Foundation planning for expats
Foundations are one of the most overlooked and yet most effective forms of asset protection and estate planning that expats can put in place which, like good investment vehicles, is designed to save expats money without costing you the earth.
The estate planning concepts of foundations are quite simple. Assets such as real estate, shares, cash etc are transferred out of the estate of the legal owner, known as the Founder. These assets are then managed by a person or persons selected by the Founder for the benefit of the beneficiaries. Foundation regulations confer both powers and restrictions on the ‘managers’ of the transferred assets, known as the Foundation Council and also identifies the ‘beneficiaries’.
Freedom of choice and freedom from tax
By transferring assets into a foundation the Founder can avoid the forced Heirship laws of countries which permit a will to be challenged and overturned if it does not meet with minimum statutory legacy requirements. Leaving your estate in the form of a foundation provides a very effective and protected, lasting legacy for expats. Such arrangements also avoid probate. Offshore foundations can also avoid future taxes that would have arisen both during the lifetime and on the death of expats. What they do not own cannot be taxed.
The Foundation factor
Foundations are legal entities. Although structurally similar to a company, a foundation differs in that it has no issued shares or stock. This is important for those expats who are required by their home countries to report foreign controlled companies. In addition because foundations are based on civil law and not common law, they are much harder to challenge and overturn than trusts, an important feature in estate planning and wealth preservation for expats.
Within a trust, only the beneficiaries can bring a legal action against the trustees, including for their removal. This can be both time consuming and expensive for expats. With a foundation, the Council members (trustees) can be replaced quickly and easily and at little or no cost. Foundations also have the advantage of being able to exist in perpetuity, with no imposed time limit. Most trusts have maximum durations imposed on them.
Common questions about foundations
Can foundations be set up in every country?
To date only a small number of countries have enacted laws allowing for the establishment of foundations but you dont have to be a citizen or even a resident of these countries to enjoy the benefits of foundations as part of your estate planning.
How well regulated are these countries?
Countries which permit the establishment of private foundations comply fully with international protocols regarding money laundering, drug trafficking and terrorism. But beyond these categories of criminal activity they maintain strict client confidentiality.
Will my money be safe in the country of establishment of the foundation?
All of the countries where foundations can be established are politically stable and well regulated world recognised international financial and banking centres. However as with offshore companies, foundation bank accounts and other foundation assets can be located anywhere in the world and for expats usually are.
What about tax?
The countries where the foundations are established do not tax foreign sourced income and even some locally sourced income, such as bank interest, is free of tax. Assets located outside of the establishing country of the foundation will usually be located in another offshore and tax-free financial centre.
What about confidentiality?
Countries where foundations are established have their own secrecy laws, thereby ensuring complete confidentiality and asset protection and since foundations are set up and administered by lawyers you also benefit from attorney-client privilege.
What does it all cost?
Some jurisdictions charge a large amount to set up and maintain a foundation, on top of hefty legal fees, whilst others are much more affordable making them a very practical option for some expats.
How rich do I need to be to set up a foundation?
This will depend on the establishing jurisdiction chosen. But the minimum estate necessary for setting up foundations is less than you might think.
Working with independent and professionally qualified financial advisers it is possible for expats to make use of foundation planning with much smaller levels of investment than are necessary to become a ‘private banking client’.
Aren’t foundations supposed to be not-for-profit entities?
Foundations are not permitted to be used directly as a vehicle for commercial activity so you can’t run a business as a foundation. But a foundation can engage in banking activities which include, the holding of bank deposits, shares, bonds, mutual funds etc, provided that the purpose is for the benefit of beneficiaries.
What about protection against creditors?
Foundations provide some of the highest level of estate planning protection available. For this reason, they are a useful protection tool for the personal assets of those expats whose work is subject to penal litigation action and awards.
Can corporations make use of foundations?
Yes. Foundations cannot be actively engaged in commercial activity but, as part of your overall financial planning strategy, a foundation can act as a holding entity, holding the shares/stock of a company or companies, which would often be IBC’s.
Avoidance and evasion
It is the task of tax collecting authorities to extract all of the tax to which they are legally entitled. It is your right to part with no more money than you are legally obliged to pay, which for some expats is nothing.
Foundations can help expats to legitimately avoid significant amounts of tax and ensure that your worldly goods are distributed as you intend.
Helping an expat investor to financially restructure into an investment vehicle via a foundation requires careful planning. For expat investors, your choice of investment location, foundation country of establishment, intended use of foundation assets and the nationalities of the beneficiaries and Founder are all crucial and interlocking factors in the design of your solution.
Professionally exam qualified financial advisers can help you to design a structure and financial plan that best meets these objectives.
It’s your money and your peace of mind.
Richard Colburn is a UK exam qualified financial adviser with Sterling Assets.
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