Family foundations not only offer effective protection of assets from fragmentation but also provide flexibility in management, tax optimization, and smooth transfer of assets to future generations. We present the key benefits that make more and more people decide to establish such institutions.
Since over a year, Polish entrepreneurs have a tool for asset management and family succession planning – the family foundation. Precisely, on May 22, 2023, the Act on the Family Foundation came into force, introducing facilitations for entrepreneurs, mainly in the field of succession and asset protection. Until then, Polish legislation did not provide adequate solutions to prevent the fragmentation of assets in family-owned companies during inheritance.
Interest in this form of institution is growing. What’s more, the number of applications to register family foundations exceeds forecasts. In the first full year of the Act (May 2023 vs. May 2024), over a thousand foundations were registered. Why do people decide to establish family foundations? How much can you gain from this? We answer these questions in the article.
Family assets are well protected
Primarily, a family foundation helps protect assets from fragmentation or accidental loss due to unforeseen events, such as divorces, bankruptcies of family members, or creditor claims. The assets within a family foundation are separate from the personal assets of family members, thus protecting them from adverse influences – both external (like creditors) and internal (caused, among others, by family conflicts or poor management).
In practice, that means the assets of the foundation do not become part of the family members’ private assets, nor are they subject to inheritance. Therefore, there is no risk of asset division or fragmentation upon the founder’s death. This is safe because if a family member becomes indebted, the foundation’s assets will not be seized by creditors. Family members cannot sell, claim, or use this wealth as security for private debts.
Another topic: the foundation is a legal entity managing the family’s assets according to previously established rules. The founder can determine who exactly is the beneficiary of the foundation. This can avoid potential legal disputes concerning the division of assets. Family members do not negotiate the division of property because the foundation – by its statute – manages assets and pays benefits according to previous arrangements. Furthermore, the founder can establish additional supervisory mechanisms, such as a supervisory board, ensuring the foundation operates according to its objectives.
A solution for succession planning
A family foundation allows for the smooth transfer of management and control over assets to the next generation, thus avoiding problems that occur with traditional inheritance. It is an excellent tool for estate succession planning. How so? The assets given to the foundation remain under joint management. Thus, we avoid the division of wealth among heirs, which could weaken the value of assets, especially those like family businesses or property. A family foundation also prevents uncontrolled asset selling that could result from conflicts or differences in interests amongst family members.
“Family foundations are for those who think about succession and would like to consolidate the acquired wealth and want the accumulated assets to remain in the form they created. In the case of ordinary inheritance, the founders no longer have this certainty,” said Dariusz Ligocki, a financial expert and consultant for SMEs, particularly advising on establishing and operating family foundations. He also emphasized that the format of the family foundation imposes upon the new managers to act according to the statute.
Lower taxes within the family foundation
Polish legislation provides special tax relief for family foundations. This stems from the fact that payouts for family members can be taxed more favorably than traditional income tax. This is due to the fact that transferring assets to a family foundation is not treated as a donation or inheritance, so it is not subject to inheritance and gift tax. Unlike the traditional system of transferring assets to heirs, the wealth given to the foundation becomes its property. This allows for the transfer of wealth to future generations without incurring estate tax costs.
Another issue: the family foundation allows you to avoid double taxation. The family foundation can serve as the owner of the company, with its generated profit being reinvested within the foundation or paid to beneficiaries under preferential tax conditions. There is also an option to defer investment income tax when it is being reinvested.
Flexibility in asset management
Allocating wealth within family foundations is convenient as it provides significant flexibility. It allows for defining rules concerning payments, investment strategies, and succession planning. Establishing rules about payments to family members is essential as it adjusts to the needs and life situations of beneficiaries. The family foundation has been designed to disburse funds depending on certain conditions such as health status, education, or support in professional activities. With a family foundation, you can manage assets professionally by cooperating with investment advisors, allowing for more diversified investments and long-term planning.
In addition, founders of family foundations can retain control over the assets by participating in the foundation’s board or other supervisory bodies. The foundation’s statute can provide various control mechanisms, which allows for great flexibility in asset management, without the need to transfer full control over to the next generations. It’s also worth mentioning that family foundations offer a high level of confidentiality. For families wishing to avoid attention, it’s enormously important to manage their assets discreetly.
“The minimum capital contribution to the foundation is 100,000 PLN (~$26,000). There are truly no other thresholds or restrictions,” said Dariusz Ligocki. He also noted that a foundation becomes profitable when the founder plans to reinvest the wealth accumulated in it, particularly in real estate or shares of companies – which is to say, reinvestment. “It’s crucial for the foundation’s statute to be very thoughtful and written for the specific founder. It is key. You need to be assisted by professionals who will guide you through the entire process of opening a family foundation,” added Ligocki.
Source: https://managerplus.pl/popularnosc-fundacji-rodzinnych-rosnie-oto-4-kluczowe-powody-dla-ktorych-warto-je-zalozyc-69487
