Foundations: Good, Bad Or Indifferent?

By - Email Editor

Date : 24-April-2007

Dear Subscriber:

When most of us think of private foundations, Bill and Melina Gates come to mind along with billionaire Warren Buffet. Philanthropic people have always used foundations as a means of spreading their charitable wealth well into the future. Some of the biggest foundations today are names that hearken back from the past. In terms of sheer assets, the J. Paul Getty Foundation is on the top ten list along with the Ford, Lilly, Kellogg and Mellon foundations. For the typical U.S. person considering a charitable foundation, there are a host of reporting rules, various guidelines to consider, and of course, funding.

If the host of reporting rules doesnít interest you and youíre not feeling particularly charitable, there is another breed of foundation commonly referred to as a Private Interest Foundation. Historical foundations have been used to hold stock in privately and publicly held companies. In Liechtenstein, these foundations, or entities of sorts, are called a stiftung. Whatever you call them, private foundations have been around since the Roman days. They generally offer enormous flexibility and give their beneficiaries privacy and Asset Protection. In many countries, foundations have been a prudent estate planning vehicle for the inter-generational continuity of one's business affairs.

Panama is probably the most notable jurisdiction with its recent 1995 foundation act. Panama has tried to combine the best of other jurisdictions around the globe. A Panamanian foundation is considered by many to be a good inexpensive choice for a number of reasons. In Panama, there is no legal requirement to ever disclose the name of the real founders, the beneficiaries, or the foundation's protector. There are no requirements to hold annual meetings and no filing of annual tax returns in Panama. The foundation also has no capitalization requirements, and there is no time frame in which contributions need to be made. Panama foundations are separate juridical entities, and therefore, have legal ownership of the assets they hold. Management and distribution of the assets are vested in the foundation council, which is essentially a board of directors rather than a trustee of a trust. Other than yearly fees, as of this date, Panama imposes no tax of any kind on their foundations.

Many web sites promote the untold benefits of Panamanian foundations without disclosing their darker side. These types of foundations, from the IRSís perspective, are specifically treated for tax purposes as an individual, partnership, corporation, trust or estate, no matter what the country of origin calls them. The IRS has specific code provisions for tax abuse and language that allows for re-characterization of an entity they do not like. Panamanian foundations could be classified as a trust for tax purposes in certain limited situations, but they are more likely to be taxed as a corporation.

While Panamanian Foundations have their place in international planning, and indeed for tax planning in a host of countries, the U.S. is not one of them. The foundation strategy may help with privacy and Asset Protection, however, in the case of a private interest foundation holding U.S. real property, itís hard to imagine a U.S. judge not completely ignoring Panamanian law in favor of a founder's or beneficiaries' own state.

So is a foundation right for you? If you are a U.S. person trying to save tax, the answer is, definitively ďno.Ē Remember: A foundation in Panama may not be a taxable event; however it certainly could be a taxable event in your place of residence or domicile.

Until next time,