Nick Shaxson ■ The deep joy of trusts and foundations
We aren’t sure whether to be horrified, flattered or entertained.
Take a look at this peculiar video from a rather iffy-looking offshore promoter, complete with ’80s soundtrack and faux newsroom. If you go to the original source of this video, it turns out that they are explicitly using TJN material (from our detailed analysis of the UK-Swiss “Rubik” fiasco). For instance, they say:
“According to the Tax Justice network the biggest loophole is “explicitly creates a carve-out for foundation and discretionary trusts” because these structures make it impossible to identify who currently owns the assets. I may disagree a bit on this one. The reason is this money laundering simply prohibits banks to open bank accounts without knowing the beneficial owner. So even when a foundation or discretionary trust is set the bank always know the beneficiaries, but of course due to the nature of foundation or trust the beneficiaries do not legally own the assets, but simply profit of the fruits of said assets.”
(In other words, they can’t identify beneficiaries because, in legal terms, there actually aren’t any. Slippery stuff, of course.)
Now we wouldn’t normally do advertising for people like this, but it turns out that the faux newsroom interview format is a very good way of getting someone to explain things in simple terms. A while ago we wrote a primer about trusts to explain the basics, but we did not really cover foundations. The interviewee here lays out the basics of foundations, and we’re going to offer a transcript here, for those who are confused about these exotic creatures. There are a couple of things in here that aren’t quite right in all cases, and this isn’t the full story — but for the sake of clarity we’ll skip over them. We’ll anonymise them, to minimise their profile.
If you’re really interested in learning how these things work, it makes sense to read our older document, In Trusts We Trust, before reading the transcript.
For those who already have some knowledge in this area, see how many potentially abusive facilities you can count.
Some young guy: What are foundations and trusts?
Some other guy: Basically, trusts and foundations are tools, which we use for asset protection, assets from creditors, for inheritance purposes, and other purposes. [TJN: ‘asset protection’ sounds cuddly, but it means, for example, that you can cheat your spouse out of getting you to fork out alimony payments, or that you can rip someone off and escape, scot-free. There are tons of other euphemisms in here like this, but we’ll let them go for now]
The main difference: a trust is a common law tool, while a foundation is civil law.
SYG: What are the main characteristics of a trust?
SOG: The first characteristic is that it is an agreement. You don’t need to register a trust for it to be effective. An agreement between the settlor and the trustee. Under a trust deed, the settlor will transfer his property to the trustee, who will then hold the property, but for the sole benefit of the beneficiary. The beneficiary will be listed in the trust deed. There is also a letter of wishes from the settlor which can be made, but it is non-binding.
SYG: What is the difference between a trust and a foundation?
SOG: The first difference is that a foundation needs to be registered to exist. So a Liechtenstein foundation, for example, needs to be registered with the Liechtenstein registry.
The second difference is that a foundation is incorporated. It is a legal entity, which has legal personality. With a trust you have a split between the ownership of the assets: assets are owned by the trustee. In a foundation, you don’t have this split: the foundation owns, fully, all the assets.
SYG: So if a foundation is incoporated, is it the same as a company?
SOG: No, because a corporation issues shares. The foundation does not have shares. Nobody owns the foundation: it is fully autonomous.
SYG: Who is regarded as the founder, and contributor?
SOG: Anyone can set up a foundation. The founder is the first person who contributes an endowment to the foundation. But once the founder has made this endowment, then anyone can contribute. The value of the first endowment will depend on the jurisdiction in which you register it: for instance, in Panama it is £10,000. It does not need to be cash: it can be shares of a company, for example.
SYG: Does the founder have any less control over assets than the beneficiary of a trust?
SOG: No, there is a small difference: the trustee will have what we call a fiduciary duty towards the beneficiary. No such duty exists in a foundation. But the founder can keep control over the assets he has endowed. This will be given through several tools.
The first is the foundation charter and by-laws, which show the will of the founder. In some jurisdictions, the founder can be a board member of the foundation council – because a foundation is managed by a board, which may have three or more council members. The founder can also in some jurisdictions be the protector of the foundation. He can have the right of veto of the decisions of the board. For example, if the board does not follow the charter or the by-laws, the protector has a right of veto. You can also have a protector and a trust.
Also, in some jurisdictions the founder can not also be a board member, or cannot be also a protector. To circumvent this restriction, we use a nominee founder.
SYG: What is the best jurisdiction to incorporate foundations?
SOG: The mother jurisdiction for foundations is Liechtenstein: it is, technically speaking, the best. But if it is cost effectiveness you want, then it is Panama: Panama or Belize. A lot of the law governing foundations in Panama is inspired by Liechtenstin. In Panama it will cost you 1800 euros, in Liechtenstein it will cost 12,000 Euros. In Panama you can acquire vintage foundations, aged foundations that have already been set up, for 6,000 Euros.
SYG: What can you use a foundation for?
SOG: A lot of objectives. For example, in Panama, the first use is to protect your assets against your creditors. You can use it to protect your assets against political instability. You can use it to protect your business. In your family you have a lot of heirs, who may fight among each other. The foundation become the owner of the business, the heirs become the benificiaries. You can use it for charitable purpose. Technically, in Panama a foundation cannot have commercial activity, but, but, but, it can receive dividends from assets that it owns: it can own bank accounts, brokerage accounts. Technically the foundation does not do business – but it can receive dividends or profits from business.
SYG: What is the average duration of a foundation?
SOG: It is like a trust here. It can be set up for a limited period, or forever. It can be revocable or irrevocable.
A foundation does not pay tax, it does not need to perform audits. It does have charges: government fees for the registry, agent fees, and fees for the corporate address. If board members are lawyers you may need to pay their fees.
That’s it. As a reminder, here’s In Trusts we Trust.