The expanding possibilities of family wealth planning in Hungary – Part 2 – The Private Foundation
The private foundation is a widely known and common form of family wealth planning and wealth management in Western Europe. The legal form of private foundation has been introduced into the domestic legal system by the new Civil Code – Act V of 2013 on the Civil Code – concurrently with the fiduciary asset management which is another significant strategy of wealth planning. Both the private foundation and the fiduciary asset management give the owners of private wealth the opportunity to ensure the family property through generations.
The primary function of the private foundation is to conserve and protect the property acquired and to guarantee it for the next generations, disapplying the inflexible rules of succession therefore it is suitable for preventing the successors in using the family fortune irresponsibly. The founder of the private foundation can set out all the exact conditions concerning the succession of the family wealth even for more generations ahead. When establishing a private foundation, founders shall consider and have regard to the property of their family members or to the long-term operation of their business or shall simply act to ensure their own maintenance and the proper management of the wealth after their retirement. To attain these objectives a detailed deed of foundation is suitable for determining how the wealth is to be distributed in the event of the death of the founder in a more complex and flexible way than a will. The private foundation is also suitable for managing effectively the transfer of more complex investment portfolios in a market economy. Furthermore, the wealth can be withdrawn from the circulation of generations, thus the inheritance taxes and fees are also could be saved.
Foundations have been serving a long-term public interest according to the former Civil Code, thus there were no possibilities to form a foundation for purposes related to a private person. The new Civil Code only stipulates that the aim of the foundation must be continuous and lawful. The aim of the foundation can be very diverse, it cannot be wholly excluded that the founder form a foundation even for purposes related to him/herself. The condition for that would be that the foundation is established for the purpose of caring for the founder’s scientific, literary, and artistic works. The new Civil Code has established a limit regarding the family member of the founder: the family members of the founder can be named as beneficiary if the foundation is formed for the purpose of caring for the family member’s scientific, literary and artistic works, or the caring, nursing or maintenance of the family member, covering the family member’s medical expenses, and supporting his/her education by way of scholarship or otherwise.
The deed of foundation shall specify the rules for the management and appropriation of the foundation’s assets. Providing initial funds is an important condition for the registration of the foundation, without complying with this condition, the competent court of registry will refuse to register the application for registration. The founder shall place at the foundation’s disposal the initial funds to cover at least the expenses for taking up operations at the latest by the time of submission of the application for registration. The founder shall place at the foundation’s disposal the whole of the committed assets within one year after the time of registration of the foundation. The foundation’s assets must be fully protected, the founder (and its successor) may not appropriate the foundation’s assets for other purposes and may not demand to recover such assets ensuring the cohesion and primary protection of the family wealth managed by the private foundation. It should also be noted that the asset protection nature of the private foundation shall only occur if the capital injection was done lawfully. If the founder transfers the funds to the foundation expressly with the intention of detracting coverage, the creditors may request for the declaration of invalidity of the transfer.
The founding family can determine the terms of exercising the ownership in the deed of foundation according to their own values, thus the representation of the owner can be independent from the current lack of competence in the family. This allows to the founder to appoint professional experts under strict conditions to represent the foundation beside a family member, which ensures that the foundation will always be conducted by the most competent person even with a long-term mandate.
The classic family private foundation is naturally created for a longer term therefore it is important to ensure the founder’s succession at the time of registration of the foundation – i.e. the founder deceases. In the event of the founder’s death, the founder’s rights shall be exercised by a person or foundation organ designated in the deed of foundation, or failing this, by the asset manager or by the board of asset managers according to the new Civil Code. If the right to exercise founder’s rights has not been delegated upon any person or organ, founder’s rights shall be exercised by the court of registry.
The family businesses are significant factors in the Hungarian economy, they provide 50-60 % of the domestic production, while nearly half of the employees belong to this circle. Therefore, it is essential to ensure that the generational turnovers will not cause difficulties to the Hungarian-owned companies regarding their profitability and employment potential. The private foundation can be one of the most important legal form for the seamless management of the generational turnovers in the upcoming years.
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