TAKEAWAYS

• A trust structure, commonly used for estate planning, can be problematic in certain civil law jurisdictions, such as those in many European countries.
• Recent acts enacted in Wyoming and New Hampshire allow for the creation of a statutory foundation, which can provide a more favorable planning option in some circumstances and is not typically treated as a trust in many civil law jurisdictions.
• For U.S. tax purposes, the statutory foundation can be treated either as a trust or business entity, depending upon how it is structured.

Under the U.S. system, based on the common law, a trust is a useful and common planning tool for estate, and sometimes income, tax planning. But a trust structure can be problematic in certain civil law jurisdictions, such as those in many European countries. A Liechtenstein Stiftung is a planning option used by many in civil law jurisdictions to create a trust-like structure (and is typically taxed as a trust in the U.S.) for planning purposes.

Recent acts enacted in Wyoming and New Hampshire allow for the creation of a statutory foundation, which mimics structures such as a Stiftung, creating many of the same advantages. Indeed, a U.S. statutory foundation treated as a U.S. or foreign grantor trust can provide a favorable option for income tax and select estate tax planning for the right client. The foundation can also be structured as a U.S. or foreign non-grantor trust. For foreign foundations, income generated by the foundation will generally only be taxed on income deemed to be U.S. source income (such as dividends from a U.S. corporation, potentially reduced under a treaty, but not those from a non-U.S. corporation). The treatment by the U.S. of a statutory foundation can be either that of a trust or a business entity, depending upon which is preferable to the client and based on provisions in the governing documents. However, civil law jurisdictions will typically not treat it as a trust (to be confirmed with local relevant counsel). The client can typically retain certain control over the entity. Below is an overview description of a U.S. statutory foundation.

U.S. Statutory Foundations Overview
Foundations have historically been used by wealthy families in civil law jurisdictions to hold and protect a family’s wealth, similar to a trust in common law jurisdictions, for succession planning and as asset preservation vehicles that provide effective family governance. A “statutory foundation” is a separate legal entity formed under U.S. state law that can operate as a business entity or a trust.

Two U.S. states (New Hampshire and Wyoming) have adopted common law foundation legislation. Though the statutes differ, both allow foundations to be created for one or more lawful purposes, which can include either a charitable and/or non-charitable purpose. The related rules are flexible, allowing tailoring to address a family’s needs and objectives. Wyoming is one of the most favorable jurisdictions for non-resident aliens doing U.S. planning due to the flexibility of its laws.

As with a corporation, a statutory foundation has legal personality and exists distinct from its founders, directors and beneficiaries. The foundation can hold assets independently, unlike a trust where legal title to the assets is vested in the trustee. The foundation can function similarly to a trust and based upon the terms of the foundation’s governing documents, which define the relevant rights, interests and powers of the founder and beneficiaries. The foundation can also be designed to operate in a manner similar to a corporation or limited liability company, with directors owing duties primarily to the foundation, and beneficiaries having limited or no rights to interfere with the foundation’s management or the directors’ control. Alternatively, the foundation can be established primarily for charitable purposes, similar to a charitable trust or charitable private foundation but without the benefit of tax-exempt status. The flexibility of the structure offers many possible advantages and the ability for a founder to structure the foundation to meet their long-term goals.

Both currently effective foundation statutes provide for asset protection for property held in the foundation, unless fraudulently transferred in. Typically, directors and protectors of statutory foundations have limited liability. Therefore, the foundation’s debts, liabilities and other obligations exist solely as those of the foundation, and other parties will not be held personally liable, other than for actual misconduct. Family members can be involved with governance and exert some control over the foundation assets, if desirable, taking on limited personal risk. The assets themselves are sheltered from potential creditors as long as formalities are maintained when setting up and running the foundation.

A statutory foundation can be utilized as a holding vehicle, for example as a shareholder of a corporation, a member of a limited liability company or a partner of a partnership. The entity can also act as a protector or beneficiary of a trust, entity to hold shares of a private trust company or a private trust company. The foundation can hold family assets, including an active business, something certain corporate trustees are often hesitant to accept. Unlike trusts formed in certain U.S. states, a statutory foundation formed in either New Hampshire or Wyoming can exist in perpetuity. The creator can exert certain ongoing control.

