The Private Foundation offers several advantages for individuals (HNWI) and wealth structuring entities whose purpose is to administer private wealth and can not be used to exercise a commercial, industrial, agricultural or professional activities:
Flexibility in the governance and the management
The Foundation has its own legal personality, has no shareholders nor members, it is considered as an orphan entity. Private Foundations are used to manage and administer an estate for the benefit of one or more beneficiaries or for the benefit of one ore more goals (other than those reserved for non-profit foundations).
The Foundation can own movable and immovable properties, tangibles and intangibles assets, and can carry out holding activities. And the Private Foundation may also issue certificates to its beneficiaries/third parties related to particular assets owned by the private foundation and entitling them to certain rights defined in the private foundation agreement or in the issuance document of the certificates. The Private Foundation is governed by one or several directors.
Founder, beneficiaries and amounts contributed to the Private Foundation do not have to be disclosed to the public, but will follow the international requirements on the beneficiaries identification in an anti-money laundering context.
Autonomy of the will of the founder and protection of the beneficiaries
The founder has a large amount of freedom to draft the constitution acts and extra-statutory regulations, including the designation of the beneficiaries. But, certain restrictions are designed to protect beneficiaries, in particular through provisions regarding the liability of the administrators and liquidators, through the information which must be available at the headquarters of the Private Foundation and by limiting the changes which can be made to the constitution acts.
Tax attractively: the Private Foundation is subject to a non-transparent tax regime
The Foundation is tax exempt on wealth management income and won’t be subject to wealth tax. The “beneficiaries”, if they are non-resident will not be taxed upon reception of income paid by the Foundation.
The foundation as being an orphan entity can be used in corporate finance and securitisation transaction; each time where a separated vehicle or a deconsolidation is needed to secure a transaction which should be bankruptcy remote. The issuance of certificates can also be used as a useful tool which yield and value are linked with an underlying asset or a portfolio of assets.
Differences between Private Foundations and trusts
Definition of a Trust
“Trust” refers to the legal relationships created ‘inter vivos’ or on death by a person, the Settlor, when assets have been placed under the control of a Trustee for the benefit of a Beneficiary or for a specified purpose. Validity of Trusts
There are three minimum certainties for a Trust to be valid:
Intention: the Settlor must have clearly intended to settle the Trust and confer legal control of assets.
Assets: the Trust is not operative until assets have been transferred.
Objects: it must be clear for whom the Trust was created and subsequent assets transferred to the Trust are being held.
Common versus Civil Law
When comparing the Private Foundation to a Trust, the fundamental difference is the legal system. Foundations are based on civil law while Trusts are based on common law.
Common Features between Trusts and Foundations
Assets can be transferred or donated to both.
They can be created during the lifetime of the Founder (Settlor) or on death.
They can both be created for a limited duration and can be revoked. • The Founder can exercise control over the use of the assets (settlors can retain certain powers).
They both foresee the supervision by outside administrators.
They are both created for asset protection and succession planning.
The Advantages of the Private Foundation
A Foundation is a separate legal entity (unlike a Trust).
Assets placed into a Foundation become the property of the Foundation itself both legally and beneficially.
Legal certainty: the Foundation is an incorporated body with clear statutory laws and regulations governing it in the jurisdiction.
Foundations are clearly governed by the law in the jurisdiction where established.
One can place assets into a Foundation and then transfer “ownership” of the Foundation in a number of ways to indirectly transfer the underlying assets of the Foundation. This is not possible with a Trust.
Issuance of certificates linked with some assets of the Foundation is not possible in Trust.
For succession planning, a Trust that is to take affect after the death of the Settlor must conform to the formalities of a will. When a Foundation is created to take effect after the Founder’s death, the formalities need not conform to making a will.
The Luxembourg government issued a draft law on such private foundation in the summer of 2013. But these provisions have not come into effect since the bill has yet to be voted.