Although foundations were known to Roman law they are, in the context of private wealth administration, relatively new. Liechtenstein, when it introduced foundations for family wealth purposes in the 1920s, was clearly trying to produce something that works like a trust but in the context of civil law principles.
Trusts rely for their existence upon a distinction known to English law (and laws influenced by the British) between legal property rights and equitable property rights. The notion that property, real or personal, can vest in one person as its owner, but that another person, not its owner in law, can have some other property rights in the same thing is difficult for clients and lawyers from other legal traditions to comprehend.
A trust is not a legal person. A trust is simply a function of property law creating a relationship between on the one hand the trustees who own the property in question and the beneficiaries on the other hand in whose interests the legal owner must act. Whilst the rights of the trust beneficiaries are fully enforceable in law some clients struggle with the underlying equitable concepts that underpin trusts.
Foundations, on the other hand, being a creation of the civil law tradition, do not rely upon their existence on this peculiarity of English property law. A foundation is a legal person, as is a company, but one without shareholders or other "owners". A foundation is established when a founder dedicates capital for a specific purpose, creates the constitution of the foundation, its charter and rules, and attends to the necessary registration formalities. Upon registration the foundation is created as a legal person independent from the founder and the assets that have been dedicated no longer form part of the estate of the founder.
Private wealth advisers had approached Guernsey-based trust service providers and representatives of the Guernsey authorities to say that they had clients who wanted a foundation solution rather than a trust one. For various reasons some clients were uncomfortable with the international financial centres that offered foundations at that time. They wanted to establish their client's foundations in a jurisdiction which had a good reputation, effective regulation of service providers and a reliable judicial and professional infrastructure. While foundations have been administered in Guernsey for some timethey were established in those civil law jurisdictions which provided for the creation of foundations.Ultimately, legal advice was needed or recourse to the courts in those jurisdictions in which the foundations were established. There was a clear demand for a domestic Guernsey foundation.
The purposes for which a Guernsey foundation can be created are very wide. Anything other than commercial activities are permissible. Foundations are not intended for use as trading vehicles although there is nothing to stop a foundation owning shares in a trading company and applying the dividends yielded towards its non-commercial purposes, for example to confer benefit upon members of a family.
The foundation is run by a council who must follow the terms of the constitution. Unlike trusts, which rely upon equitable principles, the duties of the foundation council are established on contractual principles which for some advisers and clients are more comprehensible. The council owes its duties to the foundation itself much as a board of a company owes its duties to the company itself rather than to shareholders. The council is obliged to discharge its duties set out in the constitution in good faith and as would a prudent administrator of family wealth.
In the conventional model of civil law foundations, the beneficiaries are able to ensure that their rights are respected by the council. In contrast, the laws of some common-law jurisdictions that have recently adopted foundation-type legislation stipulate that beneficiaries have no rights to information. The Guernsey draftsman considered it important that the council was properly accountable for its actions. Equally however it was recognised that in certain circumstances it might be appropriate to deny information to some beneficiaries. An example, often raised by concerned parents, is of the minor beneficiary who is encouraged to study hard and make their own way in the world who might not, if they knew that substantial wealth was available to them, be inclined to apply themselves diligently in their studies. Guernsey innovative solution to this dilemma: accountability on the one hand and ensuring that information can be denied to certain beneficiaries on the other, is to have two types of beneficiary: (i) Enfranchised Beneficiaries who are entitled to be provided with the accounts of the foundation and have standing to bring certain applications to court in relation to the foundation and (ii) Disenfranchised Beneficiaries who are not entitled to any information relating to the foundation but who are still entitled to benefit to the extent set out in the constitution. In instances where there are Disenfranchised Beneficiaries, or the foundation is established for a purpose for which there are no beneficiaries, an independent Guardian must be appointed. The Guardian has the task of ensuring that the council discharges its duties in accordance with the constitution. The Guardian owes the beneficiaries a duty of care in the discharge of his duties thereby ensuring that the council remains accountable whilst shielding the Disenfranchised Beneficiaries from information which might be damaging to them. The constitution may include provisions enabling a Disenfranchised Beneficiary to become an Enfranchised Beneficiary or vice versa, thus the minor beneficiary may become entitled to information when he attains a certain age, qualification, or whatever is the concern of the founder.
Although established on different principles than trusts, the foundation has at its heart the prudent administration of assets for the benefit of others, something that Guernsey has specialised in doing with skill and integrity.
