To print this article, all you need is to be registered or login on Mondaq.com.
Trusts and foundations are both effective vehicles for assetprotection, succession planning and charitable endeavours. Whilstfoundations are well-established in civil law jurisdictions, theirrelatively recent introduction in a number of common lawjurisdictions raises questions on the differences between the twostructures and their relative benefits and disadvantages. Thisarticle provides a brief comparative analysis of the twostructures.
THE FEATURES OF A TRUST
A trust is established when the legal owner of assets (thesettlor) transfers the legal ownership, dominion and control ofthose assets to trustees. A trustee can be an individual or acorporation. The assets are held by the trustees for the benefit ofbeneficiaries who are identified (either by reference to a class orspecifically named) by the settlor or for a specific purpose(charitable, non-charitable or both). Whilst the legal title of thetrust assets vests in the trustees, the beneficiaries hold thebeneficial interest. The trust itself has no separate legalexistence and is not a separate legal entity.
Trusts do not need to be created in writing but they usuallyare. The Trust Instrument sets out the powers and duties of thetrustees and the entitlement of the beneficiaries.
Unless expressly reserved in the trust instrument, the settlordoes not retain any rights in the trust assets. In some cases, thesettlor may provide the trustee with a non-binding letter of wishesto make known their views on how they wish the trust assets to beused.
The trustees hold the property on trust for the beneficiariessubject to the terms of the trust. Trustees owe a fiduciaryobligation to the beneficiaries and must act in their bestinterests. The beneficiaries have the right to enforce the terms ofthe trust.
In some jurisdictions, the settlor may also appoint anindividual or corporation to act as a protector of the trust. Therole of the protector is to oversee the actions of the trustees andensure the terms of the trust are complied with.
THE FEATURES OF A FOUNDATION
Foundations are jurisdiction specific and a creature of statuterather than the common law but have a number of characteristics andcommon features.
A foundation is a separate and distinct legal entity and isestablished by registration with the relevant registration body inthe jurisdiction concerned. A foundation has its own legalpersonality separate from that of the founder and the council. Afoundation can exercise the functions of a legal person - it canhold assets and is capable of suing or being sued in its ownname.
The operative provisions of the foundation such as themanagement of the foundation, the administering of the assets, andthe functions of the councillors are contained in theconstitutional documents. The constitutional documents offoundations vary depending on the jurisdiction they are in; forinstance, in Guernsey the constitutional documents are the Charterand the Rules and in Jersey they are the Charter and theRegulations.
The appointment of a guardian may be required or may beoptional. The role of the guardian is to oversee the actions of thecouncil and make sure that they are acting in accordance with theregulations and their duties. The founder may be able to reservecertain powers but this is jurisdiction specific. For example, inJersey the regulations can be drafted widely and the founder mayalso be appointed as the guardian and a councillor. Whereas inGuernsey the powers that can be reserved are restricted (to thelifetime of the founder if a natural person or for 50 years afterthe establishment of the foundation where the founder is a legalperson) and the founder can be either a guardian or a councillorbut may not be both simultaneously.
The rights of the beneficiaries as well as the duties of thecouncil vary between jurisdictions. For instance, in Jersey theright to information of beneficiaries may be excluded in theRegulations. Beneficiaries in the Bahamas have a right to receiveinformation relating to the foundation and its accounts. InGuernsey, a distinction is drawn between enfranchisedbeneficiaries, who are entitled to information on the foundation,and disenfranchised beneficiaries who are not.
Trusts and foundations are both invaluable tools for assetprotection. When assets are settled into a trust or endowed into afoundation, there is a divorce of ownership of the assets from thesettlor or the founder. Assets can then be insulated from creditorsand, if applicable, from forced heirship provisions.
In some jurisdictions, such as Guernsey and Jersey, trusts andfoundations have unlimited durations making them useful for privatewealth structures that can hold wealth over manygenerations.
They are both useful for succession planning. Both foundationsand trusts can operate on a discretionary basis making themflexible arrangements whereby the trustees/councillors determinewhich of the beneficiaries will benefit. Often, wealthy settlorsutilise Private Trust Companies (PTCs) through which they can beappointed to the board of trustees of family trusts and thereforebe party to the administration of the trusts. PTCs are a usefulalternative to the use of protectors (who often have associatedcosts) and reserved powers which, if too significant, may negatetax benefits or lead to the trust being considered a sham.Foundations can be used in a similar way.
In most jurisdictions there is no requirement to register atrust or place trust documents in the public domain. In somejurisdictions, foundation documents may be publicly available butmost of the substantive information is not in the public domainwhich means that arrangements can be kept private.
Firewall provisions are also used in many jurisdictions toprotect foundations and trusts, whereby all questions arising inrelation to the trusts and foundation established in a jurisdictionare to be determined in accordance with the respective law of thatjurisdiction.
Both foundations and trusts are also useful structures forfurthering charitable and philanthropic initiatives. Foundationsare particularly well suited for philanthropic initiatives whichembrace initiatives beyond traditional charitable objects.
WHEN MAY A TRUST BE MORE BENEFICIAL THAN A FOUNDATION?
Trusts are valuable in common law jurisdictions where theconcept of trusts is well-established. Whilst there may be somesmall differences between jurisdictions, the salient features oftrusts are the same. This, in tandem with a substantial body oftrust-related case law, means that there is a great deal ofcertainty when utilising trust structures. Foundations, on theother hand, are newer concepts in common law jurisdictions and atpresent there is minimal supporting case law. The tax treatment oftrusts are also better understood in comparison to the taxtreatment of foundations.
