundation are generally beyond the reach of creditors who might arise as a result of financial difficulties, divorce proceedings, litigation, etc.
2. Retention of Control: The private foundation allows for one to retain control and be able to decide to whom the control over the assets will pass when the Founder or Supervisory Board is no longer able to exercise this control.
3. Lifetime Tax Savings: During the Founder’s lifetime, he or she will realize substantial income and capital gain tax advantages as the result of using a private foundation.
4. Continuity: A private foundation provide a means whereby assets can continue to be administered in accordance with the Founder’s wishes, after his or her death so that vulnerable family members can be protected from others who are working against them and , for example a spendthrift family member can be protected from himself or herself.
5. Avoidance of Probate: A private foundation provides means whereby the Founder’s assets can be smoothly passed on to his or her next generation without disruption, delays, substantial costs, and loss of confidentiality associated with the probate procedure. The probate procedure is required in the normal inheritance process and a private foundations avoids it.
Therefore, a private Foundation is a legal entity that you can use to hold your properties, bank accounts, and other assets in a controlled and private manner and furthermore decide who will receive what and the conditions therefor. At Sadekya, we would be very happy to help you protect your assets and the well being of your family, by helping you set up your private foundation.