What happens to a Family Foundation when the founder or beneficiary declares bankruptcy?

Does a Family Foundation protect assets against the effects of bankruptcy?
This is one of the most frequently asked questions by entrepreneurs planning succession. The answer, however, is not simple. The declaration of bankruptcy of the founder or beneficiary does not automatically result in the loss of the Family Foundation's existence, but it may have very significant consequences both for the foundation itself and for the bankruptcy proceedings.

In practice, it all depends on this:

• who declares bankruptcy,
• when the assets were transferred to the foundation,
• what rights did the founder retain,
• what benefits the beneficiary is entitled to,
• and whether the trustee will be able to challenge previous actions.

It is these elements that determine the security of assets.

Founder's bankruptcy – is the Family Foundation at risk?

This is definitely the most interesting and at the same time the most complex case.

Many entrepreneurs establish a Family Foundation with succession and family wealth protection in mind. However, it's important to remember that The Family Foundation is not a „shelter” from liability for existing debts.

Once assets are contributed to the foundation, the Family Foundation becomes the owner of the assets as a separate legal entity. The founder ceases to be the owner of the contributed assets. This stems directly from the structure of the Family Foundation Act.

This does not mean, however, that creditors always lose the opportunity to satisfy their claims.

The trustee may investigate the founder's previous activities

If, after establishing the Family Foundation, the founder declares bankruptcy, the trustee will analyze the actions taken before the declaration of bankruptcy.

The regulations are of particular importance Bankruptcy law regarding the ineffectiveness of legal acts performed to the detriment of creditors.

If the contribution of assets to the Family Foundation took place in the period preceding bankruptcy and led to the detriment of creditors, the trustee may attempt to have such an act declared ineffective towards the bankruptcy estate.

In practice, this means the ability to seek the return of specific assets to the bankruptcy estate or to claim their equivalent in accordance with the mechanisms provided for in the Bankruptcy Law. Therefore, the Family Foundation should not be created solely as a way to "escape with wealth"„

Is the founder liable for the Foundation's obligations?

NO.

The Act clearly states that:

The Founder is not responsible for the obligations of the Family Foundation.

This also works the other way around.

As a rule, the assets of a foundation do not automatically become the assets of the founder simply because he has declared bankruptcy.

However, this does not mean full protection against the actions of the trustee if there have been previous actions that violated the rights of creditors.

Do the rights of the founder become part of the bankruptcy estate?

This issue is currently the most discussed among practitioners.

The rights of the founder are of a very specific nature.

The Act provides that:

• the rights and obligations of the founder are inalienable,
• the founder may exercise certain rights provided for in the statute,
• may also entrust the exercise of part of its powers to another person.

Since the rights of the founder are not of a classical property nature, it cannot be automatically assumed that the trustee takes over all the powers of the founder.

The scope of the trustee's potential exercise of these rights will depend on the nature of the specific powers and the provisions of the Family Foundation's statute. In practice, this may lead to interpretation disputes.

Bankruptcy of the beneficiary – the situation is different

The situation of the beneficiary is much simpler.

The beneficiary is not the owner of the Family Foundation's assets.

However, he or she is entitled to benefits specified in the statute or resulting from decisions of the foundation's bodies.

Benefits may include, among others:

• money,
• real estate,
• movable things,
• property rights,
• financing living or education costs.

Can the trustee take over the beneficiary's benefits?

Yes.

If a beneficiary declares bankruptcy, his or her claims and property rights generally become part of the bankruptcy estate.

This means that benefits due to the beneficiary may be transferred to the bankruptcy estate and serve to satisfy creditors.

This does not mean, however, that the trustee takes over the assets of the Family Foundation itself.

It only takes over the rights of a specific beneficiary. This is a very important difference.

Can a beneficiary be removed from the list of beneficiaries?

Not always.

Much depends on the content of the statute.

Some statutes provide for the possibility of:

• loss of beneficiary status,
• suspension of payments,
• changes in the order of benefits,
• making payments dependent on certain conditions.

However, if the right to benefit has already been established, its deprivation solely due to the declaration of bankruptcy may prove ineffective towards the creditors.

Therefore, the way the statute is constructed is of great importance also from the point of view of subsequent bankruptcy proceedings.

Can the Family Foundation itself declare bankruptcy?

Yes.

The Family Foundation is a separate legal entity and may conduct business activities within the scope provided for by law.

If it becomes insolvent, it may be subject to bankruptcy proceedings.

The Family Foundation Act stipulates that a foundation may be dissolved only after bankruptcy proceedings are concluded and the foundation is removed from the register of family foundations. However, if the proceedings end with the full satisfaction of creditors, approval of the arrangement, or are discontinued or revoked, the foundation is not dissolved.

The most common misconceptions

Myth 1. Contributing assets to a Family Foundation always protects them from creditors.

No. If the act was performed to the detriment of creditors, the trustee may attempt to challenge it under the provisions of the Bankruptcy Law.

Myth 2. The founder's bankruptcy means the end of the Family Foundation.

No. The Foundation continues to exist as a separate legal entity.

Myth 3. The beneficiary loses all the Foundation's assets.

No. His rights to benefits may be included in the bankruptcy estate, but not the assets belonging to the Family Foundation.

Myth 4. The statute is of no importance.

This is one of the most common mistakes. A well-prepared statute can significantly reduce subsequent interpretation and organizational problems.

Summary

A Family Foundation is an effective tool for succession and asset management, but it was not created as a mechanism to avoid liability to creditors.

Declaring the founder's bankruptcy does not automatically result in the trustee taking over the Family Foundation's assets. However, actions involving the transfer of assets to the foundation may be subject to detailed review for creditor protection. In the event of a beneficiary's bankruptcy, the scope of their rights to benefits from the foundation, which may be included in the bankruptcy estate, is crucial.

For entrepreneurs planning succession, this means one thing: It is worth creating a Family Foundation early enough as part of a long-term family and business strategy, and not only when financial problems arise. Only such an approach allows for the use of its potential in accordance with the purpose of the Act and limits the risk of subsequent disputes with creditors or the trustee.