What a family foundation protects your assets against – and what it does not

What the foundation really protects

• Continuity after the founder's death. Shares and real estate contributed to the foundation do not form part of the estate. There is no division of the estate, no co-ownership among heirs and no paralysis of the company until the inheritance is confirmed.
• Fragmentation. The assets do not break up into parts with each generation. Children and grandchildren have entitlements to distributions, not shares in the assets that they could sell, pledge or lose in a dispute.
• The founder's future risk. As a rule, obligations the founder incurs after the foundation is established do not burden its assets. The exception is maintenance – see below.
• The beneficiary's risk. A beneficiary's creditor cannot reach the foundation's assets. At most, it can pursue what the beneficiary has received or is to receive from the foundation.

Limit 1: debts from before the foundation was established

A family foundation is jointly and severally liable with the founder for the founder's obligations that arose before its establishment, including maintenance obligations. This liability cannot be excluded or limited without the creditor's consent – Article 8(1) of the Family Foundation Act.

The founder's creditor can therefore sue the foundation just as it can sue the founder, without having to prove anything more. The foundation is also liable for maintenance that the founder comes to owe after its establishment. The entitled person may enforce against the foundation's assets if enforcement against the founder's assets proves ineffective (Article 8(2)). In both cases the foundation's liability is limited to the value of the assets contributed by the founder – by their condition at the time of contribution and prices at the time the creditor is satisfied (Article 9). For the creditor this is a ceiling; for the founder it means that all the contributed assets remain within reach of his or her old debts.

Limit 2: actio Pauliana

Contributing assets to a foundation is a gratuitous act. A creditor who shows that the act harmed them may demand that it be declared ineffective as against them. In the case of a gratuitous act, they do not even have to prove that the foundation knew about the harm (Articles 527 and 528 of the Civil Code). The action (skarga pauliańska) may be brought within five years of the act (Article 534 of the Civil Code). A foundation set up at a time when the founder is in trouble attracts such an action like a magnet.

Limit 3: the forced share

The Family Foundation Act amended the Civil Code so that a foundation cannot be used to cut the family out of the inheritance:

• when calculating the forced share (zachowek), the founding fund contributed by the deceased is added to the estate (Article 993 § 2 of the Civil Code), unless it was contributed more than ten years before the opening of the succession (Article 994¹ of the Civil Code);
• distributions that the entitled person received from the foundation count towards their forced share (Article 996 § 2 of the Civil Code);
• the foundation pays the forced share only up to the extent of its enrichment (Article 1000 § 4 of the Civil Code);
• the person obliged may request a deferral of payment, payment in instalments and, in exceptional cases, a reduction of the forced share (Article 997¹ of the Civil Code);
• it is possible to waive the right to the forced share alone, without waiving the right to inherit (Article 1048 § 2 of the Civil Code).

In practice, a combination works best: distributions to children designed so that they count towards the forced share, and agreements waiving the forced share with those who receive something else – for example, a share in another part of the assets.

Limit 4: the marriage of the founder and the beneficiaries

• Joint property. Contributing an item of the spouses' joint property to the foundation requires the other spouse's consent. How to settle the contributed assets in a later divorce is not clearly resolved by the provisions. That is an argument for an agreement between the spouses before the assets are contributed.
• Distributions to married beneficiaries. Whether a distribution from the foundation becomes part of the joint property of the beneficiary and their spouse is not expressly regulated and can be disputed. The statute may define the nature of distributions, and the children may conclude marital property agreements.

Limit 5: the foundation is not the family's safe

The foundation's assets are not the family's private property. A foundation flat occupied rent-free, a foundation car used privately, an interest-free loan to a son – these are hidden profits taxed like distributions (more). A foundation that in practice serves as the founder's wallet also gives creditors and tax authorities arguments to challenge the whole structure.

Limit 6: the foundation's own debts

The foundation is liable for its own obligations with all its assets. Sureties and security given by the foundation for a subsidiary transfer the business risk back onto the family's assets. The statute should require the consent of the supervisory board or the founder for them.