Family foundation: a legal alternative to protect the family legacy

Many business families ask themselves at some point in their lives whether it is useful and/or necessary to set up a family foundation to ensure the continuity of their legacy, strengthen family values, and contribute to social welfare, as an effective communication tool to present the essence of the family, explain its values or distinguishing features, and justify the strategic direction and mission they have set for themselves.

Family businesses face unique challenges related to succession, intergenerational management, and the preservation of their values.

The vehicle for addressing these challenges is the creation of a family foundation. This non-profit entity allows (i) the channeling of the family's philanthropic efforts, (ii) the guarantee of the continuity of the business legacy, and (iii) the strengthening of family ties.

Reasons for establishing a family foundation

Preserving the business legacy

One of the main reasons for setting up a foundation is to ensure that the family business endures over time, seeking social recognition through actions and values that transcend time. 

The foundation can act as:

• a) An independent entity that is provided with resources to carry out its social purpose.
• b) A holding entity that owns the company's shares, ensuring that management and direction remain aligned with family values and objectives, even in future generations.

This is especially relevant in companies where there are no direct heirs or where there is a desire to avoid internal disputes over the ownership and management of the company.

Strengthening family values

Family foundations enable companies to pass on their values and principles to future generations. These principles are conveyed through their objectives, where they can instil in family members the importance of social commitment, business ethics and responsibility, thereby helping to create a solid and consistent corporate culture that transcends time. 

Likewise, the founder's will has a transcendental and irreplaceable influence in guiding and developing the foundation's activities. These entities are created based on the vision of a specific person or persons, and those responsible for their management (the Board of Trustees), once they have passed away, are obliged to respect and take on that mission as their own.

Contribution to social welfare

Many family businesses feel a responsibility to give back to society some of what they have received. The foundation offers a structured vehicle for carrying out philanthropic activities that also enhance the reputation and image of the family business.

Tax optimisation and estate planning

From a tax perspective, family foundations can offer significant advantages. In Spain, for example, donations to foundations can benefit from tax deductions for both the company and family members.

In addition, setting up a foundation allows for orderly succession planning for the company, avoiding family conflicts and ensuring that management follows the principles established by the founders.

Protection against external takeover attempts

As a non-profit organisation, the foundation offers a structure that makes it difficult for external investors or competitors to take control. Its governing body is the Board of Trustees, which is completely independent from the Family Business Board of Directors and reports to the Ministry's Protectorate.

Legal and tax requirements in Spain

In Spain, the creation of a foundation is regulated by Law 50/2002, of 26 December, on Foundations, and its implementing regulations, or by the applicable regional law on foundations, depending on the territorial area in which they mainly carry out their activities and, therefore, the register of foundations and the protectorate to which they are organically dependent, whether state or regional. 

In order to set up a foundation, the assets allocated to it must be permanently dedicated to the pursuit of objectives of general interest, with the family business losing effective control of the assets contributed, which will be subject to the decisions of the Board of Trustees.

From a tax point of view - the reference legislation is Law 49/2002, of 23 December, on the Tax Regime for Non-Profit Entities and Tax Incentives for Patronage - foundations can benefit from exemptions from corporation tax and wealth tax, provided they meet the requirements established by law. In addition, donations made to foundations may be deductible from personal income tax (IRPF) or corporation tax, depending on the nature of the donor.

Best practices in managing a family foundation

Developing a family protocol

The family protocol is a document that establishes the rules and guidelines for the management and succession of the family business, as we have discussed in previous articles.

In the context of a family foundation, the protocol may include aspects such as the composition of the board of trustees, the criteria for selecting new members, investment and resource distribution policies, and expectations regarding the commitment of family members to the foundation.

Establishment of transparent governing bodies

The foundation has a clear and transparent governing body, the Board of Trustees, which is responsible for decision-making and is accountable to the Protectorate. 

The inclusion of independent members in these bodies can provide valuable external perspective and ensure that decisions are made in the best interests of the foundation, in strict compliance with its social purpose. It is the function of the Board of Trustees to maintain the performance and usefulness of the foundation's assets.

Implementation of accountability policies

Transparency in the management of the foundation is essential to maintain the trust of the family, donors, and society.

This involves conducting external audits and regularly communicating the foundation's results and activities, especially if the foundation is linked to the surname of the business family.

Dissolution of the foundation

It is important to note that if, for any reason, a family foundation is dissolved, its assets will not revert to the family business, but will instead be allocated to other foundations with similar social purposes.

Conclusion

The establishment of a foundation by a family business is a strategic decision that can bring numerous benefits, both for the company and for the family (and society in general). 

A family foundation ensures the continuity of the business legacy, strengthens family values, contributes to social welfare and optimises succession planning.

For this reason, it is essential that this process is carried out with careful planning, appropriate advice and the commitment of all family members to ensure its long-term success. It is therefore necessary to have good advice that can resolve any doubts throughout the process. You can contact our expert family business lawyers here.

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Rafael Vallet – Family Business Group

Partner in the family area