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Hereditary foundation: why do we need it and how will it work in Russia. Comments for Pravo.ru by Alena Bachinskaya, head of projects at S&K Vertical

26 September 2017

In a year Russia will obtain a new legal institution, the hereditary foundation. Pravo.ru tells why we need this novelty and why is it different from its foreign counterpart, the trust. Moreover, our experts explain why in its current version this novelty seems “incomplete” and how should the legislator regulate the management of such a foundation.

Russian lawmakers took a course towards the English law institutions, says Mikhail Kiurdzhev, partner at A2. Attorneys. The current civil law reform shows that very well, added the expert: “We have already enacted options, escrow accounts and corporate agreement.” The next borrowing from abroad will enter into force in autumn of the next year. In the end of this July Vladimir Putin signed the law envisaging the opportunity to create special hereditary foundations in Russia since 1 September 2018. These structures will become a tool for hereditary transfer of property, by analogy with foreign funds.

This initiative was suggested by a group of the Duma deputies headed by Pavel Krasheninnikov. The author of the idea explained that the hereditary foundation will be founded by the people who think about how to save their businesses and whom to entrust with the management of their assets after death.

What is suggested in the law

Foundations and their application. The outcome of the reform of hereditary law as presented at Pravo.ru conference.

According to the new law, the foundation will be established by a notary following the death of founder based on his will. In this document, the testator must indicate a number of details: order to establish the foundation, approval of its charter and management rules, procedure, volume and terms of formation of the assets of the foundation, appointment of its management bodies or indication of the procedure of their election.

When the testator dies, the notary shall within three working days send an application on registration of the foundation to the empowered state authority. In this paper, the notary shall indicate the name of the individual or of a company to manage the foundation. In this vein, all the devised property shall be accumulated in the new legal institution right after death of the testator. All payments devised in the will should be deduced from these assets or from the income generated from these assets. Such payments may be effected not only by the individuals but also by companies – it all depends on the will of the testator.

If the notary does not fulfill his obligations, the hereditary foundation may be established on the basis of a court decision at the request of the asset manager or the beneficiary. In addition, they have the right to challenge the establishment of the foundation, if the notary violated the will of the testator. The charter of the hereditary fund and the conditions for its management can not be changed except for the case when the beneficiary is recognized as an unworthy heir (Article 1117 of the Civil Code).

The foundation's liqudation is carried out on the basis of Article 61 of the Civil Code, or due to the circumstances specified in the rules, or when it is impossible to form the bodies of the foundation. If the inherited assets include the property that requires management (enterprise, securities, etc.), the notary should arrange trust management of this property for up to five years.

How they work abroad

Now it is possible to establish hereditary foundations in many countries worldwide. Abroad, particularly in the United States, Great Britain and other countries, the common law institution that is used for such purposes is called a trust, says Bogdan Marchenkov, attorney at Egorov, Puginsky, Afanasiev & Partners. Initilally trusts appeared in England in the 11th century. In the Middle Ages, the transfer of property to beneficiaries through such an institution was actively used as an alternative to a will being the means against inheritance tax.

Thus, English lawyers have improved the form of property ownership: assets are only owned by the trust, but controlled by the former owner of the estate. Abroad such foundation are usually created by businessmen and very rich people during their lifetime. They do this not only to support their relatives after their death, but also to benefit society: funds of the foundation may be spent in the interests of a particular university, home city, or a country or even all of the humanity. The most famous example of such a charity foundation is the Nobel Foundation.

The most famous foreign hereditary foundations

The Nobel Foundation

Founded on June 29, 1900 by the will of the Swedish inventor Alfred Nobel

The scientist devised 94% of his fortune (31 million Swedish crowns) for the annual payment of five prizes: in physics, chemistry, physiology and medicine, literature and peace.

The base part of the foundation has been invested, the prizes are based only on profits. In 2016, the amount of the prize was $ 1.1 million.

The Ford Foundation

Founded on January 15, 1936 by the son of Henry Ford, Edsel Ford, who transferred the first $ 25,000 to the foundation.

After Edsel's and Henry's deaths in 1943 and 1947 respectively, the foundation received all of their funds as well as the assets of Ford Motor Company.

The board of trustees of 15 people was headed by Henry Ford Jr., grandson of the founder of the company, the new members are elected by the board itself.

By 1974, the foundation sold the car company and started investing. Now the Ford Foundation is one of the largest charitable organizations in the world with assets of $ 11.9 billion.

The Wellcome Trust

It was founded on July 25, 1936 after the death of Henry Wellcome, the founder of the British pharmaceutical holding company Wellcome.

All of its assets have been transferred to the Wellcome Trust.

Now the foundation operates as a non-profit organization with assets of £ 18 billion and sponsors medical research.

The Bosch Foundation

Founded on June 26, 1964 by the will of Robert Bosch, founder of the German consortium Bosch.

The Foundation owns 92% of the company's shares and is financed by its dividends.

