Episode 5 – Key parties [part 1]: Founder & Council Members
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In our fifth episode, Legal Director Kath Zagatti and Managing Partner Yann Mrazek discuss the roles of the Founder and Council Members.
Founder
What is the Founder’s role in the Foundation?
Aside from founding the Foundation, the Founder’s role is to determine how the Foundation shall be managed and controlled, who shall be the Foundation’s members (i.e. Council Members, Beneficiaries, Guardian), and how the proceeds of the Foundation’s assets – or the assets themselves – shall be allocated/distributed.
The Founder has the freedom to specify the conditions, restrictions and rules of the Foundation in the Foundation’s constitutive documents – i.e. the Charter and the By-Laws – as well as through Letter of Wishes.
Whenever a Foundation has more than one Founder, the co-Founders shall, unless agreed otherwise, take these decisions jointly.
A Founder can also be a corporate structure.
Does the Founder have any obligations?
Yes. To register the Foundation, the Founder must define the following:
- Foundation’s name
- Its purpose (e.g. succession planning, asset management and protection, or charitable and educational purposes)
- Initial Capital/Assets to be settled onto the Foundation
- First Council members (minimum 2)
- Beneficiary(ies), or procedure for designating the Beneficiary(ies)
- Right to amend the Foundation’s Charter and By-Laws (can be retained by Founder during his lifetime or vested in the Guardian and/or Council Members)
- Procedure for dissolution of the Foundation and distribution of its Assets.
What about rights? Can the Founder keep any?
Yes, definitely!
For starters, the Founder can be appointed as one of the Council members, thereby being one of the persons in charge of the foundation’s day to day administration and management. Even if he/she opts not to be part of the Council, the Founder can retain certain special powers called “Reserved Powers”, which allow the Founder to control key decisions without jeopardizing the integrity of a Foundation.
Unless expressly stated in the Charter and the By-Laws, the Reserved Powers cannot be inherited or passed on to Founder’s heirs. Where this option has been provided for, it is possible to appoint a “substitute Founder”, who will be able to exercise the Reserved Powers once the Initial Founder passes away.
Founder’s reserved powers can address many different issues, including the right to:
- modify the Charter and By-Laws
- change the Beneficiaries and their entitlements
- appoint and dismiss Council Members, Guardian, etc.
Broad Founder’s reserved powers: any red flag?
The excess of Founder’s control can potentially trigger tax requalification and angles for attacks against the foundation and its assets by third-parties, including but not limited to creditors and forced heirs.
Legal advice should always be sought when creating a Foundation and determining the Founder’s reserved powers, depending among others on the Foundation’s purpose, the Founder’s faith, place of domicile.
Council Members
The Foundation Council must be composed of a least 2 Council Members, initially appointed by the Founder. Subsequent Council Members can be appointed by the Founder (if he reserved the powers to do so) or by any party empowered to do so by means of the Foundation’s constitutive documents.
What is the Council Member’s role?
The Council Members’ role is to administrate and manage the assets of the Foundation in accordance with the Foundation’s constitutive documents – the Charter and Bylaws.
Similar to a Board of Directors in a company, the Council Members do not hold personal title to the Foundation’s assets and, therefore, no personal liability towards the Foundation, save for negligence for any breach of that foundation’s obligations or fraud.
As opposed to a Board of Directors, the Council Members have no shareholders or investors to report to. The independence of the Council in managing the assets of a Foundation is however not absolute; it is limited by the Founder and/or Guardian by virtue of the Reserved Powers.
Considering acting as Council Member? Beware of responsibilities!
A Council Member has the duty to manage the affairs of the Foundation in accordance with its constitutive documents – Charter and By-Laws –, also considering Letters of Wishes issued by the Founder from time to time, which provides further guidance to the Council Members on the management of the Foundation’s affairs according to the Founder’s wishes.
Council Members shall therefore only exercise powers that have been given to them by means of these documents, failing which a Council Member may be found liable towards the other Foundation’s members or 3rd parties for acting beyond the powers conferred to him/her.
A Council Member is also expected to act honestly and in good faith in the best interests of the Foundation, exercising independent judgment and reasonable care, skill and diligence.
Engaging professionals to act as Council Member/s is a good option to guarantee regulatory compliance and a high-level quality of management of the day-to-day affairs of the Foundation, in view of the professional’s expertise and knowledge on succession planning strategies and asset management and protection.