Private Foundation as Escrow Agent
One of the commercial areas, where Private Foundations, has successfully been deployed, is the use as an Escrow Agent:
Private Foundations, can successfully be used when buyer and seller does not know each other and needs a trustworthy 3rd party, to hold part of the purchase price, until all conditions of the purchase & sale agreement are met. Here the Private Foundation is acting as an Escrow Agent
Most of the Private Foundations we see are used to, lower inheritance tax, protect assets against future creditors, arrange estate planning purposes and eliminate Probate. But these are not the only legal practical uses, in which a Private Foundation can be deployed. Private Foundations, given their high degree of structuring flexibility, and attractive characteristics can also be effectively used in a wide variety of commercial arrangements.
One of the commercial areas, where Private Foundations, has successfully been deployed, is the use as an Escrow Agent.
An escrow is, an arrangement where an independent trusted third-party receives and disburses money and/or documents for two or more transacting parties, with the timing of such disbursement by the third-party to be dependent on the performance by the parties agreed-upon contractual provisions.
To illustrate how in the past Private Foundations, was successfully used as Escrow Agent, we use a typical scenario, in which a USA Corporation purchased a family owned Company in Latin America.
The USA Corporation (USCo) was negotiating the purchase of a Company in Latin America (LACo). The price was agreed upon, however the USCo was concerned that, having parted with their money, previously undisclosed liabilities might appear later on. The USCo suggested to hold back 10% of the purchase price, and to release this 10%, upon the receipt of satisfactory audit reports.
The owners of LACo agreed in principle but only if the 10% of the purchase price was held by their lawyers in Latin America. The Directors of USCo, not surprisingly, took the view that the funds should remain with their lawyers in New York. And the inability to reach an agreement was starting to put the whole deal in jeopardy.
Luckily one of the lawyers, working on this deal, had previous experience with the use of Private Foundations in commercial arrangements and after some discussions back-and-forth it was agreed that a Private Foundation will be used as an Escrow Agent
The articles of incorporation of the Private Foundation were drafted as such that, although the probable beneficiaries were to be the former owners of LACo, the actual amount payable to them under the arrangement (scheme) would be reduced by the amount of any previously undisclosed liabilities that surfaced (to be certified by the auditors), and such amounts would be paid instead to the second class of beneficiaries, in this case the USCo.
In order for both parties to feel comfortable with the arrangement, they elected members of the Supervisory Board of the Private Foundation, and all distributions from the assets of the Private Foundation, needed to be pre-authorized by the Supervisory Board.
The 10% of the purchase price of LACo was invested and part of the income generated on the investment was used to cover the operational expenses of the Private Foundation.
The Supervisory Board, met to inspect and discuss the audit reports and approve the payments to the owners of LACo.
Conceptually, this could be described as follows:
The Private Foundation may be described as the endowment of funds for a specific purpose (Escrow) the conditions of which are determined in the document of incorporation, whereby the Private Foundation is created and internally organized known as the Articles of Incorporation.
An appointed body known as the Supervisory Board (to be appointed by Buyer And Seller) is entrusted with the supervision of the day to day management to ensure the Foundation will pursuit its objects and they must give prior approval for all distributions from the assets of the Private Foundation. The person who creates the endowment is the Buyer and the persons who will benefit from the endowment are the Seller.
In case the conditions laid down in the articles of incorporation are not met, the endowment or part of it would go to the Buyer.
This is just one example of a Private Foundation being used, successfully, as a great solution to a commercial impasse.
For more information about this or other structuring possibilities:
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