Alasdair Davidson, Partner at Bedell in Guernsey, looks at the Island's proposed new Foundations legislation, how it compares to trusts and companies and who might consider using the new structure.

Guernsey has a long and successful history in demonstrating its flexibility and pragmatism in reflecting and adapting to changes in world trade and commercial needs. Stretching back to the days of the "impôt" and merchant trading with the European continent through to the success of the modern finance industry Guernsey has never rested on its laurels.

The next significant piece of financial services legislation will provide another useful tool to wealth planning. The drafting of the Foundations (Guernsey) Law is now at an advanced stage having passed through the consultation process launched and is expected to enter into law in late 2012. The uptake in the use of private trust companies and non-charitable purpose trusts are examples as to the success of recent legislative developments in Guernsey. However, for those not familiar or comfortable with the Anglo-Saxon construct of the trust, particularly from civil law jurisdictions, the ability to establish foundations in Guernsey will be welcomed.

Foundations are used extensively in jurisdictions such as Panama and Liechtenstein and were introduced in law in the Bahamas in 2004. They have attracted bad publicity in the past in some jurisdictions due to their reputation as a secretive vehicle associated with money laundering and tax evasion. However, the vehicle proposed in Guernsey has a very different underlying basis and regulatory frameworks from many jurisdictions.

In brief terms, the foundation is an entity which is used to hold assets and which has its own legal personality – somewhat like a company. Further, it is run and managed by its counsellors who take a function similar to that of a board of directors of a company. However, like a trust, a foundation is established when given assets by its founder (similar to a settlor) and may have an advisor or protector along with beneficiaries. A foundation is governed by a charter which forms its constitution which plays a similar role to either the deed of a trust or the memorandum and articles of a company. This charter governs the manner in which the assets held by the foundation will be administered.

Like a trust a foundation does not have shareholders but like a company, it may need to be registered. In approaching its foundations legislation Guernsey has been careful to ensure that the vehicle it is introducing takes on the best aspects of foundations found elsewhere but ensuring that they will be properly and carefully regulated with sufficient safeguards for beneficiaries and their advisors in line with the secure regulatory environment offered by Guernsey in relation to companies, trusts and other investments.

The Guernsey law is drafted so that Guernsey foundations will appear much more similar to trusts than to companies. The draft law imports many concepts from and reflects the provisions of the existing Guernsey Trusts Law. For example, a councillor will have a duty to the foundation to act in good faith and act "en bon père de famille" in exercising their functions. The duty to act en bon père de famille is unique to Guernsey trust law and is not found, for example, under company law – it means literally to act as a good father.

In addition, there will be the usual duties one finds imposed on trustees for councillors not to profit from their office unless permitted to do so by the constitution, to provide information and to keep accounts. Further, a Guernsey foundation could, but does not have to, have a beneficiary and it may also be established for any purpose. However, Guernsey foundations will be able to distinguish between "enfranchised" beneficiaries (entitled to information including the constitution, certain records and accounts) and "disenfranchised" beneficiaries (who are not entitled to any information). Furthermore, the Royal Court of Guernsey will enjoy similar jurisdiction concerning the welfare and administration of a Guernsey foundation as it does to a trust.

Whilst the Guernsey foundation will draw upon and echoes much of the Trusts Law there are also many similarities with the Guernsey Companies Law. A register of foundations will be created held with the Guernsey Registrar and details of each foundation will need to be provided and placed on this register.

However, there will only be limited publically available information on foundations just as with Guernsey companies presently. Guernsey foundations will be able to migrate out of Guernsey in the same way that foreign foundations will be able to move into the jurisdiction. These provisions mirror those in respect of companies.

The proposed legislation will provide Guernsey with a product that adopts not only the best aspects of the foundation concept found worldwide but also familiar facets of Guernsey's Trusts and Companies Laws. Through registration and the stringent regulatory regime it will also ensure that the criticism which foundations face in certain jurisdictions is avoided. The councillors will be subject to the same robust legal framework as company directors and trustees and it will be impossible to establish the foundation without the founder being identified transparently and made subject to due diligence processes in Guernsey that have been endorsed by the OECD, IMF and FATF.

The Guernsey foundation will provide an offering enabling clients to preserve and enhance their wealth and assets using a flexible structure in a reputable and sophisticated jurisdiction. In tandem with the recently introduced Jersey Foundation, both Channel Islands together will be well placed to continue to present world leading solutions for the international private client market.

Once the legislation has been approved and due to be implemented we will publish a detailed guide to its provisions and the associated regulatory framework.

For more information about Guernsey's finance industry please visit www.guernseyfinance.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.