According to some estimates, there are at least 10 million nonprofit organisations in the world today, in the form of political organisations, associations, memorial parks, temples, schools, hospitals, business associations, religious institutions, foundations, social clubs, consumer cooperatives, and much more. And more often than not, these organisations exist and function as representations of the creation, the vision and the sheer passion of their founders.
You might well be one such founder. Perhaps it’s philanthropy / charitable causes to which your organisation is committed. Or maybe it’s an animal welfare group. Or a religious, faith-based organisation. Or you might be an instrumental figure in an industry-wide association, created to strengthen unity across your chosen profession, as well as to promote the occupational well-being of fellow members.
Whatever your raison d’être happens to be, ensuring that your labour of love – as well as the cherished assets associated with your organisation – can endure and thrive, both during your lifetime and well beyond, may well be something that is on your mind.
Thankfully, effective legal structures exist that enable such an undertaking, with offshore trusts and foundations proving ideal for not only delivering robust legal protection for your assets, but also crucially for securing an all-important, lasting legacy for your organisation.
Nonprofit Organisations and Tax Exemption
As the name implies, a nonprofit organisation operates primarily not to generate profits. Instead, these entities serve a wide variety of purposes including altruistic, religious, charitable, socially beneficial, educational, scientific, and much more, with the goal invariably being to benefit the general public, or in some instances, the organisation’s members, and/or beneficiaries.
As such, any earnings generated from the nonprofit are usually invested back into the organisation to fuel and advance its goals. And while employees of the organisation do receive income for their work, they do not receive additional financial benefits from any growth in the nonprofit’s net earnings.
Sounds familiar? Perhaps your own passion project falls under this category. If so, then you may know that the majority of nonprofits are tax exempt – and you may also be seeking this status for your own organisation.
To be eligible, your organisation must not serve any private interests. Rather, it must operate for specific charitable purposes: religious, charitable, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.
Section 501(c)(3) of the US Internal Revenue Code allows for a tax exempt status for nonprofit organisations. Every Section 501(c)(3) nonprofit entity is classified as either:
- Public charities, including churches, schools, hospitals, medical research organisations, and organisations that receive at least some of their financing from public sources. Funding for public charities typically come from individual or corporate donors, local and federal government grants, membership fees, and more recently crowdfunding. As such, public charities tend to have considerable interaction with the general public. All donations made to public charities are also completely tax-deductible, although they do have to adhere to strict rules for federal tax exemption.
- Private Foundations – partly similar to charitable nonprofits in that they provide funding to charitable organisations, the main activity of private foundations is to issue grants to other charitable organisations, rather than directly overseeing any charitable programmes of their own. Indeed, private foundations are either classified as:
- Non-Operating, which exists only distribute its assets to other charitable organisations;
- Operating, whereby the foundation directly participates in advancing charitable missions – a more complex endeavour from a regulatory perspective.
Money that is provided to private foundations is also sourced from different entities: initially, the owner contributes the foundation’s starting endowment, and then money is provided by family, corporate contributors and/or investment income.
From a legal standpoint, private foundations are more akin to companies, although they have no shareholders and are instead governed by a council in accordance with the foundation’s constitutional documents.
Indeed, a Foundation Charter is created to stipulate the actual mission of the private foundation, as well as how the foundation intends to use its assets. Having clear instructions on the control of your structure and the operating rules is hugely important, and perhaps even more so for delegating authority for successive generations in the future.
Charitable Trusts Are Increasingly Popular Structures
While both public charities and private foundations are undoubtedly popular, many are also looking to trusts as an appealing structure for advancing nonprofit goals and funding charitable activities.
Trusts are set up for various reasons, but they typically involve you (as the settlor of the trust) setting up a fund to transfer assets under the guardianship of a trustee before eventually transferring the assets onto beneficiaries listed in the trust deed – that is, the document which lists the specific terms and conditions under which the trust operates.
While private trusts are set up for the benefit of individuals (including the settlors themselves) and/or families and heirs, public trusts are normally created for charitable purposes. These trusts can designate charities as beneficiaries, while the trustee is tasked with performing any periodic functions in service of its charitable purpose.
