When it comes to asset protection and strategic estate management, trusts and foundations have perhaps been the most effective instruments for many generations. The laws and regulatory framework governing them have been amended throughout the years to cater modern demand making them current and efficient to this day. In fact, today, innovation and global digitalization has made it very difficult to maintain confidentiality and security over hard earned assets and ensure that they are safeguarded from personal liability, prying eyes, fraud and theft and inheritance conflict, especially when it comes to diversified, complex high value family wealth. Invaluable protection vehicles like a trust or a foundation, if set up and administered correctly, can provide piece of mind and security for your personal and family estate, business continuity, efficient and controlled inheritance planning and the necessary foundation for an intergenerational legacy. When it comes to charitable purpose, they can help educate, involve and pass on philanthropic values to your future generations as well as ensure that your humanitarian objectives live far past your lifetime.
This article aims to outline the key differences between a trust and a foundation, cover some of the benefits of each and describe the main concepts of their structure and formation.
- A trust is not a legal entity, it is a written agreement, often referred to as the trust deed, between a founder/settlor and a nominated trustee, pursuant to which the founder transfers a certain property or properties to the trustee to hold and manage under specific instructions for the sole benefit of the beneficiaries that the founder choses to appoint. A trust does not have to be registered to be effective.
- The legal ownership of the trust property is vested in the trustee; however, the beneficial ownership is always with the beneficiaries. The trustee cannot claim physical proprietorship of any assets under the trust, nor is the trustee permitted to utilize them for his personal use or gain profit for their exploitation unless otherwise instructed by the founder/settlor. Furthermore, it is important to note that any assets listed under the trust are protected by law and will not be affected in case of the trustee’s personal bankruptcy or insolvency. Similarly, if the founder or beneficiary of the trust becomes bankrupt, the property listed under the trust will not be legally affected.
- The legal rights and liabilities fall on the trustees rather than the trust itself. Any legal proceedings against the trust administration or assets listed under the trust will be borne by the trustee on a personal level. However, for the protection of the trustee’s personal property, any creditors relating to the trust property itself can only claim legal ramification against the trust property and not the trustee’s personal estate.
- In order for a trust to be formed, the founder must have a certain property or asset to put under the trust. Additional property may be added to the trust at any time throughout its lifetime.
- In most jurisdictions a trust is valid for a period of 21 years, while some others allow them to exist indefinitely. However, common practice is that a trust is terminated after the death of the founder/settlor and the assets under the trust are distributed to the beneficiaries. However, the main benefit of a trust is that it can be quite flexible in nature and its validity and conditions can be set up at the full discretion of the founder. For example, a concerned father of a troubled child, may only chose to distribute a certain share of the trust property upon completion of university, followed by another upon marriage, birth of a grandchild and so forth. The possibilities of the trust conditions in respect of asset distribution and continuity are limitless.
- A foundation is a registered entity with its own legal personality existing and regulated under the laws of the jurisdiction in which it is formed. However, unlike a company, a foundation does not have shares or shareholders, it is fully autonomous.
- Any assets or property listed under the foundation belong directly to the foundation itself.
- A foundation has its own legal standing and therefore can sue and be sued in its own name.
- A Foundation requires minimum to no initial capital to be registered depending on the jurisdiction. Any form of assets can be transferred to the foundation at any time.
- Like most legal entities, a foundation can exist indefinitely as long as it complies with the regulatory framework of the jurisdiction in which it is registered and is renewed in a timely manner.
MANAGEMENT, CONTROL, ADMINISTRATION AND BENEFICIAL INTEREST
- For a trust to be effective, the founder/settlor of a trust must not maintain too much control over the trust. The founder may retain some rights to oneself but this will need to be carefully structured in the trust deed to avoid potential tax and legal liabilities. However, it is important to note, that when creating the trust deed, the founder has no limitations to how the trust property is to distributed or managed provided that it is in line with the local laws. The conditions and terms of the trust can be constructed at the full discretion of the founder.
- A trust is fully administered and managed by the trustee. This can be an individual or a corporate body and can either be a professional lawyer or a trusted third party like a family member, close friend or business partner. The founder may appoint more than one trustee in which case, any action relating to the administration of the trust or its property will need to be by mutual consent of all the trustees, unless otherwise instructed in the trust deed.
- The founder may appoint a Protector for the trust. Although this is not mandatory, it is highly recommended as the Protector is appointed to ensure that the trustees are always in line with their duties, that there are no conflicts between the trustees and the beneficiaries and that the trust is fully compliant with any laws and regulations. The protector has the legal obligation to ensure full compliance with the founder’s wishes and thus has the right to approve or reject any undefined asset distribution or the addition or removal of a beneficiary.
