The American statutory foundation: An interesting alternative to trusts for wealthy Polish families | In Principle

Entrepreneurs and other wealthy individuals in Poland now have the convenience of choosing between different succession planning tools. If their business and assets are largely Polish, and the beneficiaries live in Poland, a natural choice may be the family foundation, a relatively simple instrument based on Polish law and increasingly encountered in practice. But if the business is more international, and the family is dispersed between jurisdictions, many clients begin to consider foreign solutions.

Apart from Liechtenstein, a popular European choice, trusts created in common-law jurisdictions increasingly come into play.

But recently another tool has been added, an American form of private foundation known as a “statutory foundation.” It may be an attractive vehicle particularly for clients who invest in the US, have family there, or simply appreciate the reputation and predictability of the American legal infrastructure.

Trusts under Polish law

A trust is not a legal person, but a fiduciary relationship in which ownership of assets is divided: formal legal title is held by the trustee, while the economic benefits belong to the beneficiary. This construction is unfamiliar in the tradition of Polish property law, which is based on consolidated ownership rights.

Basing asset planning on the institution of the trust poses challenges from the perspective of Polish residents. This is primarily because the Polish legal system does include trusts as a specific institution. Nor is Poland a party to the Hague Convention of 1985 on the Law Applicable to Trusts and on Their Recognition. In practice this reduces the predictability of resolutions in disputed cases, where the limited jurisprudence does not offer solid support.

Wyoming statutory foundation: “legal personality” instead of a “legal relationship”

A Wyoming statutory foundation is an entity distinct from its founders, beneficiaries, and directors. It can acquire real estate, enter into contracts, and sue in its own name.

Unlike a company, a foundation has no shares or shareholders. Its existence is not based on capital ownership, but on pursuit of the purposes set forth in the statute.

The model for administering a Wyoming foundation is a unique hybrid of corporate and trust solutions, offering the founder great flexibility. The central managing body, comparable to a management board in Poland, is the board of directors, which must be composed of at least one natural or legal person. Its principal tasks include current administration of the assets and consistent pursuit of the purposes of the foundation as set forth in the founding documents.

A key legal aspect here is the specific construction of fiduciary obligations. Unlike in a classic trust, where the trustee has direct fiduciary duties to the beneficiaries, in a Wyoming statutory foundation these duties are owed first and foremost to the foundation itself and its statutory purposes. Importantly for the personal security of the members of the board of directors, they are not personally liable for the foundation’s obligations, as long as they act in good faith and in compliance with the operating agreement (discussed below).

Supervision of the actions of the directors is typically exercised by a “protector.” This person may be vested with broad authority, including a right to veto key investment or distribution decisions, but also the right to appoint and dismiss the members of the board of directors, and to ratify amendments to the foundation’s constitutive documents. In the case of a private foundation, appointment of a protector is optional, but in succession planning practice one is almost always appointed.

Governance of a foundation is based on two main documents:

• Articles of formation: a public founding deed, registered with the state, containing only the bare minimum of information (name, registered agent), which ensures a high degree of discretion.
• Operating agreement: this is a private agreement serving a role analogous to a trust instrument or the statute of a Polish family foundation. This is where the purposes of the foundation are set forth, along with the identity of the beneficiaries and the management rules. It remains entirely outside of any public registers.

Mechanism for protecting assets

The core protection for assets in a Wyoming statutory foundation is a clear provision making the assets of the foundation difficult for third parties to reach. Under this provision, property contributed to the foundation by the founder, as well as any income, increase in value, or proceeds obtained from the property, is exempt from claims by the founder’s creditors.

Crucial from the perspective of international succession, this protection was designed comprehensively, also expressly including claims for forced heirship. In practice this creates a legal barrier making it harder for business creditors or heirs pursuing claims based on foreign inheritance regulations to reach the assets gathered within this structure.

But in the case of a Polish founder, the scope of this protection must be analysed in each instance through the prism of conflict-of-laws rules (private international law). It must be determined which law governs claims by creditors or heirs:

• American law, as the place where the foundation is based
• Polish law, as the place where the founder resided before death, or
• The law of another place, where specific assets of the foundation are located.

