The benefits from starting a family foundation
The Family Foundations Act, entering into force on 22 May 2023, introduces the family foundation into Polish law as a new legal entity designed for collecting property and managing assets in accordance with the founder’s will and paying benefits to beneficiaries. Therefore, the objectives of a family foundation are different from those of existing foundations, which are non-governmental organisations operating for public benefit and not for profit.
Below we present the main advantages of a family foundation, which show that this legal form can serve diverse purposes.
The introduction of a new legal entity to manage private assets for a specific set of beneficiaries arises from the need to safeguard the founder’s assets for future generations in a planned manner, consistent with the founder’s intent. Until now, a testator in Poland could make a will and transfer assets to his or her heirs, but had limited options for deciding how the assets would be administered after death (e.g. a testamentary instruction). This problem is particularly relevant in the case of family businesses whose owners do not have successors prepared to continue their activity. In such case, the easiest thing to do would be to simply sell the company, but this too is not always an optimal solution from the point of view of the elders, who may treat the family business as their life’s work.
Therefore, the idea of a family foundation is related to the need for succession planning, but this are not the only benefit that this legal form provides.
Managing family assets and paying benefits to beneficiaries
A family foundation is an entity with legal personality authorised to manage the assets contributed by the founder. A founder can establish a family foundation in either a founding deed or a will, which requires the form of a notarial deed. The founder’s duty is to contribute assets to the foundation to cover the founding fund with a value specified in the statute, but not less than PLN 100,000. A family foundation cannot return to the founder any or all of the property contributed to cover the initial fund unless otherwise provided by law.
The founder can have a significant influence over the activity of the foundation and how it manages its assets, both through the relevant provisions of its statute, which indicates, among other things, the purpose of the family foundation, its beneficiaries or the method of determining them, and by defining their powers or guidelines for investing the family foundation’s assets. At the same time, the founder may also address comments, opinions or recommendations to the bodies of the foundation regarding its activity.
The foundation’s beneficiaries, who may be members of the founder’s family as well as the founder himself, but also persons unrelated to them or public-interest organisations, are entitled to receive the benefits specified in the statute. These benefits can take various forms—assets, including cash, tangible or intangible property, transferred to the beneficiaries or given to them for their use. If the beneficiaries are natural persons, the foundation may also cover their living expenses or education.
A beneficiary to whom the family foundation has provided a benefit in violation of the law or the statute is obliged to return it. The management board members responsible for making an undue benefit are liable to repay it jointly and severally with the beneficiary.
A family foundation can be an appropriate solution for preserving the family assets and ensuring their protection from imprudent decisions of the founder’s potential successors, while not depriving them of the benefits associated with those assets. Through appropriate provisions in the statute, the founder can have a long-term influence on how the foundation’s assets are managed and disposed of, for the purpose of preserving them for future generations, avoiding disadvantageous distributions often leading to loss of control over the assets. A family foundation can be used to secure the assets of people who cannot, for various reasons, manage them independently, e.g. wealthy people with no heirs who are incapacitated and require care. A family foundation can also provide lifelong care and maintenance for persons who are elderly, disabled or otherwise dependent and cannot rely on family support.
A family foundation as an investment vehicle
A family foundation can acquire equity rights and make capital investments in other entities, taking advantage of tax preferences, as we discuss in more detail in the article “Taxes and the family foundation.” Under the law, a family foundation is entitled to join and participate in companies, partnerships, investment funds, cooperatives and other such entities, based in Poland or abroad, as well as to acquire and dispose of securities, derivatives and rights of a similar nature.
A family foundation can also help secure proper exercise of corporate rights, among other things by ensuring unanimity in the management of shares in companies. Otherwise, as happens after the death of the testator, the decedent’s stake of shares in a company may be divided among the heirs, who may have differing views when exercising corporate rights. In extreme situations, this can lead to a decision-making impasse. Another threat is the transfer of shares by some heirs seeking to cash in on their inheritance, thus introducing outsiders into what was a family company. In contrast, the transfer of shares to a family foundation results in a limited risk of capital dissipation, as they are subject to management by the foundation, and the beneficiaries’ rights and duties are non-transferable (except for their claims to due benefits).
Asset protection—the foundation’s liability for the founder’s obligations
The assets of a family foundation are separate from those of the founder. The founder is not liable for the family foundation’s obligations, due to its separate legal personality. In this respect, the founder’s legal situation is similar to that of a shareholder of a limited-liability company.
On the other hand, a family foundation will be jointly and severally liable for the founder’s obligations arising prior to its establishment, limited to the value of the property contributed by the founder at the time of contribution, at the prices at the time the creditor is satisfied. This means that once a foundation is established, by operation of law, it will accede to the founder’s obligations, for example under contracts. Exclusion or limitation of the family foundation’s liability for such obligations will be possible exclusively with the creditor’s consent. The family foundation can also step into the shoes of the obligated founder, if the creditor releases the founder from the debt.
