Like any other legal form, a family foundation may also involve the risk that the management of assets will be delegated to incompetent persons, the foundation will act in a manner contrary to its stated purpose or the interests of its beneficiaries, or it will conduct business activity in areas not permitted for a family foundation. However, in the Family Foundations Act, the Polish parliament has provided certain tools to prevent such situations.
With all the advantages of a family foundation, it should be remembered that a lot depends on the individual solutions adopted in specific cases, i.e. on the wording of the foundation’s statute, the designated beneficiaries, their powers, the structure of the foundation’s bodies, and the persons elected to these bodies. If the foundation’s statute is poorly worded, the contribution of assets to a family foundation may result in a loss of direct control over the assets, or the risk of mismanagement or intentional abuse.
Risk of losing control over the foundation and its assets
The founder can significantly reduce the risk of losing control over the assets primarily through proper construction of the family foundation’s statute, the powers of the foundation’s bodies, and the rules of their cooperation and control. Particularly, it will be important for the founder to indicate the objectives of establishing the family foundation and the guidelines for managing and investing the assets. Also, the founder may establish a supervisory board whose approval will be required to perform acts specified in the statute and act as a controlling body (if there are more than 25 beneficiaries, establishment of a supervisory board is mandatory). Also, the founder may address comments, opinions or recommendations to the bodies of the foundation regarding its activities.
The members of the management board and supervisory board of a family foundation are obliged to act loyally towards the foundation, and are also liable for damage caused by an act or omission violating the statute (among other things), unless they are not at fault. Therefore, violation of the statute by a member of the foundation’s bodies may result in the member’s liability.
Also, the founder may specify activities for which approval of the assembly of beneficiaries will be required. In this case, the founder may decide through appropriate provisions in the statute which beneficiaries will have the right to participate in the assembly of beneficiaries.
To reduce the risk of the foundation acting contrary to the founder’s intentions, it is also worth detailing the rules for amending the statute. In this regard, the founder may establish certain requirements in the statute, for example a qualified majority of votes at the meeting of beneficiaries needed to make such changes or the need to obtain additional approval from the foundation’s supervisory board, or some other procedure as appropriate.
It should be remembered that management of the assets of a family foundation is subject to mandatory audit. The assembly of beneficiaries will appoint an audit firm or team of auditors to examine the management of the assets of the family foundation, incurrence and performance of obligations and public charges, for regularity, reliability and compliance with the law and the purpose and documents of the family foundation.
The audit team may include auditors, tax advisors, advocates or attorneys-at-law. The auditors must be independent, i.e. only persons who during the period covered by the audit and during the audit:
- Are independent of the family foundation
- Did not and do not participate in the decision-making process of the family foundation
- Have not provided and do not provide audit or consulting services to the family foundation.
An audit must be carried out at least once every four years, while the statute may provide that it is to be conducted more frequently. In the case of a family foundation whose financial statements are subject to mandatory audit under the Accounting Act, the audit is to be conducted annually before approval of the financial statements. The audit report is submitted to the management board, and the management board then presents it to the supervisory board, or if there is no supervisory board, to the assembly of beneficiaries at the next meeting.
Therefore, a mandatory audit assessing the proper management of assets of a family foundation is one of the control mechanisms for preventing abuse and eliminating irregularities.
Restrictions on conducting business activity
While a family foundation may conduct business activity, the regulations provide an exhaustive catalogue of permissible activity. Therefore, it will not be feasible to contribute directly to a family foundation every enterprise that might be pursued, due to the unfavourable tax consequences in the event of conducting activities not allowed for foundations (an increased 25% corporate tax rate). From this perspective, it will be more efficient to conduct activity in the form of a commercial company (or partnership), where the shares are contributed to the foundation. If the founder wishes to contribute to the foundation an undertaking previously carried out in the form of an individual business that does not fall within the scope of business allowed for family foundations, it may be necessary to first convert it into a company or partnership. In this context, it should be noted that a business operator who is a natural person conducting activity in his or her own name can transform the business into a single-shareholder company.
Thus, when planning to contribute a business to a family foundation, the first thing to consider is whether an appropriate corporate structure should be created beforehand. For more on this topic, see the article “Running a business through a family foundation.”
The possibility of dissolving a family foundation—sometimes against the founder’s will
The assumption is that a family foundation is set up on a long-term basis to protect the assets for future generations. However, the parliament provides for the possibility of dissolution and liquidation of a family foundation, creating a risk of losing control over its assets.
A family foundation may be dissolved for various reasons, including as a result of the occurrence of circumstances indicated in the statute, in particular when the duration for which the foundation was established has elapsed, when the purpose of the foundation has been fulfilled, or when the foundation is managed in a manner contrary to its purpose or the interests of its beneficiaries, or for other valid reasons it is no longer purposeful to continue the foundation’s activities. In either case, a decision by the competent authority of the family foundation or the registry court will be required. By contrast, the dissolution of a family foundation for other valid reasons requires the unanimity of the assembly of beneficiaries.
In the course of liquidation, a family foundation must first perform its obligations to entities other than its beneficiaries. Only after these obligations are fulfilled can the benefits to the beneficiaries be paid and the assets distributed. The liquidators’ duties will include winding up of current business, collection of debts, and fulfilment of the family foundation’s obligations.
To protect against the negative consequences of dissolution and liquidation of a family foundation, the founder may regulate in the statute the circumstances justifying its dissolution and the use of the property remaining after liquidation. If a family foundation is liquidated during the founder’s lifetime, he or she is solely entitled to receive the property remaining after liquidation, unless otherwise provided in the foundation’s statute. Also, the entities entitled to the assets of a family foundation after its dissolution may be selected beneficiaries, but also persons outside this group, depending on the founder’s intention expressed in the statute. In the event of the founder’s death and the lack of any beneficiary entitled to the property, the assets of the family foundation will go to the founder’s heirs.
Certainly, a family foundation has many advantages over the previous forms of succession planning or effective management of family assets provided for in Poland. Due to the favourable tax arrangements, it can also be used as an investment vehicle. However, when deciding on a family foundation to manage assets, it is important to ensure that not only the objectives, but also the interests of the founder and the foundation’s beneficiaries are properly safeguarded, in particular through the wording of the foundation’s statute. As with other legal forms, the success of a family foundation depends on an effective structure, but also on selection of the right people to manage the foundation.
Dr Kinga Ziemnicka, attorney-at-law, M&A and Corporate practice, Wardyński & Partners
Dr Radosław Wiśniewski, adwokat, Real Estate practice, Wardyński & Partners
Adam Strzelecki, M&A and Corporate practice, Wardyński & Partners