Recently, the founder of Facebook, Mark Zuckerberg, announced that he wants to dedicate $3bn of his personal fortune to “cure, prevent or manage all illness.”
Quite what steps he will take to achieve this are still to be determined, but he may well follow a similar route to that taken by the Microsoft Founder, Bill Gates, who in 1994 established The Bill and Melinda Gates Foundation, arguably the best known private foundation in the world, with assets of over $38 billion.

Although the vast majority of foundations don’t come anywhere near this in size, they are becoming increasingly popular estate planning vehicles for high net worth individuals around the globe – philanthropists included.

Foundations have been around for decades, especially in civil law societies. But as competition for a larger slice of the global wealth management cake has intensified, a number of mainly offshore, common law jurisdictions have accommodated foundations law into their own legislation.

This has become particularly attractive to private clients from civil law jurisdictions, hitherto unfamiliar with the trust concept, looking for a wealth management entity easily recognised by third parties in their home jurisdiction.

The main difference between the common and civil law systems is that in common law countries the law varies from case to case, depending on the customs of the society, so judgement varies, whereas civil law has a pre-defined written set of statutes and codes for reference which judges must strictly adhere to.

As a result, whilst both systems have their merits, common law is arguably seen as more flexible than civil law.
Affluent individuals and families in emerging economies such as China, Russia, and the Middle East have particularly latched on to the opportunities that common law foundations can provide.

Globally, foundations come in all shapes and sizes and can be used for a wide variety of purposes. In the context of wealth management, the objective of a foundation is much the same as that of a trust – essentially providing legitimate tax efficient protection from onshore tax regulators.

The manner in which a foundation is established and run, however, is quite distinct from a trust.

Common Law Foundations
A foundation can come under a number of guises, including charitable foundations and private foundations. In essence, however, they are each legal entities which can typically donate funds and lend support to other organisations, or provide a funding source for their own charitable purposes. A charitable foundation, which is a non-profit organisation, differs from a private foundation, which is typically endowed by an individual or family.

Generally speaking, foundations can be used for:
• family provision and wealth preservation;

• business succession planning;

• charity and philanthropy.

• protecting assets against personal liability;

• tax mitigation

• confidentiality;

• probate avoidance;

Unlike a common law trust, a foundation is more akin to a company and, as such, it is usually entered on the Companies Registry in the jurisdiction concerned. It can hold assets, trade, raise funds, sue and be sued in its own name. Foundations are established by a founder who provides the initial assets, otherwise known as the endowment.

Unlike a trust, the assets are held for the purposes set out in the foundation’s constitutive documents and are administered according to contractual rather than fiduciary principles.
A trust’s assets are held by a trustee, whereas a foundation has a council which acts in a similar way to a company board and, although there are no shareholders as there would be with a company, the council is responsible for fulfilling the purpose of the foundation.

Beneficiaries have contractual rights to enforce the operation of the foundation in accordance with its constitutive document – rather than proprietorial rights in its assets.

A foundation is highly flexible in that it can last in perpetuity – unlike Trusts which usually have a time limit, although it should be noted that Isle of Man Trusts can last forever.

In addition, the founder may remain involved in the management of the foundation’s affairs. It can also be used as part of a larger wealth management structure; to hold the shares of a private trust company; to act as an umbrella vehicle for other companies or assets; or to hold high risk or non-income producing assets which may not be suitable for a trust.

Isle of Man Foundations
One such common law jurisdiction which has successfully established Foundations legislation is the Isle of Man. The Foundations Act 2011 is written under Manx law which, although separate from the English legal system, is based on the principles of English common law, in line with the legal systems of most Commonwealth countries.

An Isle of Man foundation has its own separate legal personality but, unlike a Company, it does not have shareholders. It holds assets in its own name in order to further “the objects” of the foundation. Under the Act, these objects may be individuals, purposes (charitable or non-charitable) or a combination of both, provided they are certain, reasonable and possible and not unlawful, contrary to public policy or immoral.

The establishment of a Foundation is also seen as quite straightforward in the Island. A Registered Agent must submit an application form to the Isle of Man Registrar for Foundations, together with a copy of the Foundation Instrument and a prescribed fee, which is currently set at £195.
It’s stipulated that each foundation must have a founder, a registered agent, a constitutional document, rules, a Council and also, if it’s been established to carry out a specified non-charitable purpose, an enforcer.

From a tax perspective, as with an Isle of Man Limited Company, a foundation benefits from a 0% corporate tax rate, except in the case of income derived from Isle of Man land, which is subject to a 10% tax rate.
A further incentive is that there is no capital gains tax and no form of inheritance, gift or estate tax in the Isle of Man.

Furthermore, in addition to the opportunities for creating new foundations locally, there is also the opportunity for high net worth individuals to migrate existing foreign law foundations to the Isle of Man. These existing entities would then themselves be able to take advantage of the Island’s advantageous tax system and reputation for delivering high standards of professional service. Additionally, the Island has a sophisticated and proven legal system and is in close proximity to London.

By using the services of a registered agent, such as Isle of Man based Sterling Group, it is now possible for a foundation, which currently exists under a foreign law, to apply to the Isle of Man Registrar to be registered under the Act – and resurface as a bona fide Isle of Man foundation. An interesting prospect!

It seems highly likely that foundations will grow in popularity in the coming years, particularly as increasing numbers of high net worth investors catch on to the benefits that jurisdictions such as the Isle of Man can provide.

At the same time, it’s also fairly certain that we’ll be hearing a lot more about Mr Zuckerberg’s laudable announcement in the years to come.

© 2024 Sterling is a Registered Business Name of Sterling Holdings Limited. Sterling Trust Limited is registered in the Isle of Man Number 72969C and is licensed by the Isle of Man Financial Services Authority.


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