A private foundation may be an excellent tool to protect the family’s and company’s assets. In order to serve this function, it must be established with full awareness. What should you know? What should you avoid? Find out below.

Foreign private foundations (because it is not possible to establish such a foundation in Poland) are commonly considered to be an ideal legal solution to satisfy a few important needs: inheritance planning, succession in companies and protection of assets and investments.

To put things plainly, a private foundation (as understood by the laws of, for instance, Austria, Liechtenstein or Guernsey) is a legal person equipped with assets by the funder, with such assets being managed independently of the founder, for a specific purpose or for the benefit of the so-called beneficiaries. A private foundation does not have to fulfil any public or charitable purposes.

This general definition constitutes quite a good reflection of the essence of the private foundation and helps to distinguish it from a capital commercial-law company or a trust. However, proper and risk-free establishment and operation of a foreign private foundation is not simple.

Every country has its own customs

What must you know if you consider the establishment of a private foundation?

First of all, that there is no single, universal model of such foundation. Each of the states whose legal order anticipates a possibility of establishment of a private foundation regulates it in a different manner.

Secondly, the differences referred to above are not petty. We cannot reduce a decision on selection of a foundation to geography.

In each country, there is a different procedure for establishment, determination of the scope of rights of the founder and beneficiaries, and of the rules of asset management. There are also different limitations concerning the conduct of a specific activity by the foundation. If the funders do not learn in depth the basic rules of operation of the foundation in a given country, they (or the beneficiaries of the foundation – in the next generations) may become strongly disappointed.

A private foundation is an independent being

The founder must be aware that the foundation, after becoming established and being granted legal personality and becoming capable of performing legal acts, will become a being independent of the founder.

Naturally, the purpose of establishment and existence of a private foundation is to fulfil the will of the founder expressed in the founding documents. Such purposes must be clearly specified, because the foundation’s council or management will have to implement them independently (of the founder, beneficiaries or third parties).

If, however, a public foundation becomes – in principle or in the course of fulfilment of its purpose – an alter ego of the founder or simply its “money box” which is under a great influence of the founder – it will not serve its role. In extreme cases, the foundation may be dissolved or considered as non-existent by the court from the moment of its establishment. The separation and legal independence of the founder’s assets of the assets of the foundation (principle of separation) will cease to exist. Thus, the protection of the assets, which the foundation was supposed to guarantee, will become fictitious.

The good faith of the founder

A similar situation will arise if the founder does not act in god faith in the process of establishing the foundation. In such case, the foundation may be considered as non-existent even if many years pass from the time of its establishment!

In addition, if the purpose of establishment of the foundation is to prevent enforcement of claims, the tax authority or another creditor may make an attempt to satisfy its claims from the assets of the foundation (for example, applying the actio pauliana procedure). At the present times of wider co-operation in tax matters between states and financial institutions all over the world, this scenario does not seem science fiction to me anymore.

When do the independence of the foundation from the founder or the good faith of the founder’s actions become doubtful? For example, if the founder formally or informally reserves the right to use the assets of the foundation for his own needs and not for the purpose of achievement of the foundation’s purpose, or when the founder manages the assets of the foundation in such a manner as if he was managing his own assets in a private account (e.g. using a credit card of the foundation or exerting an influence on the management as if they were his own attorneys or contractors). In such situations, the foundation may be considered to be non-existent as a result of proceedings instituted on the basis of a suit lodged, for instance, by the spouse of the founder or beneficiaries of the foundation.

Reasonably, carefully, without any illusions

Therefore, when one is considering the establishment of a foreign private foundation, one should – firstly – eliminate a thought of establishment a fund towards which one may retain an unlimited array of rights. Secondly, one should remember that the founding documents of the foundation must be prepared with utmost care, and its purposes and functions must be specified in detail and with precision guaranteeing independence.

The author of the article is Aldona Leszczyńska-Mikulska, a tax advisor and attorney-at-law at GWW.