The family foundation will not be liable for the founder’s obligations arising after its establishment, with one exception—the founder’s maintenance obligations (alimenty). In the case of maintenance obligations, arising either before or after its establishment, the foundation will be jointly and severally liable with the founder, regardless of the amount of the obligation. Similar to other obligations, the family foundation will be liable up to the value of the contributed property. This means that if enforcement against the founder’s assets is ineffective, it will be possible to pursue maintenance claims against the family foundation. Also, the act allows an action to be brought against a foundation before enforcement against the founder’s assets proves ineffective.
The asset protection function that a family foundation can perform can also be understood in a broader context, by providing long-term planning for the management of family assets, preventing the disruptions accompanying each generational change. The division of assets between the heirs may lead to fragmentation, imprudent disposition of particular assets, or differing visions of heirs as to the purpose of family assets. The establishment of a family foundation allows for consistent, long-term management of the entirety of the assets contributed to the foundation, while ensuring that benefits are distributed systematically to its beneficiaries.
Family foundation and succession planning
Although a family foundation is widely viewed as a succession instrument (broadly understood as a vehicle giving flexibility in the disposition and management of the founder’s assets), its establishment and operation does not actually change the situation of the founder and his or her relatives from the perspective of succession law. However, in certain circumstances, the establishment of a family foundation may prove particularly helpful in adequately providing for minors.
When establishing succession plans, a significant risk is usually associated with potential claims for a forced share, which occurs if the testator omits persons entitled to a forced share in testamentary instructions or donations made during the testator’s lifetime (inter vivos gifts). This follows from the general rules for determining the forced share, under which, to calculate the forced share, it is first necessary to determine the basis (substratum) for the forced share, i.e. the sum of the absolute value of the inheritance, gifts and legacies made by the testator. Thus the value of gratuitous dispositions made by the testator during his or her lifetime should also be added to the estate left by the testator. In the case of developed family companies, the value of forced-share claims is sometimes so significant that it can even lead to a forced sale of the company to collect funds to satisfy such claims by persons who received the family business from the testator.
The transfer of the company to a family foundation will not fundamentally change this situation. Such gratuitous dispositions will be added to the substratum of the forced share on the same basis as any other inter vivos gifts by the testator. In turn, the family foundation itself will be liable for forced-share claims in the same manner as other gift recipients are liable for these claims. In this regard, the new provisions of the Civil Code require that a family foundation be treated like any other type of entity not being an heir or entitled to a forced share and receiving a gift from the testator. Thus, the founding fund transferred to the family foundation by the testator will always be added to the substratum of the forced share, unless the contribution occurred more than ten years before the testator’s death and the family foundation was not appointed to the testator’s estate.
As for benefits received by the beneficiaries of the family foundation who are also entitled to a forced share from the founder, from the perspective of inheritance law the parliament instructs that they should be treated the same as any other benefits received from the testator by those entitled to a forced share. Therefore, in such cases, the beneficiaries must count the value of the benefits received from the family foundation against the forced share due to them.
Due to the ten-year restriction on adding the founding fund to the substratum of the forced share, it might seem that establishing a family foundation and naming as beneficiaries only some of those entitled to a forced share from the founder’s estate might be a way to offset the risk related to a forced share. Unlike in the case of a transfer of assets directly to selected beneficiaries entitled to a forced share, in such an arrangement the designated beneficiaries would receive the benefits from the foundation, while if the founder survived ten years after the transfer of the founding fund, the value of the fund would not be added to the substratum of the forced share. Therefore, the condition is the lapse of a ten-year period since the initial fund was contributed to the foundation. Given the highly precarious nature of this condition and the analogous nature of the rules for determining the forced share with regards to the founding fund of the family foundation regarding the testator’s other donations, it is impossible to conclude that the family foundation introduces instruments for limiting claims for a forced share of the founder’s estate. Therefore, in this respect, the rules for determining the forced share based on the founding fund of a family foundation have only been adapted to the existing rules.
Continuing with succession law, it is worth noting the advantage of a family foundation when planning for distribution of benefits to a minor. This refers to situations in which the testator would like to transfer some assets to a minor, but at the same time does not have confidence in the minor’s legal guardians, who, until the beneficiary reaches the age of majority, would manage such assets under the supervision of the guardianship court. Moreover, if the transferred asset were a company or part of a company, any decision regarding its operation would require prior authorisation from the guardianship court, which in turn would threaten to paralyse the company’s ongoing business operations. Usually, such dilemmas occur in the case of dispositions made by grandparents for the benefit of grandchildren, but with the desire to omit one of the grandchildren’s parents (former or current spouse or partner of the testator’s own child). Under such conditions, it would seem helpful to contribute the company to a family foundation, while at the same time appointing the minor as a beneficiary of the foundation. This would avoid the influence of the minor’s legal guardians in the day-to-day management of the company and would make it unnecessary to obtain the court’s permission for the company to carry out specific activities, while ensuring that adequate provision is made for the current needs of the minor.
Summary
The above analysis shows that a family foundation can be used not only for succession planning, but also for investment purposes and as a mechanism ensuring long-term management of family assets, protecting them from fragmentation. Such a broad spectrum of application makes the family foundation a particularly attractive formula for owners of companies or wealthy individuals struggling with the dilemma of how to divide assets among children so that, on one hand, no one is harmed and, on the other hand, divisions do not arise that could disrupt the company’s activity or the unity of family assets.
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
