Press Release: New Hampshire Introduces Foundation Act
July 31, 2012
New Hampshire has introduced a bill that would allow the formation, registration, and domestication of foundations. The bill (SB 225), which has already received a favorable vote in the state senate, would establish the New Hampshire Foundation Act. With the enactment of the Foundation Act, New Hampshire would become the first U.S. jurisdiction to permit the establishment of civil-law foundations. If the bill passes, the Foundation Act will be effective October 1, 2017. By recognizing foundations, New Hampshire would enable families from countries in which foundations are preferable to trusts as wealth management vehicles to avail themselves of a U.S.-based structure.
Nature of a Foundation
Under the Foundation Act, a foundation is a legal entity that holds and manages its assets for the benefit of its beneficiaries or in furtherance of its purposes. The Foundation Act marries elements of the New Hampshire Trust Code, the New Hampshire Business Corporations Act, and the New Hampshire Revised Limited Liability Company Act. The Foundation draws on the trust laws for purposes of defining the rights and duties of the founders, beneficiaries, directors, and protectors, instituting the processes and parameters for modifying or reforming a foundation's governing instruments, and establishing the probate court's jurisdiction over foundations and their internal affairs. The Foundation Act draws on the company laws for the procedural rules governing the formation, registration, domestication, and dissolution of a foundation.
In a foundation, the cast of characters includes an organizer, founder, and director, and it may include a beneficiary and protector.
An organizer is a person who signs and files the foundation's certificate of formation. Under the Foundation Act, a founder or any other person may act as an organizer. An organizer may be an individual or an entity.
An organizer forms a foundation by filing a certificate of formation with the New Hampshire secretary of state. The certificate of formation must include the foundation's name, the name of the foundation's initial registered agent, and the address of the foundation's initial registered office. The certificate of formation may include a statement of the foundation's purposes, as well as any other matter that the organizer deems necessary or advisable so long as it is consistent with the Foundation Act and any other applicable law. The Foundation Act contemplates that the bylaws will generally contain all of the substantive provisions governing the powers, duties, rights, and interests of the founder, beneficiaries, directors, and protectors. The bylaws must include the foundation's purposes. The bylaws may include the dispositive provisions governing the distribution of the foundation property to the beneficiaries or in furtherance of the foundation's purposes. The bylaws laws may contain a no-contest provision (i.e., a forfeiture provision) or a provision requiring the nonjudicial resolution of disputes among the founders, directors, protectors, and beneficiaries. Under the bylaws, the founder may reserve any rights, powers, and interest in a foundation. For example, the founder may reserve the power to appoint and remove a director or protector, the power to direct distributions, or the power to dissolve the foundation. Unless the certificate of formation or the bylaws provide otherwise, either the founder or the directors may amend or revoke the bylaws.
The directors must manage the foundation property for the benefit of the beneficiaries or in furtherance of the foundation's purposes. From each founder, a foundation will receive a contribution of money or other property. The Foundation does not impose any minimum capital requirement. A founder does not acquire any right, power, or interest in a foundation solely by reason of contributing property to the foundation.
The probate court has exclusive jurisdiction over the modification, reformation, or termination of a foundation and any claim by a beneficiary against a director or protector for a breach of a duty. The certificate of formation or the bylaws, however, generally may require any dispute concerning the foundation to be resolved in accordance with a nonjudicial dispute resolution procedures. The dispute resolution procedures must be reasonable. Also, only the probate court can decide whether a foundation's formation was valid, whether a contribution by a founder to the foundation was valid, or whether any particular purpose is a material purpose of the foundation. 3 Under the Foundation Act, the beneficiaries do not have any power to participate or otherwise share in the management of the foundation's property. Since the rights, powers, and duties of a foundation's directors and beneficiaries mirror the rights, powers, and duties of a trust's trustees and beneficiaries, a foundation formed under the Foundation Act generally should be classified as a trust for U.S. tax purposes.
For New Hampshire tax purposes, a foundation will be taxable in the same manner as a trust and thus generally will be exempt from tax. The bill amends the state's tax laws so that a foundation will be treated in the same manner as a trust. A foundation, however, will not be exempt from tax if it has transferrable interests that are functionally equivalent to company shares or if it directly engages in business activities. By, Todd D. Mayo TEP. Mr. Mayo is the principal author of the New Hampshire Foundation Act.