Tax challenges

Despite its undoubted legal advantages, the Wyoming statutory foundation requires precise tax analysis. The US Internal Revenue Code does not provide a separate category for such foundations. In practice, this means that for purposes of federal tax law, the foundation will be classified either as a business entity, including as a corporation, or as a trust. This classification will depend primarily on the purpose for establishment of the foundation and the nature of its operations, which in turn will translate directly into income tax consequences.

For a Polish founder investing in American assets, the most serious threat is not current taxation of income, but the American estate tax. The mere existence of a Wyoming statutory foundation does not provide effective protection against this 40% tax, which is imposed on “US-situs assets,” such as shares in operating companies based in the US. An exception is the situation in which the foundation has obtained the status of a “foreign non-grantor trust,” but in practice this requires that the founder not retain control over the structure or its assets, and the founder must entirely waive any rights to be a beneficiary of the foundation.

For this reason, in creating structures investing in American assets based on a Wyoming statutory foundation which does have the status of a foreign non-grantor trust, most often it is necessary to introduce the mechanism of a “blocker entity.” This is a company that is a tax resident of a country other than the United States, which for US purposes is taxed as a corporation. Placing such a “blocker” between the foundation and, for example, an American operating company, means that in the event of the founder’s death the subject of the inheritance is shares in the foreign company, which are not subject to US estate tax. But the problem of the US estate tax does not apply to a structure based on an American statutory foundation which is not the owner of American assets. In that case, the structure can be simpler, without the need to establish a “blocker entity.”

When planning a structure based on an American statutory foundation, the tax challenges on the Polish side should also be taken into account. As in the case of a Liechtenstein foundation, a Wyoming foundation may be regarded as a controlled foreign entity (CFE). This entails the obligation of taxation in Poland of the foundation’s income, even if it has not been distributed to the beneficiaries. Moreover, CFE status may also be attributed to the blocking company itself. According to the Polish administrative courts, distributions received by beneficiaries of an American statutory foundation will be treated as dividends subject to taxation in Poland at the rate of 19%. The amount of dividends paid out and taxed on the side of the beneficiary will then reduce the basis for taxation of the CFE. If the foundation does not accumulate the income it generates, but distributes all the income to the beneficiaries, the real total taxation of the beneficiaries for holding this status and receiving benefits from the foundation will remain at 19% (only the tax on benefits treated as dividends for tax purposes). After the founder’s death, the assets gathered within the foundation will not be subject to inheritance and gift tax in Poland.

New England instead of the Wild West?

Wyoming is not the only state offering statutory foundations; New Hampshire does too.

The differences between these two solutions are subtle. Wyoming offers a better solution for persons who are concerned about maximum discretion, because the law there automatically seals all court documents concerning the foundation, so that third parties cannot view them. But the New Hampshire foundation may be more attractive for those who prefer a more European structure, because it allows for the use of traditional names such as the Dutch stichting, which can facilitate cooperation with foreign institutions.

Moreover, a New Hampshire foundation has greater freedom in managing other entities, which is very useful in building extensive family structures. When it comes to passage of property to successors, both states effectively protect against forced-heirship claims by family members (subject to the remarks above concerning the applicable law), but they differ in their method of management. Wyoming requires a strict division of roles and prohibits the same person from simultaneously managing the foundation and exercising oversight of the foundation, while New Hampshire takes a much more flexible approach to these issues.

There are also apparent differences in protecting the beneficiaries against creditors. In New Hampshire, by default, the beneficiary’s rights are treated only as an “expectancy” of future definitive acquisition of a claim, which means that the beneficiary’s creditors cannot attach this right. However, the law in Wyoming awards the beneficiaries by default a share in the foundation’s assets and income (beneficiary interest). This share can be seized by the beneficiary’s creditors. However, the operating agreement for a Wyoming foundation may deprive the beneficiary of this share, thus reducing the beneficiary’s assets subject to execution.

Geographical considerations may also come into play. New Hampshire is much closer than Wyoming to Poland, and if there were a need to appear in person in the US, a trip to New England may pose less of a logistical challenge than an excursion to the Wild West.

Summary

The American statutory foundation offers a new alternative to trusts. Its unique solutions strengthen the legal protection of the assets against creditors and forced-heirship claims. But it requires precise tax structuring to avoid the American estate tax and the risks associated with the regulations on controlled foreign entities.

Jędrzej Figurski, attorney-at-law, Private Client practice, Wardyński & Partners