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In 2017, New Hampshire became the first U.S. state to allow civil law foundations (“CLFs”) when it enacted the New Hampshire Foundation Act. See RSA 564-F:1-101, et seq. (the “Act”).1 While the title of the act may not suggest it, this was truly groundbreaking. Unlike a traditional charitable foundation, CLFs are non-charitable entities and can provide benefits similar to those of trusts for holding and transferring familial wealth. They have long been available in civil law jurisdictions (e.g., Liechtenstein, the Netherlands) that may not recognize the validity of trusts, but are novel in common law jurisdictions such as the United States. New Hampshire’s adoption of CLFs is a bold step forward that offers flexibility and opportunity for U.S. and non-U.S. citizens alike.
Like a trust, a CLF can be used to hold and manage family wealth. The structure of a CLF, however, differs in that it reflects corporate law. For instance, in a basic trust, a settlor (or grantor) transfers the ownership of certain assets to a trustee to be administered and used for the benefit of identified beneficiaries pursuant to the terms of a trust document. This arrangement is normally a private transaction with no requirement that a trust settlor (or anyone else) file formation documents with a government office. Further, ownership of trust assets vest in the trustee and trusts normally have a limited duration (although New Hampshire allows for the creation of a dynasty trust which can last in perpetuity).
Conversely, in New Hampshire, a CLF is formed when an organizer files a certificate of formation with the New Hampshire Secretary of State. This filing is made on behalf of a founder, who contributes property to the CLF (like a trust settlor). Along with the creation of a CLF comes an obligation to file annual reports. Rather than a trustee, a CLF will have a board of directors to govern its affairs. It must also adopt bylaws setting forth its purpose. The bylaws can further include any other provision that the founder or directors deem necessary such as provisions governing contributions, a founder’s continuing rights or interest, and defining beneficial interests, among other things. Like a corporation, a CLF isa separate legal entity, distinguishable from its founders, CLF officials and beneficiaries. Ownership of assets is vested in the CLF itself and not in its directors, and there is no limit on its duration.
Like the New Hampshire Trust Code (RSA 564-B:1-101, et seq.), the New Hampshire Foundation Act allows the creation of customized and flexible documents to match specific needs and circumstances. It also draws on trust law and trust principles by providing that directors owe duties of loyalty, impartiality, and prudent management, among other.2 The primary consideration when interpreting a CLF’s governing documents is the founder’s intent. This principle parallels the interpretation of trust documents pursuant to a settlor’s intent. Further, the Foundation Act allows for protectors to serve in separate fiduciary oversight roles, much like the Trust Code allows for trust protectors and trust advisors. Also aligning New Hampshire CLFs and trusts, both acts provide for jurisdiction in the Probate Division of the New Hampshire Circuit Court for the resolution of disputes.
In many civil law countries throughout the world, common law trusts are not recognized. The New Hampshire Foundation Act allows a non-U.S. citizen from a civil law country to establish an entity that can accomplish the purposes of a trust while still being recognized within the founder’s home country. It also can allow anon-U.S. citizen to “on-shore” assets. Another aspect of the New Hampshire Foundation Act that may benefit non-U.S. citizens is that is allows for the registration of existing foreign CLF in New Hampshire.
A CLF may also be a good fit for a U.S. citizen desiring the unique combination of trust and corporate aspects. For instance, it may be used to hold a variety of assets, used for succession planning in a family business, or even as the governing structure of a private trust company. However, depending on the primary purpose of the CLF, tax treatment may vary.
To determine whether a New Hampshire CLF would be beneficial requires a specific analysis of the facts and circumstances by qualified legal and tax professionals. However, under the right conditions, it could be an effective and powerful tool, providing flexibility and opportunity.
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1 Wyoming followed New Hampshire’s lead in 2019and enacted its own Wyoming Statutory Foundations Act. See Wyoming Statutes, Sections 17-30-101, et seq.
2 Interestingly, although both statutes provide for such duties, the New Hampshire Foundation Act would appear to allow a CLF to alter such duties within its governing documents. See, for example, RSA 564-F:11-1102, Duty of Loyalty (qualifying duty by stating “[u]nless the governing documents provide otherwise”).
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