Trusts and foundations are two of the most popular vehicles for asset protection and wealth management, This article serves to provide an in-depth look at trusts and foundations to allow you decide which one best fits your needs.
A Brief Overview on Trusts
A trust has been an integral element of common law jurisdiction since the 12th century. In essence, it describes the existing relationship between a person who holds assets (trustee) on behalf of another person or group of individuals (beneficiaries).
A trust is a legal entity that typically starts when an individual (settlor) transfers assets to a trustee or trustee company, whose primary function is hold assets and preserve, or in some cases,enhance their value until such partial or an entire trust fund is distributed to one or all of the named beneficiaries.
While the legal title is under the name of the trustee, the beneficiaries, as the term implies, will be the individuals who will solely benefit from the trust fund. Therefore, the primary role of a trustee is to hold the assets on behalf of beneficiaries.
A trust must be governed by a formal written trust deed that delineates administrative and dispositive powers of the trustees, including terms agreed with the settlor and his or her adviser/s.
There are different types of trust. One example is a trust where a settlor may wish for the trustee to pay income to one person during their entire lifetime. There are also cases wherein a trustee is given full discretion to make decisions on paying capital and income.
Trusts that are founded for the purpose of succession planning for families are laid out wherein trustees may administer wealth after the lifetime of a settlor, which in turn guarantees that the settlor’s family will continue to receive income after they have passed away.
Therefore, a trust has the ability of delaying time at which beneficiaries may become entitled to family wealth. This structure helps prevent significant wealth diminishing until such time that children become responsible adults to ensure wise money spending.
Separating assets from an individual’s personal wealth carries a host of advantages, such as protection from personal debts and other financial threats. Furthermore, a trust may also provide significant tax savings depending on the laws of the settlor’s place of domiciliation.
In essence, trusts were originally designed for asset protection, estate planning, and succession purposes.
A Brief Overview on Foundations
A foundation is a relatively new concept in some common law jurisdictions. Typically, most individuals or families utilize trusts for asset holding and succession planning purposes. On the other hand, foundations have been utilized for the same applications in civil law jurisdictions.
In essence, a foundation is an incorporated legal entity that can be used to hold assets, wealth structuring, and succession planning. It is neither a company nor a trust, although carries some features inherent in both. A foundation does not have shareholders or owners, as well as no requirement when it comes to naming beneficiaries. It is slowly becoming a preferred holding vehicle as it separates underlying assets from an individual’s personal wealth and falls outside inheritance tax purposes.
Foundations are essentially orphan structures that are being used by charitable or non-profit trusts, purpose trusts, and companies. They can also be used for non-charitable purposes, such as in the case of succession planning for ultra-high-net-worth families, allowing them to divest assets that a foundation can hold for its beneficiaries for the time being.
Foundations can hold all types of assets from a single asset to various assets. There are no limitations on what can be held by a foundation, other than immovable property.
Legal Structure- Foundation vs Trust
- Considered a separate legal entity, similar to a company.
- Can contract and hold assets under its own name.
- It can also sue or be sued in its own name.
- Holds legal and beneficial title to assets.
- Not categorized as a separate legal entity.
- Legal rights and obligations lie on the shoulders of a trustee rather than the trust itself.
- Trustees contract their own name on behalf of the trust.
- Trustee can sue or be sued in their own name, instead of an action being taken by or against the trust.
Setting up – Foundation vs Trust
- Must be registered formally with the concerned register or authority in its home jurisdiction.
- Registration will serve as a proof of foundation incorporation, and has met the requirements of the law.
- Legal foundation document or charter is publicly accessible. A charter does not have to reveal the identity of guardians, founders, and beneficiaries.
- A trust must meet the following requirements upon its establishment. These include demonstration of an intention of a settlor to create a trust and identification of its beneficiaries.
- It doe not need to be registered. Trust documents does not have to be made public.
- The existence of a trust can remain confidential.
Beneficiaries- Foundation vs Trust
- Does not need to have beneficiaries.
- Beneficiaries have limited rights, unless the founder provides additional rights under prevailing regulations.
- Beneficiaries do not have access to information about a foundation.
- Beneficiaries do not have beneficial interest in a foundation, unless included in its own regulations.
- For a trust to be valid, it must have beneficiaries.
- In case there are no beneficiaries, it must have an enforcer to ensure the trustee/s manage the trust in accordance to its original purpose.
- Beneficiaries have vested interest in assets. They have inherent legal rights that can including forcing trustees to make the necessary actions through the courts, and many more.
- Beneficiaries have rights to certain information about the trust.
Funding- Foundation vs Trust
- Can be set-up without initial funds.
- Founder is not required to deposit funds to the foundation, which automatically comes into existence on registration.
- Settlor is deemed to pass initial assets to form a trust.
- Additional assets may be included down the line or under professional advice.
Management – Foundation vs Trust
- Has its own council to manage its affairs.
- One member of the council must be a trust company service provider or company based in its own jurisdiction.
- No fixed maximum members of council, but the number can be set under a foundation’s regulations.
- Council members must be at least 18 years old with sound mental capacity.
- Trustee is primarily responsible for decision making and management of a trust fund.
- Trustee can be a natural person or corporate entity.
- There can be one more trustee. Decisions made on behalf of the trust must be a unified agreement of all trustees.
Duties and Responsibilities- Foundation vs Trust
- Council members assume similar duties and functions to the board of directors of a company.
- Council members must act in good faith with a foundation’s best interests in mind.
- Showcase care, diligence, and skill that reasonably prudent individuals would exercise in similar circumstances.
- Council members do not carry obligations similar to a fiduciary duty towards a foundation’s beneficiaries.
- Trustees have broader duties to ensure the protection and best interests of beneficiaries.
- A trustee must act with due diligence, as would any reasonably prudent individual, to the best of their ability and skill, exercising actions and decisions in good faith.
- Subject to prevailing terms of a trust, trustees may be tasked to preserve or enhance the value of a trust fund.
- Some of the duties of a trustee may be delegated to other third parties such as investment managers. However, overall management of their performance lies on the shoulders of a trustee/s.
Assets that Structures may Hold – Foundation vs Trust
- Holds all kinds of assets except for immovable property.
- Holds any type of property except for realty.
Taxation – Foundation vs Trust
- Taxed as zero-rated entities in most jurisdictions. This means they will pay tax at 0% on any income and gains realized from outside their jurisdiction.
- Founder may taxed when endowing the foundation, or taxes on distribution from the foundation that is largely dependent upon a recipient’s tax position.
- No tax payable for trusts provided there are no income realized from assets in its own jurisdiction.
- Specific tax advice should be taken based on where a trust is established.
Damalion can help you set up your trust and guarantee your legacy. Learn the detailed process of trust formation in Luxembourg or your desired jurisdiction. As a premier consulting firm, we leverage our expansive global service network of lawyers, accountants, and other service providers pertinent in the smooth formation of trust funds. We can also help you in opening a bank account for your trust. Our sterling reputation, excellence, extensive knowledge, commitment, and reliability, you can rest assured to experience a hassle-free formation of trusts in your preferred jurisdiction. Reach out to a Damalion expert today to learn more about trust formation and our other services.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.