The U.S. federal tax treatment of a statutory foundation is determined based on the specific attributes of the foundation. Precedent exists for treating civil law foundations established under the law of foreign jurisdictions as trusts when set up to preserve property for beneficiaries and not to engage in commercial activities. Additionally, the entity classification regulations of the Internal Revenue Code are helpful to determine tax classification. As a result, if a statutory foundation is conducted by “associates” as a “business for profit,” it will likely be classified as a business entity. In contrast, if the foundation is deemed to be an arrangement to protect or conserve property for beneficiaries, it will likely be classified as a trust. This U.S. tax analysis will be dependent on the terms of a statutory foundation’s governing documents, such as its operating agreement. Their provisions should be drafted to ensure the intended tax treatment can be supported. So, if business entity treatment is desired, the foundation should be designed to carry on a profit-making business more typically carried on through a corporation or partnership. Beneficiaries should be given a defined and preferably transferable interest in the foundation.

In contrast, if trust treatment is desired for U.S. tax purposes, the foundation should be structured to hold and manage assets for the benefit of such beneficiaries, while also being expressly prohibited from directly conducting business activities. The nature of the beneficiaries’ interests should be defined, and the duties of the foundation’s directors should approximate those of trustees under the applicable state law. If the foundation is treated as a trust, it can be either a grantor trust or non-grantor trust, and a domestic or foreign trust. Given the flexibilities of the structure, adding corresponding provisions in the foundation’s operating agreement will help achieve the desired ultimate tax treatment.

A key disadvantage of forming a U.S. statutory foundation is the newness of the underlying statutes. As a result, directly applicable U.S. State and U.S. federal law interpreting and governing statutory foundations is limited or nonexistent, leaving us to rely on prior precedent for similar structures. Trust law, in contrast, is long-standing and well established.

Benefits of statutory foundations include:

• A statutory foundation benefits from its trust-like structure in common law jurisdictions but is recognized in civil law jurisdictions as a separate entity, thereby enjoying the benefits of a legal personality in those jurisdictions.
• Because a statutory foundation has no shareholders, the controlled foreign company rules that may pertain to beneficiaries are of no effect.
• A statutory foundation may exist in perpetuity.
• The flexibility of a statutory foundation’s governing documents, including its operating agreement, allow it to be structured for whatever specific purpose best meets each family’s or founder’s needs.
• A statutory foundation may hold various assets, including funds, financial investments, real estate, business assets or intellectual property, in a structure globally recognized as legally and fiscally effective. Both U.S. and foreign assets are allowable.
• A statutory foundation may be used as a holding vehicle in other structures.
• A statutory foundation can be a holder of public or private company shares, a general or a limited partner of a limited partnership, a beneficiary of a trust, or a beneficiary of another statutory foundation.
• Statutory foundations offer privacy.
• Under the relevant Wyoming statutes, foundations founded by foreign persons in other jurisdictions can be transferred to Wyoming.
• Statutory foundations may be used to avoid the “forced heirship” provisions contained in the testamentary laws of many civil law jurisdictions.
• The creator and related entities can transact with the foundation, though certain formalities must be maintained.

The required parties in this structure are the organizer, the founder, board of director and beneficiaries.

Planning Alternatives
U.S. individuals typically use trusts for similar planning. The main alternative when structuring income and estate tax planning for a non-resident doing U.S. planning is likewise often a trust. As with the above discussion, the trust can be a grantor or non-grantor trust, and be either a U.S. or foreign trust. Certain civil law jurisdictions have rules which make creating a trust by their residents unfavorable. The foundation discussed above can be structured to be treated as a trust for U.S. purposes but not for civil law jurisdiction purposes. At other times, certain U.S. assets can be held in offshore entities, which are in turn owned by a non-resident alien.

Conclusion
The U.S.-based statutory foundation is an exciting option for certain clients, particularly for non-resident aliens from civil law countries holding U.S. assets. However, for the right U.S. individual, this option provides great flexibility.

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