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Trust or Foundation: what should you choose?
Trusts and foundations are both valuable solutions if you are thinking of ways to protect your assets or succession planning for the future. But there are a number of similarities and important differences between both options so you need to find whatís right for you.
Foundations have evolved in civil law whereas trusts have a long history in UK common law and have become much more sophisticated over time. The foundation is a flexible alternative to the traditional common law trust for tax and succession planning. So what does this mean in practice? The foundation is particularly appealing to those from civil law jurisdictions which have forced heirship provisions in their succession legislation.
There are many other similarities and differences that will define which one is best for you.
Main similarities are:
- Both may be created for asset protection, succession planning and wealth preservation.
- The Settlor/ founder can transfer assets to both.
- Both can be set up during the founder/ settlors lifetime
- Both entities have the ability to be revoked(with appropriate drafting)
- A Protector or Enforcer can be appointed for both (with the exception of some jurisdictions).
- With certain types of trust, such as a BVI VISTA the settlor is able to exercise the power over investments where he is director of the underlying company. This is similar in a foundation where the Founder, as a member of the Council, can exercise control over foundation assets.
Notable differences are:
- A trust does not have separate legal identity from its trustees. In contrast a foundation has an independent legal identity and holds assets in its own name. The foundation therefore goes through an incorporation procedure, whereas the trust doesnít, it is established upon the execution of the trust instrument and transfer of assets from the Settlor to the trust. As a trust does not have separate legal personality the trustee must contract personally in their name, however, a foundation can contract in the name of the foundation.
- Foundation Regulations (which governs the foundation) are private but the Foundation Charter (containing basic information) is a public document. In contrast, the trust instrument remains private.
- The beneficiaries of a foundation do not have equitable rights over the assets of a foundation, whereas beneficiaries of a trust do have equitable rights.
- The foundation is usually established with the sole purpose of holding wealth or assets and in some jurisdictions legislation prevents any commercial activity being conducted by foundations.
- A foundation should comply with the wishes of the founder, whereas the trustee should act in the best interests of the beneficiaries.
So what would you choose?
While the foundation is a rival concept to the trust, and has many advantages, it is a fact that the trust concept will continue to be widely used in international tax and wealth planning for two reasons.
- Many countries do not recognise the concept of trusts but this can be an advantage because countries that do not recognise the trust concept cannot enact specific anti-avoidance legislation against trusts;
- Even where countries recognise and enact anti-avoidance legislation against trusts itís possible to advise with certainty in relation to such legislation and its impact on settlors and beneficiaries; Trusts have been widely used as family succession planning vehicles for many years in prestigious jurisdictions, and this will continue.
A well-known problem confronting would-be settlors of trusts is that they must transfer ownership and control of their valuable assets to third party professional trustees who they may not know well.
The private family trust company (PTC) is a good way to address this problem. A PTC is a company which is the sole corporate trustee of the family trust. The board of directors of the PTC will include family members. In some PTC arrangements the head of the family, will own all the shares of the PTC. The PTC is also an effective solution for those who wish to segregate their interests.
So, trust or foundation?
Either choice can provide a solution for succession, asset holding and privacy issues. It very much depends on your individual situation. Thatís why we take care of finding the best bespoke solution that addresses each individualís unique circumstances.
You can find out more about our Trust and Foundations services here.
Beth Lansdown TEP, BA (Hons)
Consultant - Corporate & Trust Planning Unit