Take-away: Thirty years ago, from the unlikely source of Wyoming,  the civil law concept of the limited liability company arrived in North America.  We now find yet another civil law concept that has made its way onto the shores of North America, the Non-Charitable Private Foundation, from yet another unlikely source- New Hampshire. The LLC came to the states as a more flexible entity than a conventional corporation. The non-charitable private foundation arrives, apparently, as a more restrictive type of trust surrogate. Whether New Hampshire’s non-charitable private foundation attracts the same level of nationwide attention that the Wyoming limited liability company act received in 1997, where 20 years later now all 50 states have limited liability company statutes, will be anyone’s guess.

Background: For a long time many civil law countries have used the concept of a non-charitable private foundation (instead of formally recognizing trust relationships). It has only been in recent years that civil law countries have begun to recognize the unique common law creature, the trust relationship, but they do so reluctantly. Yet a trust relationship, while possibly being used for the same purpose, is not the same thing as a non-charitable private foundation (for ease of reference in the following overview it will simply be called the foundation.) Why New Hampshire decided to adopt this act is unclear, but it may reflect a desire to attract foreign investment assets to that state, much like the fevered competition among the states to attract trust business to their jurisdictions.

Non-Charitable Private Foundation: A foundation is often used  in civil law countries to hold family wealth. The wealth is held by the foundation for the creator of the foundation, and the creator’s family, which continues for multiple generations, much like a dynasty-type trust. The foundation provides minimal interference from the creator’s descendants after the creator’s death, along with minimum interference with the foundation’s assets by the beneficiary’s creditors.  Unlike a trust, the beneficiary generally has no rights to interfere with the management of the foundation by its directors, nor does the beneficiary possess the ability to challenge the directors’ discretion. More to the point, if the foundation beneficiary has any standing to address a claimed breach of duty by the directors, that breach of duty is directed solely to the foundation itself and not to the beneficiary, all of which makes the administration and responsiveness of the foundation trustees much different than the trustee of a conventional irrevocable trust.

Traits of a Non-Charitable Private Foundation: The distinguishing characteristics of a foundation are summarized below:

  • Privacy: The foundation is not established to benefit the public. As a result, its terms are private, much like an irrevocable trust instrument.
  • Wealth Holding Device: Like a trust, the foundation is usually established to hold family wealth. While the foundation must have a purpose, it does not  actually have to have beneficiaries. The foundation functions, albeit for a long time, more like a purpose trust under the Michigan Trust Code, (e.g. a pet trust) which usually has a relatively short life-span, or which requires periodic reports to be filed with the state attorney general’s office- Charitable Trust Division.
  • No Beneficiaries: As a generalization, a trust almost always has at least one beneficiary who has the right to enforce the terms of the trust (a purpose trust being an exception to this generalization.) But a foundation does not have to have any beneficiaries. In the absence of any beneficiaries, the New Hampshire law mandates that the foundation’s governing bylaws contain provisions for an enforcer [not to be confused with the recent Denzel Washington film.] Which, of course, begs the question, if there are no beneficiaries to monitor the foundation directors, how will the enforcer know when to become involved to enforce the terms of the foundation’s bylaws?
  • Limited Beneficiary Rights: A trust beneficiary possesses many rights both at common law and under the Michigan Trust Code. A foundation can be established that gives to its beneficiaries few, if any, rights. The foundation enabling legislation permits a beneficiary to challenge any action taken by the directors, but that presupposes that the beneficiary has any knowledge about the foundation and how it has been administered by the directors. What will be the basis of a beneficiary’s challenge if the foundation directors have no duties to act with prudence, with impartially, to keep records, to keep the beneficiary reasonably informed, or even the duty to manage the foundation in the beneficiary’s interest and consistent with the foundation’s stated purpose?
  • Creditor Protection: As a result of the absence of virtually any rights held by the beneficiary, some commentators believe that the foundation form of asset ownership might provide more creditor protection for the beneficiary than a conventional support trust where the common law and multiple statutes give the beneficiary far more rights to enforce the trust and against which exception creditors by statute can access some of the trust’s assets on distribution.
  • Good Faith Duty: The trustee owes an affirmative duty to the beneficiaries of the trust to always act in their best interests. With the foundation, which is not a relationship but a separate legal entity (like an LLC), the directors of the foundation owe a duty primarily to the foundation itself. Only secondarily would the foundation directors owe a duty to the beneficiaries of the foundation (if at all) which duties can be totally eliminated in the foundation’s bylaws. About the only duty that the directors of the foundation have is to act in good faith. While the New Hampshire act does actually mention that the directors have duties of impartiality, prudence, and to keep the beneficiaries reasonably informed, which sounds like it intended the foundation to be a trust surrogate [consistent with a trustee’s statutory duty to beneficiaries] all of those enumerated duties can be waived or eliminated in the foundation’s bylaws. Thus, the only duty that cannot be waived is the foundation directors’ duty to act in good faith. Example: the foundation directors could keep sloppy records, or no foundation records at all, but if they acted in good faith, they could not be held liable by the beneficiaries of the foundation.
  • Registration: Since the foundation is a creature of state law, like an LLC, it must be registered with the state. The downside to this registration is that the certificate of registration must disclose the names of the foundation’s directors, which is not an issue if a trust relationship is established, where the trust instrument is usually private and maintained confidential.

Foreign Foundations: The New Hampshire statute permits a foreign foundation of like character to register in New Hampshire, which may be one way the state intends to attract foreign investments and business. But the directors of many foreign foundations that are accustomed to functioning under civil law principles, and they may not be comfortable exposing themselves to the liability risks of a common law jurisdiction. If a probate court were called upon to address a claim against the foundation directors for mismanagement, the classic quip comes to mind,  ‘if it looks like a duck, and it sounds like a duck, it must be a duck’ would probably result in the probate court imposing common law trust principles to evaluate claims, rights and remedies despite dealing with a non-charitable private foundation with origins in the civil law.

Conclusion: Who knows if New Hampshire’s non-charitable private foundation legal entity will sweep the country over the next couple of decades like the Wyoming limited liability company did a few decades ago.  This new legislation appears to be tailored to be used like an irrevocable trust, but without many of the duties and obligations (or risks) imposed on trustees, or few rights and remedies held by beneficiaries. It will be interesting to see how this plays out as the  ‘newest and greatest idea’ in estate planning, or merely a ‘flash in the pan.’