- A trust must have beneficiaries in order to be valid, unless it is Purpose Trust created for the sole function of fulfilling a certain objective set out by the founder. This type of trust is very different in nature and is an entirely different financial vehicle with its own set of rules and limitations, if you would like more details on this particular trust, please feel free to contact our firm for a more detailed information. In relation to all other trusts, the beneficiaries of the trust property are selected by the founder at his/her full discretion. They do not have to related by blood or in fact have any formal relationship to the founder. The beneficiaries of the trust are not dependent on inheritance laws or subject to inheritance tax. The share, timeframe and conditions of distribution are also very flexible in nature and can be set up in accordance to the wishes of the founder. Although a beneficiary or a dissatisfied legal heir of the founder may take legal action against a trustee, their rights are fairly limited if the trustee has acted in line with the instructions prescribed in the trust deed.
- Unlike a trust, the founders of a foundation can maintain full control over the entity and its assets, if they so wish it. He/she can choose to act as a council member or guardian of the foundation or alternatively strictly retain the right to veto certain actions and decisions of the council.
- In a foundation, a council is appointed to run its affairs and manage its assets. The minimum number of council members needed for the formation of a foundation will depend on the regulations of the jurisdiction in which it is registered and, in most cases, there is no restriction to their maximum number, unless otherwise prescribed in the foundation’s By-Laws and Charter. The council members can be individuals or corporate bodies and may be a legal representative, a trusted family member or friend, the founder itself or his/her company or alternatively one or all of the beneficiaries. The council is in charge of running the day-to-day affairs of the foundation, its accounting records and ensure compliance with the local regulatory framework and the foundation’s Bylaws and Charter, therefore it is essential that they are selected with careful consideration.
- Every foundation must appoint a Guardian. This individual or corporate body is chosen to ensure supervision over the council members. Its duties include making sure that the laws and regulations are complied with, that the council members perform their fiduciary obligations in a proper and timely manner and that any actions and decisions they take are inline with the By-laws and Charter of the foundation. The guardian may also be granted the power to approve or reject certain actions that are not prescribed or permitted under the initial By-Laws of the foundation, if he/she believes that they are in the best interest of the foundation. Due to the legal and fiduciary nature of the position, it is highly recommended that a professional lawyer is appointed for this role, unless one is appointed in the foundation’s council. However, it is important to point out that there is no legal restriction to who can assume this position, in fact, it can be founder himself/herself or a trusted third party, provided that this individual is of legal age and full mental capacity.
- A foundation does not need to have beneficiaries in order to be registered and valid. If beneficiaries are assigned, their rights and powers are very limited, unless they are also appointed as council members or it is otherwise prescribed in the By-Laws and Charter of the foundation. In most jurisdictions, the beneficiaries are not authorized to receive any information about the foundation or its assets nor are they entitled to any beneficial interest until the time of distribution or unless specifically prescribed by its regulations or the council members decide to do so. This ensures ultimate protection over the assets of the foundation and prevents potential conflicts of interest between the beneficiaries as well as any potential legal heirs.
KEY BENEFITS AND BEST USES
- Easy to set up
- Centuries-old structure supported by well-stablished laws
- Clear International tax treatment with many incentives, deductions and double tax treaty entitlements
- Due to its structure, trusts enjoy enhanced confidentiality and privacy
- A trust allows the founder to transfer the legal ownership right of the trust assets to the trustee, thus protecting the assets from the founder’s or the beneficiary’s personal liability, bankruptcy or insolvency as well as from being subject to property and wealth taxation, inheritance tax and forced inheritance rulings of their country of residence. This makes a trust a powerful vehicle for protected and tax efficient succession planning.
- There are no set rules for the creation of a trust deed, allowing ultimate flexibility in defining its purpose, trustee instructions and conditions for beneficiaries
- A legal entity with its own legal personality serves as a great registered alternative to trusts which can act and engage in contracts in its own name, especially in some civil law jurisdictions that do not recognize trusts
- Little to no initial capital required
- Beneficiaries do not hold information, interest or fiduciary duties from a foundation which makes it a perfect vehicle for holding depreciating or high-risk assets
- As a registered organization, it is an effective vehicle for structured distribution for philanthropic and charitable purposes
- Unlike a trust, the founder can maintain control over the assets in the foundation
- There is no restriction to the type of assets that can be held by a foundation, making it a secure and convenient ‘one-umbrella’ holding entity for personal, business or family wealth
- Due to the structure of the foundation, it can ensure control over succession planning and estate management with flexibility for changes throughout its lifespan. A foundation can continue its existence and purpose long past the lifespan of the founder encouraging inter-generational involvement and legacy progression.
Although a relatively new concept in comparison to trusts and quite different from companies in nature, foundations enjoy a number benefits and deductions in terms of tax, expense write-off and profit distribution and as such can prove to be quite efficient for revenue optimization.
As outlined above, both trusts and foundations can be excellent instruments for a whole number of purposes especially related to asset protection and succession planning, each with its own merits. Our lawyers are very knowledgeable in both vehicles on an international level and can offer invaluable advice relating to their set up, management and administration. We can consult you on the right vehicle and jurisdiction based on your particular needs and can provide guaranteed and secure fiduciary services of Trustees, Council members, Protectors and Guarantors. Contact us today for a complimentary consultation and our professional team will answer any query you may have.
- 1 Choose your package
- 2Submit documents
- 3Get registration documents