The situation in which the founders of a family foundation divorce is one of the most serious events that may occur in the life cycle of a foundation established by spouses. The question whether the founders’ divorce affects the foundation, the status of beneficiaries and the taxation of distributions is significant both for the family and for those managing the foundation. PLA.partners helps private clients order the consequences of the founders’ divorce in relation to the family foundation.
Short answer, divorce affects the foundation only in a limited way
Yes, the divorce of spouses who jointly established a family foundation affects the foundation’s situation and the taxation of distributions to beneficiaries. This influence, however, is rather limited and selective. One must distinguish between the existence of the foundation as an autonomous legal entity, the status of beneficiaries and the taxation of distributions. These are three separate layers that react to divorce in different ways.
Maciej Pilarek, attorney and partner at PLA.partners, emphasises that the founders’ divorce does not annihilate the family foundation. The foundation remains an autonomous legal person, operating on the basis of the statute, independently of the personal relationship between the founders. This does not mean, however, that divorce is indifferent for the foundation.
Existence of the family foundation, what does not change?
The mere fact of the founders’ divorce does not affect the existence of the family foundation. The foundation remains an autonomous legal entity, its assets are not subject to division as a result of the founders’ divorce, and its statute retains binding force. This is an important element of protection, since the family foundation does not become a battleground in the divorce between former spouses.
In projects conducted by PLA.partners this parameter is one of the main arguments for the family foundation in situations where spouses wish to secure the durability of accumulated business assets independently of the dynamics of their personal relationship.
Status of beneficiaries, does it change?
In the case of the founders’ divorce, the question of the status of beneficiaries who are family members of both or one of the founders may arise. The mere circumstances of the divorce do not deprive beneficiaries of their status. The distribution policy remains set in the statute and in the distribution policy established by the foundation. Any changes in the group of beneficiaries require a decision in the statutory mode.
In the practice of the PLA.partners team, this area is designed in a way that minimises the risk of conflict in the event of the founders’ divorce. The family foundation’s statute should contain rules resolving typical situations, including the rules of possible modification of the list of beneficiaries and the distribution policy.
Taxation of distributions
The impact of the founders’ divorce is most visible in the area of taxation of distributions paid to beneficiaries. The tax rate and the availability of the exemption are linked to the family relationship between the beneficiary and the founder. Divorce affects this relationship with respect to the former spouse and potentially other derivative relationships. In consequence, distributions that previously benefited from the exemption may, after divorce, be classified differently with respect to the former spouse of one of the founders.
PLA.partners experts help the client in such a situation assess the tax consequences of planned distributions and, if needed, adjust the distribution policy so that it is consistent with the new family realities.
Legal and business consequences for the client
From the decision-making perspective within the family, the divorce of family foundation founders means:
- preservation of the family foundation’s autonomous existence and the unchanged statute,
- non-subjection of the foundation’s assets to division due to the founders’ divorce,
- preservation of the status of beneficiaries defined in the foundation’s statute,
- possible change of the tax classification of distributions with respect to the former spouse,
- the need to adjust the distribution policy to the new family realities,
- preservation of reporting and corporate servicing obligations of the foundation.
Possible actions, a plan for the business owner
In the practice of the PLA.partners team, managing the situation of the founders’ divorce involves:
- analysis of the current statute and distribution policy of the family foundation,
- assessment of the impact of divorce on the status of beneficiaries,
- tax assessment of distributions paid after divorce,
- possible update of the distribution policy or the foundation’s statute,
- preparation of corporate documentation supporting the changes,
- arranging the ongoing servicing of the foundation in the new family realities.
Contact PLA.partners Law Firm
Do you need legal support or an individual analysis of your matter? Visit PLA.partners and contact our team, we will help assess the situation and propose specific solutions.
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