Since its inception, the Foundation has spend more than € 1 billion for the grants in education, medicine and culture.

Why do we need Russian trusts: experts' opinions

The emergence of hereditary foundations in Russia is another initiative of "selective modernization" of Russian inheritance law, says Roman Rechkin, senior partner at Intellect-S. He notes that this branch of law is still 90% of the Soviet heritage. According to the expert, the Russian version of Anglo-American trusts is fundamentally inferior to foreign counterparts: "Abroad, the property of the trust is immune vis-a-vis any claims based on the debts of its founder. In Russia however the law has directly established that the hereditary foundation may be sued by the testator's creditors." Nevertheless, the new institution will be to some extent in demand by rich Russians, assures the lawyer. Kiurdzhev suggests that influential businessmen who fall under the sanctions lists could use Russian trusts.

According to Olga Sedova, lawyer of KSK Group, the new foundation can solve the problem of heirs, when it is impossible to manage the business within the interval between the death of the owner of the estate and the acceptance of the inheritance. When the latter moment comes, the heir sometimes has nothing to accept, the lawyer explains: "Unscrupulous partners of the deceased may have already grabbed everything for themselves, or due to stagnation the business may have already collapsed under the influence of free competition." Alena Bachinskaya, attorney at S&K Vertical, agrees with colleagues that the target audience of the initiative is businessmen and other people with significant assets: "In other cases, using such a foundation simply does not make much sense."

Marchenkov sees several objectives of the discussed institution: 1) Professional property management transferred to such a foundation allows it to be preserved and even multiplied. 2) The heirs of the deceased receive certain means of subsistence. 3) It will be possible to prevent separation of hereditary assets. However, these goals can be achieved already now by a will or a trust management agreement (Article 1173 of the Civil Code), the expert points out. Nevertheless, Pavel Khlyustov, lawyer and partner at Barshchevsky & Partners, is confident that in the next 5-10 years the discussed innovation will not be popular amongst Russian testers. He explains his skepticism by several factors: 1) The circle of wealthy individuals who could make use of hereditary foundations is not yet wide enough in our country. 2) The majority of assets of such citizens are exported abroad, and their Russian property is usually bundled with a network of off-shores or held through nominees. 3) The wealthy Russians are not inclined to rely on domestic legal instruments. Thus, we can borrow whatever advanced achievements of foreign legal thought, but so far as the psychology of Russian businessmen still remains unchanged, these innovations will continue to exist only on paper, Khlyustov sums up.

Is there something that the Russian hereditary foundations still lack?

Denis Arkhipov, partner at Egorov, Puginsky, Afanasiev & Partners, notes that the law offers a half-solution, i.e. only posthumous personal foundations: "And in foreign legal systems it is possible to establish a personal foundation even during the lifetime of the testator." According to the expert, it is important that the estate's owner could see himself how his foundation will work after his death. Arkhipov says that in-life inheritance foundations have been opposed by the Legal Department of the Presidential Administration. The Department asserted that such funds may be used in bad faith for evading duties towards the testator's creditors. However, this problem can be solved by providing additional rights to creditors, the lawyer points out: "instead of imposing a complete ban on in-life foundations."

Problematic aspects of Russian hereditary foundations:

1) Need for a special tax regime for hereditary foundations and benefits for the beneficiaries obtaining property from a hereditary foundation.

2) What kind of degree and knowledge should the foundation manager have? How to regulate its activity? Is a testator free to appoint any person that he finds worthy of it? There are still no requirements and standards for foundations managers.

3) There are no limits for liability of a foundation manager, as well criteria for determining whether he is acting in bad faith.

4) The law does not amend the Federal Law on not-for-profit organizations. There is still a question how to regulate this foundation given the requirements imposed on not-for-profit organizations.

Source: Alina Zelenskaya, attorney at Mitra National Law Company.

Bachinskaya adds that the law does not allow the spouses to establish their common hereditary foundation: “the law discusses the testator as one person”. Meanwhile it would be logical to give this opportunity to spouses too: “They could establish a foundation in favor of their common or pre-marriage children”. Moreover, the law as adopted presupposes a complicated procedure to establish the hereditary faoundation, says Marina Krasnobaeva, partner at Yukov & Partners: starting from drafting the foundation's charter and ending with its state registration through a notary public. According to the expert, this procedure may turn out to be too long due to bureaucracy. In addition, it may be difficult to use the testator's property for charity, the lawyer stated: "The foundation's beneficiaries may be either certain third parties or specific categories".

Marchenkov noted that the volume of the laws that are discussed is very much limited. The lawmakers should pay attnetion to the application by analogy of other legal norms as to hereditary foundations, he advises.

Test of federal law dated 29 July 2017 N 259-FZ "On amending Parts 1, 2 and 3 of the Civil Code of the Russian Federation " (Draft Law No. 801269-6) is available here.

By: Alexey Malakhovsky

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