Information about foundations

This article explains what a foundation is, why they are created and highlights the differences between Isle of Man foundations and foundations, generally.

What is a foundation?

A foundation is a legal entity, created by a founder, who gifts an asset to the foundation for the benefit of one or more persons (known as beneficiaries) for a specific purpose. The assets which are transferred to the foundation are known as an ‘endowment’. It is
not until the foundation’s constitution documents are registered (a ‘registered foundation’) or deposited (a ‘non­registered foundation’) with the registry for the appropriate jurisdiction that the foundation is recognised as a legal entity.

A foundation is run by a governing body such as a Board of Directors who manage the foundation. The Board is responsible for authorising and executing the activities of the foundation, for the benefit of the beneficiaries, who can have an absolute, discretionary or contingent entitlement.

Foundations have existed in civil law jurisdictions for a number of years, the two key jurisdictions being Liechtenstein and Panama. Other jurisdictions to recognise foundations include Switzerland, Austria and the Netherlands. The earliest foundation to be recognised legally was created in Liechtenstein in 1926 when it implemented legislation governing the law of foundations.

Foundations have become increasingly recognised in non­European jurisdictions where they have been seen as an alternative to trusts, another legal entity used to entrust assets destined for specific beneficiaries. Foundations are especially used in jurisdictions where trusts are not well known, understood or accepted.

Absolute entitlement

The beneficiaries are named at outset, cannot be changed at any time in the future and will benefit from the foundation.

Discretionary entitlement

The board use their discretion to decide who may benefit from the foundation and when.

Contingent entitlement

The beneficiaries will become entitled upon a certain event happening. For example, when the beneficiaries reach age 21.

Why would a foundation be created?

Foundations are created for a purpose. Some examples are listed below, although this is not a definitive list.

  • Family foundations – created exclusively for the benefit of family members with the purpose of providing education or support of relatives in the future.
  • Charitable foundations - created for charitable purposes.
  • Mixed foundations - created for the benefit of, but not limited to, charitable purposes and to benefit family members.
  • Ecclesiastical foundations - created for the purpose of benefiting religious activities.

How does the structure of a foundation compare to that of a trust and a company?





Who creates the entity?

The founder

The settlor

The promoter

How is the entity created?

Charter and rules

Trust deed

Memorandum and Articles of Association

Who manages the entity?

Board of Directors/Council

The Trustees

Board of Directors

Who owns the assets?

The Foundation

The Trustees

The Company

Who benefits from the entity?





The founder

The ‘founder’ is the name of the person, persons or group of people who creates the foundation, donates assets to the foundation and determines who can benefit from the Foundation. When the assets are transferred to the foundation the founder loses control over those assets. However, it is normal for the founder to retain some influence over the foundation by reserving the right to appoint and remove board members as well as, appoint, remove or vary beneficiaries and determine when the foundation should come to an end.

The beneficiaries

A foundation must have beneficiaries. It is possible for them to have an absolute, discretionary or contingent entitlement although they can only benefit when the foundation distributes assets to them.

The founder, when establishing the foundation, determines who and when the beneficiaries can benefit from the foundation. It is common for the founder to include himself as a beneficiary. Caution should be taken where the foundation holds assets in a jurisdiction which doesn’t formally recognise foundations, for example where the founder is included as a beneficiary and the assets are situated in the UK. HM Revenue and Customs may regard the inclusion of the founder as a beneficiary as a gift with reservation of benefit for UK inheritance tax purposes.

The Council/Board of Directors

The foundation must have at least one council member who must be an individual and at least 18 years of age. The Council is responsible for administering the assets of the foundation and carrying out its objectives as well as conducting the foundation's affairs in accordance with its foundation instrument, foundation rules and legislation, if any, governing the foundation.


Most jurisdictions insist that an enforcer is appointed to foundations. The role of the enforcer is to take reasonable steps to ensure that the Council of the foundation carries out its functions. The rules of the foundation must give the enforcer, if any, the power to approve or disapprove the actions of the Council. The Council is accountable to the enforcer.

Benefits of creating a foundation

The benefits of creating a foundation will be personal to the objectives of the founder. However, some of the benefits are, but are not limited to, the following:

Generation planning

Foundations allow for assets to be passed from one generation to another and they are recognised as being an effective form of generation planning. The founder can state within the incorporation documents who can benefit and when. This can eliminate potential problems where beneficiaries are minors and are unable to legally hold assets.

Caution should be asserted where consideration is being given to the creation of a foundation in a jurisdiction where forced heirship is recognised and also where the jurisdiction is governed by Sharia law. The foundation may not be legally recognised and the objectives of the founder may not be achieved.

Tax advantages

In certain jurisdictions, depending upon local tax rules, foundations are regarded as a tax advantageous way of transferring assets so that they are no longer regarded as personal assets. In some cases the transfer of the assets can be free from gift tax and there is generally no tax on the assets whilst in the foundation and when assets leave the foundation. For example, a Liechtenstein foundation, which also has assets solely in Liechtenstein, is not liable to tax on capital gains or distributions made to beneficiaries.


Unlike a trust there are no perpetuity period rules applicable to foundations. This means that the foundation can continue indefinitely until the foundation is wound up or assets transferred to another foundation.


The formation documents of the foundation do not normally contain details of the beneficiaries, the founder or the assets of the foundation and therefore the purpose of the foundation and parties to the foundation can remain confidential.

The future of foundations in common law jurisdictions

Foundations are predominantly recognised in civil law jurisdictions. However, foundations are becoming increasingly popular and recognised in common law jurisdictions. The Bahamas was the first common law jurisdiction to introduce legislation relating to foundations. It formally recognised a foundation in law by enacting the Foundations Act 2004; this was closely followed by St Kitts and Nevis issuing similar legislation.

The spread of the concept of foundations to common law jurisdictions looks set to continue. Jersey enacted the Foundations (Jersey) Law 2009 which formally recognises foundations as an alternative to trusts. The Isle of Man followed with The Isle of Man Foundations Act 2011 which came into force on 1 January 2012 and Guernsey have since enacted The Foundations (Guernsey) Law 2012 which came into force on 8 January 2013.

The Isle of Man Foundations Act

The characteristics of an Isle of Man foundation are similar to those created in other jurisdictions and follow the rules already stated in this article. However there are a number of differences.

  • The foundation instrument must be written in English. However, there is no requirement for the foundation rules to be written in English.
  • The appointment of an enforcer is optional unless the object of the foundation is to carry out a specified non­charitable purpose.
  • The foundation must be established by an application to the Registrar of foundations by a Class 4 (corporate services provider) license holder which means a person who holds a license issued under the Financial Services Act 2008 which permits that person to undertake regulated activity on behalf of the foundation.
  • A Registered Agent must be appointed. This person is likely to be the Class 4 license holder, referred to above. The Registered Agent is responsible for approving the foundation rules and dealing, generally, with communications with the Registrar. They will also assume a level of responsibility for the foundation's activities.

Before a foundation is created the founder should seek tax and legal advice in the jurisdiction relevant to the foundation to ensure it meets the founder’s objectives and the benefits and any disadvantages are fully understood.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown on the title page. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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