It has taken a long time for agreements to be reached between businesses, the Ministry of Economic Development and Technology, the author of the government bill, and the advisory industry, but finally the time has come. On 22 May this year, the Polish Family Foundation Act entered into force.
Although family foundations are a completely new solution in Polish law, they have been known and used by Polish businesses for many years. However until now, founders of family businesses had to look abroad for tried and tested solutions when thinking about who would continue their life’s work.
Many business families in Poland planned and organised successions according to the best models from Western Europe, from countries such as Switzerland, Liechtenstein, the Netherlands, Germany and others. However, this required the transfer of assets to a foreign jurisdiction where a family foundation was established.
The introduction of family foundations into Polish law means that assets no longer need to be transferred abroad.
The need for early succession planning
The multi-award-winning, hugely popular HBO series of the same name is a testament to how much excitement succession can generate.
Telling the story of a family of US media tycoons, “Succession” demonstrates the unpredictability of life and confirms a truth that can be put in simple terms: “Life writes its own script”.
Polish business history is also littered with spectacular and well-publicised cases in which the lack of planned succession proved to be a major problem. Relatives and those who had to step into the role of successors from one day to the next, surprised by the sudden and unexpected departure of the head of the family, were deprived of instruments and tools that would have ensured proper family business succession planning and organisation.
Well, now that the last season of the series has come to an end, it’s time to delve a little deeper into the details of Polish family foundations on the basis of the Act that has been in force for several weeks.
What is a Family Foundation
The first question that needs to be answered is what a family foundation actually is, and also what a family foundation is not. It is not a so-called charitable foundation, nor is it one of the non-profit organisations established under the long-standing Foundation Act. Nor is it a commercial company, although in some ways it is closer to a company than to an ordinary foundation.
The purpose of a family foundation is to accumulate assets and to manage them in the interest and for the benefit of its beneficiaries. One of the main purposes of a family foundation is to ensure succession to future generations. However, it should not be forgotten that a family foundation also enables the protection of family assets during the founder’s lifetime.
The oft-cited example of the famous Formula One driver Michael Schumacher shows that a family fortune worth millions can require special protection and management. Not only in the event of the founder’s death, but also if they suffer a serious accident, or if illness prevents them from functioning normally, either permanently or for such a long period that a special organisation such as a family foundation is required to manage the family’s assets.
Succession planning also includes arranging appropriate expenses and support for the founder’s loved ones. This is especially true for children, whose age may require adequate preparation for their future role. For this reason, the Polish Family Foundation Act stipulates that a family foundation may, in particular, cover the costs of maintenance or education of its beneficiaries.
A family foundation is conceived as a kind of family holding company that holds shares or other participation titles in companies and other business ventures. To a certain extent, it may also carry out business activities directly.
No restrictions under succession law
Family foundations make it possible to organise succession in a way that is completely different from the rules of succession law.
The transfer of family assets to a family foundation means that these assets are not subject to normal succession, which in many cases would lead to their fragmentation among successors. In addition, successors are not always keen to retain the family business, with many thinking of selling their shares, releasing the family business into foreign hands. A foundation allows the business to remain in the hands of the family, whose members are designated as beneficiaries of the foundation, contribute to its management and collectively benefit from the assets it produces.
However, this does not mean that the rights of “natural successors” can be violated in this way. In fact, according to the law, the family foundation is jointly and severally liable with its founder for the latter’s pre-establishment obligations, including maintenance obligations. It is also liable for the fulfilment of the maintenance obligation incurred by the founder after its establishment.
If the enforcement from the founder’s assets of the maintenance obligation arising after the establishment of the family foundation proves to be ineffective, the creditor may pursue the enforcement from the assets of the foundation. Its liability in this respect is limited to the value of the assets contributed by the founder at the time of the contribution and at the prices at the time the creditor is satisfied.
Summary
The establishment of a family foundation is a momentous event that requires careful preparation and consideration of complex succession arrangements. In addition to drafting the founding documents, it is necessary to consider the composition of the foundation’s bodies, in particular the management board and the supervisory board, as well as the establishment of appropriate legal mechanisms to maintain full control over the assets and their future development.
It’s clear that a process involving the legal protection of assets built up over decades, the foundation of a modern organisation based on family values, capable of ensuring the continued growth of multiplied capital whilst caring for the well-being of present and future generations, requires the involvement of professional advisors.
The introduction of family foundations into Polish law is a change that Polish businesses have been awaiting for many years. These should be considered beneficial for Polish businesses, as they allow for a relatively flexible adjustment of the foundation to the individual needs of the family and the business it develops.
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