Alexander A. Bove Jr. and Melissa Langa
BridgeTower Media Newswires
In mid-2017, New Hampshire adopted the first private foundation law in the United States, immediately giving rise to two questions: What is a private foundation? And, so what?
A private foundation, in this context, refers to a non-charitable entity that may be established for individual beneficiaries or for a non-charitable purpose, or for both.
The non-charitable private foundation (here let’s just refer to it as a “private foundation” or “foundation”) has been used for decades in almost all of the civil law jurisdictions, often as a substitute for a trust, which is a common law creation and not recognized in civil law jurisdictions, except by statute.
As we common law lawyers know, the trust arrangement divides ownership of property into legal ownership (in the trustee) and equitable ownership (in the beneficiaries).
The civil law system does not recognize such a division of ownership, although it does recognize, through the foundation, that property may be held by one party and applied for the benefit of others. That, however, may be where the similarity ends.
Unlike a trust, the private foundation is a separate legal entity, is the sole legal and equitable owner of its property, operates for the benefit of the foundation itself, and answers to the applicable court rather than to its beneficiaries, if any.
It is formed by a founder who contributes funds or property to the foundation, and in many respects it resembles a corporation without shareholders, since no one “owns” the foundation.
It has a board of directors that manages the foundation. The foundation may own any type of property, enforce contracts, and operate entirely on its own, generally without answering to beneficiaries, except of course in a case of wrongdoing, in which case, a court would decide the resolution.
The duty of the board is a purely contractual one to manage the foundation in accordance with the bylaws, which in turn often contain provisions for beneficiaries.
Typically, the board is given broad discretion to make distributions to the beneficiaries, and unlike a trust, unless the bylaws contain some direction or express guidelines for distributions, it is extremely difficult for a beneficiary to make a claim or complaint about the board’s distributions (of course, if the board is mandated to make certain distributions, that changes the situation entirely).
But whether distributions are mandatory or discretionary, unlike a trust, there is no express fiduciary duty to the beneficiaries by the board as there is from a trustee to a beneficiary.
This does not mean the board is not held to a type of “fiduciary” standard. If the board or a member is found to have committed a wrongdoing, or acted directly against the interests of the beneficiaries, the beneficiaries could lodge a complaint and the board would be answerable to the court.
The usual party to bring the matter to the court’s attention is the auditors of the foundation, but also could be a beneficiary. Auditors are generally accountants chosen by the founder or by the directors to annually review the activities of the foundation.
Since the foundation is so removed from the control and interests of the beneficiaries, it is regarded by many advisors and clients as superior to a trust for purposes of creditor protection.
An obvious exception is when a transfer to the foundation by the founder who is also a beneficiary was found to be a fraudulent transfer. Short of that, however, once the transfer is made to the foundation, no one would have a claim to it other than creditors of the foundation itself.
Like a corporation, the private foundation may be perpetual, providing for generations of beneficiaries or for other purposes.
So, how does the New Hampshire private foundation law fit into this picture? It doesn’t. The New Hampshire law is drafted (intentionally, we are told) in a way that basically follows its own trust law but at the same time allows the founder to design the foundation entity on his own terms.
The problem is that most of the provisions in the statute must be drafted out of the bylaws in order to end up with anything that resembles a traditional civil law foundation.
For example, the New Hampshire statute provides that the directors owe the beneficiaries a duty of impartiality, a duty to manage with prudence, having in mind the beneficiaries’ interests, a duty of loyalty to manage in the beneficiaries’ interests, and a duty to keep the beneficiaries reasonably informed.
While no one, especially a beneficiary, would argue with the propriety of any of the foregoing requirements, the problem is they are all contrary to basic foundation law. If we want these provisions, we can have them all by simply using a trust. Why bother with a foundation, which has nothing behind it (in New Hampshire at least) in terms of established law or experience other than this statute?
On the other hand, the statute allows the “governing documents” (basically meaning the bylaws and the certificate of formation) to provide otherwise with respect to all the duties noted above and more. The only duty that may not be overridden in the documents is the duty of good faith.
Thus, if a person wants an entity that really operates like the traditional private foundation, he or she would have to form the foundation and proceed to enact bylaws that override all of the non-mandatory provisions in the statute, which basically make up the heart of the statute.
That is, we could form a foundation that relieved the directors from the duty of loyalty, the duty of prudence, the duty to inform the beneficiaries, the duty to keep records, even the duty to protect the foundation property! Sound a little counter-intuitive? We think so, too.
It seems that the Legislature believed the underlying mandatory duty of good faith might somehow make up for all this.
It also seems that the drafters of the law felt that offering a U.S. private foundation might attract the migration of foreign private foundations here to the U.S.
The New Hampshire law appears to make it relatively easy to allow such a ‘re-location,’ simply by registering the foreign foundation with the secretary of state. That is, the foreign foundation would not be forming or establishing a new foundation; rather, it would simply be acquiring a sort of permit to carry on its existing functions in New Hampshire, and maybe elsewhere in the U.S. (though this is not clear).
This option for a foreign foundation may be significant, because at the moment no other state in the U.S. recognizes a non-charitable private foundation. (It should be noted that a foreign foundation registering in New Hampshire is not permitted to carry on a business in New Hampshire.)
Thus, an existing non-U.S. foundation that had U.S. beneficiaries might wish to register in New Hampshire and have investment assets located in New Hampshire for the “convenience” of the U.S. beneficiaries and for the stability and protection of U.S. law.
But what about us practicing here and advising our U.S. clients on protective domestic structures? It would be a mistake to simply draft an entity that adopts all the provisions of the New Hampshire law. There is much more to think about, including provisions for protectors and possible curtailment of beneficiaries’ rights, as well as the tax implications of the foundation.
Here is our conclusion: The New Hampshire private foundation law seems to have been drafted as a do-it yourself law in which a lawyer working with the client can pick and choose those particular provisions desired to construct an entity that is something between a private foundation and a trust, or override all of the non-mandatory duties and have an entity that is a private foundation, for practical purposes, at least.
How such a DIY foundation would operate in practice and how it would be viewed by New Hampshire courts with no history to go on remains to be seen.
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Alexander A. Bove Jr. and Melissa Langa are shareholders at Bove & Langa in Boston, where they concentrate in domestic and international trust and estate law.
