In recent years, several private foundations have gained prominence in the media, and raised public awareness of their causes. Foundations are often created with one philanthropic goal in mind. However, as the grantors often realize, establishing your own foundation can often make smart money sense, as well.
Plus, your last name does not have to be Rockefeller or Getty to start your own.
The Role of the Foundation
A Private Family Foundation (PFF) is a separate entity, privately funded by you. It is created with the specific purpose of contributing to various charitable causes.
As a distinct, legal entity, The Private Family Foundation:
Contributes to a charitable cause and takes a tax deduction, while relinquishing personal control over your gift;
Minimizes your estate tax liability;
Avoids capital gains tax on the sale of appreciated property contributed to the charity of your choice;
Provides continuing employment and activity for your family members;
Identifies and preserves your family name for years to come;
Create and Control Your PFF
Any Private Family Foundation must be created with a charitable “intent.” The Foundation is managed by a Councilor or executive director that oversees the Foundation’s investments and distributes the Foundation’s assets.
You can even appoint yourself as the Councilor of your own Foundation. This way, you maintain control over the assets contained in the Foundation. Instead of making a one-time gift to a public charity (and losing control of that gift), you can monitor your favourite charities. If one non-profit changes its focus, or if a more meaningful cause comes along, you can reallocate your Foundation’s support.
Foundations may be established for the benefit of a person or persons, a family, or a specific social purpose.
Uses and Advantages of Private Foundations
In general, Private Foundations are used by people who wish to control and maintain ownership of foreign corporations; however, they do not wish to own their corporations themselves directly, due to the Controlled Foreign Corporation (CFC) rules in their home countries. Several highly taxed countries such as the UK, Canada, USA, Australia, New Zealand, France, Italy, Spain, etc. have CFC rules which require that their citizens submit declarations (reports) to the appropriate tax authorities, in which they declare that they are the shareholders of such foreign corporations.
Instead of holding the corporations’ shares in their personal name or in bearer form, they establish a Private Interest Foundation in Panama that holds or owns the shares of their foreign corporation(s), thus avoiding the CFC reporting rules. Hence, the advantage of using the Foundation as a shareholder for their corporation is to remove ownership from one’s personal name (or through a Bearer Share arrangement), and transfer ownership to the name of a foreign entity which does not have owners, rather has privately appointed beneficiaries, which are anonymous. In this way, there is no question as to who owns the company, since the company’s shares are issued to the Foundations’ name.
Another advantage of utilizing the Foundation as a shareholder applies in the following scenario: In many cases, when opening corporate bank accounts or investment accounts, the financial institutions require that you reveal the beneficial owners of the corporation. Through the Foundation ownership strategy, one can state that the Foundation is the owner of the corporation. Again, the objective is to remove ownership from their personal name, to the name of a foreign entity whose ownership is anonymous.
The Private Foundation provides additional advantages other than just ownership. Some people donate their funds to their Panama Foundations and later use the Foundation to give educational or special grants to their children, grandchildren, or any one else they choose. The advantage in this case, is to avoid fiscal regulations surrounding donations, where some governments impose “gift taxes” and exhaustive reporting requirements.
In general, Private Foundations may not engage in habitual profit-making commercial activities as a corporation can. Nevertheless, they may carry out commercial activities from time to time, as long as the profits of those activities are used for the objectives of the foundation. For example, a Private Interest Foundation may engage in banking or investment activities, such as investing in bank time deposits (Certificates of Deposit – CD’s), stocks, bonds, mutual funds, options, money markets, etc. so long as the proceeds from these investment activities are for the benefit of the beneficiaries of the Foundation.
Elements of a Foundation
The Foundation has a Founder, a Council, a Protector, and Beneficiaries. Below we have explained what role each of them plays in the Foundation:
Founder – The Founder is the person or entity that establishes the Foundation in the Public Registry. Our firm is generally the Founder of each Foundation that we establish, since it is our firm that goes to the public registry to incorporate the Foundation. The Founder has no influence over the control of the Foundation, and is only recognized as the individual who presented the Foundation articles in the public registry when the entity was originally registered.
Council – The Foundation’s Council serves the same purpose as the board of directors on a corporation. The council members are each registered in the public registry with their names, addresses, and identifications as council members to the Foundation. Our firm can either appoint a “Nominee Foundation Council” to fill the council positions, so to provide additional privacy and confidentiality for our clients, or the client can nominate him/herself the council. If that is the case it is best that the client choose non-family members, and/or others who will have no beneficial interest in the Foundation itself. When we appoint a nominee council, we provide our client with pre-signed, undated letters of resignation from each nominee council member so that our client can replace the council at any time. The nominee council has no control over the Foundation or any of its’ assets, they are only there to fill in the blanks in the public registry. However, and to provide you more comfort, although a bit more expensive, and as referred above, we would suggest the incorporation of a separate Management Services IBC, owned by you, for this charge.
Protector – The Protector is the person or entity who ultimately Controls the Foundation and all assets held within it. The Protector is appointed by the Foundation Council when the Foundation is created, however, once the Protector is empowered, the Protector can then remove the council members at any time without consent of any one else. The Protector can be appointed privately, through a Private Protectorate Document, signed by the Foundation Council. Hence, the Protector can maintain this position free of public knowledge.
We can appoint our client or some other trusted family member as Protector of the Foundation, through a notarised Private Protectorate Document so that our client maintains complete control over the Foundation, in a private and anonymous manner. Once the Protector is appointed, it can always be changed per the Protectors wishes. However, a Protector is not required and if you prefer, you can choose to not use a Protector, or to use a nominee Protector.