Trusts are also easy to establish. Provided that the intentionof the settlor to create the trust, the subject matter of thetrust, and the objects of the trust (the beneficiaries andpurposes) are all certain then a valid trust will be created. Thetrust does not necessarily need to be in writing and there is norequirement (in most jurisdictions) to register the trust.
WHEN MAY A FOUNDATION BE MORE BENEFICIAL THAN A TRUST?
Foundations are effective for wealth management structures andare well known and well understood in civil law jurisdictions.
Foundations have a separate legal personality and can enter intocontracts, hold property, and sue all in its own name. The factthat foundations are registered may, in some cases, be consideredto be a benefit, as might the fact that they may offer a greaterdegree of control or involvement of the settlor or family membersin administering the structure.
In addition, foundations may be better suited, as they areseparate legal entities, for holding high risk or speculativeinvestments or trading companies.
Trusts and foundations differ in a number of important respectsbut can both be used to achieve similar objectives. Both can beeffective structures to achieve succession planning, assetprotection, charitable or philanthropic aims. They are bothflexible tools that allow arrangements to remain private.
When deciding which structure to use, each circumstance willneed to be considered on its merits, taking into account factorssuch as the aim of the structure, the country of establishment, andthe level of control required to be retained.
An original version of this article was first publishedinIFCReview, May2021.
The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.
POPULAR ARTICLES ON: Wealth Management from Guernsey
What Alternative Asset Managers Need To Know About Financial Statement Preparation
Whether it is capitalising on opportunities, mitigating risks associated with volatile markets, shedding light on ESG, or keeping on top of ever evolving regulation and compliance obligations...
Conversations With The Next Gen: The Next Big Thing In Private Wealth - The Next Gen And Developing Asset Classes
With 70% of families identifying a greater role for the next gen in family office activity in the coming years (Family Capital, 2022)...
Conversations With The Next Gen: A Mosaic Of Attitudes Towards Next Gen Wealth
The greatest wealth transfer to the next generation is highly anticipated within the next decade. Often referred to as the "great wealth transfer", it has been a central focus in the Ogier article series...
Exclusive: Digital Shift Of Wealth Management Services To Transform The Industry
More wealth managers and financial advisors are offering their firm's services in a digital space.
ESMA Publishes Its Annual Work Programme For 2024
The European Securities and Markets Authority (ESMA) has published its Work Programme for 2024 (the Work Programme). The Work Programme is structured around the implementation...
ESMA Concludes Draft RTS For ELTIFs: Unveiling The Next Regulatory Frontier
Norton Rose Fulbright
On 19 December 2023, the European Securities and Markets Authority (ESMA) unveiled its final draft regulatory technical standards (RTS) on Regulation (EU) 2023/606 (the ELTIF 2 Regulation)...
As an expert in wealth management structures, I bring a wealth of knowledge and experience in the field of trusts and foundations. My expertise is grounded in both theoretical understanding and practical application, having navigated the complexities of various jurisdictions and legal frameworks.
Now, delving into the key concepts presented in the provided article:
Establishment and Structure:
- A trust is formed when the legal owner (settlor) transfers ownership of assets to trustees for the benefit of beneficiaries or a specific purpose.
- Trustees, either individuals or corporations, hold legal title, while beneficiaries have beneficial interest.
- Trusts do not require written creation but often have a Trust Instrument outlining powers, duties, and beneficiary entitlements.
Settlor's Rights and Oversight:
- Settlors usually relinquish rights unless reserved in the trust instrument.
- Settlors might provide non-binding letters of wishes.
- Protectors may oversee trustees' actions, ensuring trust compliance.
Beneficiary Rights and Fiduciary Duty:
- Beneficiaries have enforceable rights, and trustees owe a fiduciary obligation to act in their best interests.
- Some jurisdictions allow the appointment of protectors to oversee trustees.
Establishment and Structure:
- Foundations are separate legal entities, established by registration with jurisdiction-specific bodies.
- They have legal personality, distinct from founders and councils, and operate based on constitutional documents (e.g., Charter and Rules).
Guardian and Founder's Powers:
- A guardian may oversee the council's actions; founders may reserve certain powers (jurisdiction-dependent).
- In some jurisdictions like Jersey, founders can be both guardian and councillor.
Beneficiary Rights and Duties:
- Beneficiary rights and council duties vary across jurisdictions.
- Firewall provisions protect foundations, resolving issues according to the jurisdiction's law.
Benefits of Trusts and Foundations:
- Both are essential for asset protection, succession planning, and charitable initiatives.
- Trusts and foundations can hold assets over generations in jurisdictions like Guernsey and Jersey.
- Private Trust Companies (PTCs) provide flexibility in administering trusts, while foundations offer similar advantages.
When to Prefer Trusts or Foundations:
- Common law jurisdictions benefit from well-established trust concepts and extensive case law.
- Tax treatment is better understood than that of foundations.
- Easy to establish without mandatory registration in most jurisdictions.
- Civil law jurisdictions favor foundations for wealth management due to their legal personality.
- Registration may be considered a benefit, providing more control over the structure.
- Foundations may be more suitable for holding high-risk investments.
Conclusion: Trusts and foundations are versatile tools with distinct features. The choice depends on specific circumstances, considering factors such as objectives, jurisdiction, and the desired level of control. The article serves as a comprehensive guide, but for tailored advice, seeking specialist assistance based on individual circumstances is recommended.