This enables you to apportion your assets onwards to intended worthy causes, while allowing your chosen beneficiary to not only receive those assets at a chosen time, but to also receive income (eg dividends, rental income) from those assets in the interim.
Trusts can be hugely advantageous in this regard, especially if you have not decided on a suitable successor for your assets. By having a trustee to manage your assets in the meantime, you can take your time to complete your search
As such, charitable trusts operate as legal vehicles for enabling the efficient management and distribution of assets from a person to a charity, say, at the end of the trust’s term. Usually, those who pursue this route will choose from two key charitable trust types:
- Charitable Remainder Trust – an irrevocable trust that periodically distributes income to non-charitable beneficiaries during the term of the trust, and also allocates the remainder of donated assets to charities at a predetermined time in the future – either at the time of your death, or at some other specified time as chosen by the donor.
- Charitable Lead Trusts – Almost the exact reverse of a charitable remainder trust, whereby the periodic payments are made instead to the charities, while the remainder is distributed to non-charitable beneficiaries at the end of the trust’s term.
Charitable trusts also differ importantly from foundations as there is no requirement for the former to file any documents with the government, whereas registration for the latter is compulsory. This added layer of privacy is often why some opt for a trust instead of a foundation. The division under a trust between the owner of the assets (the trust settlor) and the manager of the assets (the trustee) also represents a marked structural difference – foundations do not contain such divisions.
To be exempt from taxation under Section 501(c)(3), moreover, the trust “must be organised and operated exclusively for certain specified exempt purposes, such as religious, charitable, or educational purposes,” according to the Internal Revenue Service. Those not exempt from tax, however, remain open to some of the same requirements and restrictions that apply to private foundations.
Go Offshore for Even More Tantalising Benefits
By placing your assets in an offshore vehicle such as a charitable foundation or trust, you can unleash even more benefits, particularly regarding tax, asset protection, and privacy. Take Labuan as just one example. Charitable trusts and foundations can be created in the popular Malaysian offshore jurisdiction, located just off the coast of Borneo island, for the following charitable purposes:
- The relief or eradication of poverty;
- The advancement of education;
- The promotion of art, science, and religion;
- The protection of the environment;
- The advancement of human rights and fundamental freedom; or
- Any other purposes which are beneficial to the community.
By setting up asset preservation vehicles such as a charitable trust or charitable foundation in Labuan, you can enjoy several key advantages, including:
1. Legal Protection – Trusts and foundations provide secure legal frameworks for your organisation, whilst also ensuring that your preferences and wishes remain legally binding, even after you pass on and the ownership of your assets is transferred to your chosen beneficiaries/successors, and perhaps even in perpetuity should you so desire.
Offshore vehicles are also highly preferred for the robust and transparent legal protection they offer – Labuan’s structures, for instance, are predicated on English Common Law, thanks to the Labuan Trusts Act of 1996 and Labuan Foundations Act 2010. As such, your chosen asset preservation vehicle has strong legal backing to effectively protect your assets from predatory lawsuits and creditors, and a range of other legal threats.
2. Tax Savings – Trusts and foundations in Labuan offer distinct tax advantages via a straightforward and transparent tax system. For example, you can avoid having to pay taxes on investment growth, donations, withholding, capital gains or stamp duty for conducting offshore business activity.
3. Strong Privacy Regulations are in place to protect foundation founders, and trust settlors, trustees and beneficiaries. With Labuan trusts not having to be registered, moreover, your privacy can be further guarded.
4. Suitable for Islamic Finance – should your organisation require the implementation of strong Shariah finance principles, Labuan is arguably the world’s leading offshore jurisdiction for Islamic trusts and foundations. Not only through strong legal frameworks, but Labuan has a strong financial ecosystem to successfully navigate the often-complex requirements for managing Islamic Charitable Trusts and Foundations.
Here at Famos, we have a wealth of expertise to ensure that the operations of Labuan Islamic Charitable structures remain in compliance at all times with Shariah principles.
Planning on the ideal offshore location to enjoy these advantages can be a complex task. We can help you to make that decision easier to reach. So, if you want to ensure that your own organisation enjoys the strongest legal protection, can optimise tax savings, and can be managed by an expert team who truly care about preserving your legacy, feel free to reach out to us.
