Trusts and foundations are both effective vehicles for asset protection, succession planning and charitable endeavours. Whilst foundations are well-established in civil law jurisdictions, their relatively recent introduction in a number of common law jurisdictions raises questions on the differences between the two structures and their relative benefits and disadvantages. This article provides a brief comparative analysis of the two structures.
THE FEATURES OF A TRUST
A trust is established when the legal owner of assets (the settlor) transfers the legal ownership, dominion and control of those assets to trustees. A trustee can be an individual or a corporation. The assets are held by the trustees for the benefit of beneficiaries who are identified (either by reference to a class or specifically named) by the settlor or for a specific purpose (charitable, non-charitable or both). Whilst the legal title of the trust assets vests in the trustees, the beneficiaries hold the beneficial interest. The trust itself has no separate legal existence and is not a separate legal entity.
Trusts do not need to be created in writing but they usually are. The Trust Instrument sets out the powers and duties of the trustees and the entitlement of the beneficiaries.
Unless expressly reserved in the trust instrument, the settlor does not retain any rights in the trust assets. In some cases, the settlor may provide the trustee with a non-binding letter of wishes to make known their views on how they wish the trust assets to be used.
The trustees hold the property on trust for the beneficiaries subject to the terms of the trust. Trustees owe a fiduciary obligation to the beneficiaries and must act in their best interests. The beneficiaries have the right to enforce the terms of the trust.
In some jurisdictions, the settlor may also appoint an individual or corporation to act as a protector of the trust. The role of the protector is to oversee the actions of the trustees and ensure the terms of the trust are complied with.
THE FEATURES OF A FOUNDATION
Foundations are jurisdiction specific and a creature of statute rather than the common law but have a number of characteristics and common features.
A foundation is a separate and distinct legal entity and is established by registration with the relevant registration body in the jurisdiction concerned. A foundation has its own legal personality separate from that of the founder and the council. A foundation can exercise the functions of a legal person - it can hold assets and is capable of suing or being sued in its own name.
The operative provisions of the foundation such as the management of the foundation, the administering of the assets, and the functions of the councillors are contained in the constitutional documents. The constitutional documents of foundations vary depending on the jurisdiction they are in; for instance, in Guernsey the constitutional documents are the Charter and the Rules and in Jersey they are the Charter and the Regulations.
The appointment of a guardian may be required or may be optional. The role of the guardian is to oversee the actions of the council and make sure that they are acting in accordance with the regulations and their duties. The founder may be able to reserve certain powers but this is jurisdiction specific. For example, in Jersey the regulations can be drafted widely and the founder may also be appointed as the guardian and a councillor. Whereas in Guernsey the powers that can be reserved are restricted (to the lifetime of the founder if a natural person or for 50 years after the establishment of the foundation where the founder is a legal person) and the founder can be either a guardian or a councillor but may not be both simultaneously.
The rights of the beneficiaries as well as the duties of the council vary between jurisdictions. For instance, in Jersey the right to information of beneficiaries may be excluded in the Regulations. Beneficiaries in the Bahamas have a right to receive information relating to the foundation and its accounts. In Guernsey, a distinction is drawn between enfranchised beneficiaries, who are entitled to information on the foundation, and disenfranchised beneficiaries who are not.
Trusts and foundations are both invaluable tools for asset protection. When assets are settled into a trust or endowed into a foundation, there is a divorce of ownership of the assets from the settlor or the founder. Assets can then be insulated from creditors and, if applicable, from forced heirship provisions.
In some jurisdictions, such as Guernsey and Jersey, trusts and foundations have unlimited durations making them useful for private wealth structures that can hold wealth over many generations.
They are both useful for succession planning. Both foundations and trusts can operate on a discretionary basis making them flexible arrangements whereby the trustees/councillors determine which of the beneficiaries will benefit. Often, wealthy settlors utilise Private Trust Companies (PTCs) through which they can be appointed to the board of trustees of family trusts and therefore be party to the administration of the trusts. PTCs are a useful alternative to the use of protectors (who often have associated costs) and reserved powers which, if too significant, may negate tax 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 a trust or place trust documents in the public domain. In some jurisdictions, foundation documents may be publicly available but most of the substantive information is not in the public domain which means that arrangements can be kept private.
Firewall provisions are also used in many jurisdictions to protect foundations and trusts, whereby all questions arising in relation to the trusts and foundation established in a jurisdiction are to be determined in accordance with the respective law of that jurisdiction.
Both foundations and trusts are also useful structures for furthering charitable and philanthropic initiatives. Foundations are particularly well suited for philanthropic initiatives which embrace initiatives beyond traditional charitable objects.
WHEN MAY A TRUST BE MORE BENEFICIAL THAN A FOUNDATION?
Trusts are valuable in common law jurisdictions where the concept of trusts is well-established. Whilst there may be some small differences between jurisdictions, the salient features of trusts are the same. This, in tandem with a substantial body of trust-related case law, means that there is a great deal of certainty when utilising trust structures. Foundations, on the other hand, are newer concepts in common law jurisdictions and at present there is minimal supporting case law. The tax treatment of trusts are also better understood in comparison to the tax treatment of foundations.
Trusts are also easy to establish. Provided that the intention of the settlor to create the trust, the subject matter of the trust, and the objects of the trust (the beneficiaries and purposes) are all certain then a valid trust will be created. The trust does not necessarily need to be in writing and there is no requirement (in most jurisdictions) to register the trust.
WHEN MAY A FOUNDATION BE MORE BENEFICIAL THAN A TRUST?
Foundations are effective for wealth management structures and are well known and well understood in civil law jurisdictions.
Foundations have a separate legal personality and can enter into contracts, hold property, and sue all in its own name. The fact that foundations are registered may, in some cases, be considered to be a benefit, as might the fact that they may offer a greater degree of control or involvement of the settlor or family members in administering the structure.
In addition, foundations may be better suited, as they are separate legal entities, for holding high risk or speculative investments or trading companies.
Trusts and foundations differ in a number of important respects but can both be used to achieve similar objectives. Both can be effective structures to achieve succession planning, asset protection, charitable or philanthropic aims. They are both flexible tools that allow arrangements to remain private.
When deciding which structure to use, each circumstance will need to be considered on its merits, taking into account factors such as the aim of the structure, the country of establishment, and the level of control required to be retained.
An original version of this article was first published in IFC Review, May 2021.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.