Beneficiaries – Unlike a corporation that issues share certificates to certify who the owners are, the Foundation does not have owners, rather it has Beneficiaries. The Foundations Beneficiaries are appointed by the Protector through either a simple, privately written Letter of Wishes, or through a more formal set of Foundation By-Laws (Foundation By-Laws should be written with the assistance of a local Attorney at the registration jurisdiction). Either way, the privacy and confidentiality of beneficiaries can be protected through their appointment in the Letter of Wishes, or By-Laws of the Foundation, since the contents of the Letter of Wishes or By-Laws may remain private and need only be known to interested parties. Also, a Foundation may be set up so that the Protector is the sole beneficiary until his or her death, at which time the foundation continues for the benefit of other beneficiaries. Many like to choose one or more charities as beneficiaries
Letter of Wishes – The Letter of Wishes is a simple letter, written by the Protector, which specifies exactly how the Foundations assets should be handled or distributed upon a triggering event such as the death or incapacity of the Protector. The Letter of Wishes should also state whether the Foundation should continue existing, and have a new Protector appointed, or if the Foundation should be dissolved upon the death of the Protector. There is no specific format that the Letter of Wishes must be written, and it can be written or changed at any time after the Foundation is incorporated, per the Protectors wishes. The Letter of Wishes can be held privately, or can be registered publicly. Generally, most people prefer to maintain the Letter of Wishes privately, so that the Beneficiaries and Protector remain anonymous and private.
Foundation By-Laws – The Foundation does not need to have By-Laws, since a Letter of Wishes is legally sufficient for expressing the Protectors’ requested testamentary instructions. However, if one wishes to have a more formal Foundation testamentary document, written and signed by an Attorney, and notarised by a notary, then one can request the assistance of an attorney to draft the Foundations By-Laws. The Foundations By-Laws essentially handle the same function as a Letter of Wishes since the By-Laws should specify exactly how the Foundations assets should be handled or distributed upon a triggering event such as the death or incapacity of the Protector. The By-Laws should also state whether the Foundation should continue existing, and have a new Protector appointed, or if the Foundation should be dissolved upon the specified triggering event(s). There is a specific format that the By-Laws must be written, yet the contents of the By-Laws can be changed at any time after the Foundation is incorporated, per the Protectors wishes. The By-Laws can be held privately, or can be registered publicly. Generally, most people prefer to maintain the By-Laws privately, so that the Beneficiaries and Protector remain anonymous and private.
Frequent Foundation Facts
No Reporting Requirements or Taxes;
Anonymous Ownership and Control;
The Protector and Beneficiaries need not be publicly registered;
No Capital Requirements;
Directors – Every Foundation must have a council (same as directors of a corporation), whose names and addresses are registered in the public registry. The council members can be either individuals or entities of any nationality and resident of any country. If the council is made up of individual persons, then it requires 3 council members (President, Secretary and Treasurer). If the council is an entity, then only one council member is required;
Nominee Foundation Council – We offer our clients the optional service of using our “Nominee Council” for their Foundation(s). For purposes of confidentiality, most of our clients prefer that we provide nominee council members for their Foundations. When we appoint nominee council members for the Foundations that we establish for our clients, we always provide our clients with pre-signed, undated letters of resignation from the council members so that our client can replace those council members at any time;
Directors or Beneficiaries Meetings – Annual general meetings of council members of the Foundation are not mandated or required. However, if meetings are held, they can take place anywhere in the world by proxy – via telephone, email or other electronic means. Any resolutions passed are valid regardless of whether they are signed on different dates or in different jurisdictions;
Corporate Books – The Registered Agent is not required to keep any records for the Foundation, however, it is recommended that every Foundation should maintain a minute (council meeting) record book, which can be held anywhere in the world;
Convenience – It is not necessary for the interested parties to be present in the jurisdiction of registration for the purpose of establishing a Foundation. We can handle everything for you without your physical presence;
No Business License Requirement to operate internationally;
Legal Address – When registering a new Foundation, it must have a legal physical address that is included in the articles of incorporation. Our firm provides a legal physical address as Resident Agent and Registered Office;
Foundation Tax Information
Most Foundations usually offer the following tax advantages:
No tax reporting requirements.
No income tax.
No capital gains tax.
No interest income tax.
No sales tax.
No tax to beneficiaries.
No beneficiary transfer tax.
No capital tax.
No property tax (for non-Panamanian property).
No estate tax.
No gift tax.
No inheritance tax.
No stamp tax.
No succession tax.
No inventory tax
Advantages of the Foundation
The Assets placed inside a Foundation are sole and separate property and cannot be seized to satisfy any personal judgements or obligations of the founder or the foundation’s beneficiaries. Assets inside a Foundation cannot be attached in order to satisfy any claims against the founder, including judgements for divorce, lawsuit and other liabilities.
The Foundation offers the best of a trust and the best of an offshore corporation.
While the Foundation cannot technically engage in business activities, it can own the shares of a company engaged in business activities. It is also permissible for the foundation to engage in any activity, which will increase the value of assets. This means that a Foundation can be the owner of bank accounts, securities brokerage accounts and real estate holdings.
Since there are no shares of ownership in a Foundation, the founder does not own the Foundation and as such gains important tax reporting and protection benefits with this.
In reality, there are quite a number of practical uses and strategies for the use of a Foundation. As an asset protection vehicle, there is probably no better entity in any jurisdiction at the present time for this purpose.
For more information on how to use a Foundation as part of an overall asset protection strategy, and to hear about ways we have assisted other clients, please contact our office.