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European-style foundations come to the United States

Bethlem Hospital, London, 1677. Engraving.
Credit: Wellcome Library, London. Wellcome Images (http://wellcomeimages.org)

Foundations have existed in Europe for over 600 years. The oldest is likely Bethlem (aka “Bedlam”) Royal Hospital, which has been taking care of the mentally ill without interruption since the 1400s in London. Even though it’s a charitable organization, it’s called a foundation because that’s the legal way it was set up.

The way foundations are set up in Europe is different in the law than the way foundations (as we know them) are set up here in the US. (At least, until now – I’ll get to that in a minute).

The foundations we’re familiar with are required to give away at least 5% of their assets yearly to beneficiaries that are nonprofit organizations. The purpose of the giving has to be charitable, and if there’s too much monkey business, like commissioning and buying self-portraits or giving grants to pay for a trustee’s kid’s tuition or what-not, the authorities tend to take notice and shut it down. US foundations have to file a report annually saying how much money they have, what their charitable priorities are, who their trustees are (and how much they pay them), and what they gave their money to in that year.

In Europe, a foundation can be set up for charitable purposes but, depending on the country, it doesn’t have to be. As mentioned above with Bethlam Hospital in England, that foundation was established for a very charitable purpose. UK law states that if you’re going to incorporate as a foundation, it has to be for public-benefit purposes only. That said, there really aren’t that many entities known as “foundations” in the UK – most grant-making organizations are called grant-making trusts or charitable trusts.

In the countries where it’s not required that a foundation has to be charitable (like Austria, Belgium, Germany, The Netherlands and Liechtenstein, just to name a very few), a company founder, let’s say, can establish a foundation entity that could contain their actively-operating company, their home(s) and artwork, their yacht, or any other asset that they want to protect from taxation or transfer to future generations without the encumbrance of pesky death taxes.

For example, flat-pack furniture mega-company IKEA’s ultimate corporate parents are two foundations, Stichting INGKA Foundation (based in The Netherlands) and Interogo Foundation (based in Liechtenstein). Neither foundation makes grants; they are a tax-efficient structure holding the various divisions and subsidiaries of IKEA and entirely benefitting the Kamprad family. When IKEA founder Ingvar Kamprad passed away, his family members were already on the board of the foundations, so the transition of assets was smooth and unencumbered.

So why am I going into all this? Because that kind of European-style non-grant-making foundation now exists in the US.

In late 2017, the New Hampshire Foundation Act was passed in Concord, NH. Written largely by a wealth management attorney named Todd Mayo, the law allows for the establishment of foundations in NH that do not have to be either charitable or philanthropic. The purpose of the law was to appeal to high net worth individuals (HNWIs) outside of the US (but anybody is eligible) who want to park their assets in a stable country but maintain control over it.

Here’s what I mean by that. Let’s say you’re a HNWI that wants to place assets in a country that is not where you reside to avoid taxes or protect your assets in case you divorce. Usually this might be done in an offshore trust, but a trust that’s established in Bermuda or Panama is required to have as its manager a Bermudan or Panamanian. You’re effectively signing away the rights to your assets and trusting that the Bermudan or Panamanian isn’t going to run away with it (that’s generally a fairly safe assumption since by law they’re required to provide a duty of service to the trust founder. But still – it’s got to give you pause as you sign away hundreds of millions.).

The New Hampshire law allows someone to create a non-charitable private foundation (NCPF) where you get to keep control over your money. Like a trust, a person can use a NCPF to park assets to provide for themselves or their family during their life and after their death and protect it from taxation. But with an ordinary trust, the beneficiaries have a say in the management of the trust. With a NCPF, the ownership of the assets is with the NCPF. The beneficiaries have no ownership or rights to ownership of the assets. The NCPF is managed by a board or council, and the board’s duty is to the NCPF and not (necessarily) to the beneficiaries.

According to some trust and estates legal experts, the law is sloppily written but it’s a start in creating European-style foundations here in the  US.

Meanwhile, in Wyoming

In 2019, Wyoming went one step further. Wyoming’s Statutory Foundation Act allows that establishment of foundations that can be a trust, a business entity (like an LLC), or a hybrid of the two.

The Statutory Foundation has to file an annual report, benefit at least one person (and you can use the term “benefit” loosely here), and have a board of directors. However, the identity of the founders, directors, beneficiaries, or protectors of a Wyoming Statutory Foundation do not need to be filed or recorded for the public to see, so there’s a good chance – like Donor Advised Funds – we’ll never know the names of those behind their establishment.

These new entity types are fairly new and, as far as I was able to find, still untested. Still, for those of us researching foundations and perhaps finding something that doesn’t add up, one of these non-charitable private foundations might be the reason why.

Much more information here:

 

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