Trusts Versus Foundations
In this piece, we’ll discuss the comparisons and contrasts of two key mechanisms for wealth management; Trusts and Foundations.
Introduction to Trusts
The best way to think about a Trust is it acts as a safety deposit box for a person’s assets. Trusts are oftentimes an integral part of wealthy families’ asset protection, succession planning strategy and wealth management. Depending on a number of factors such as the rules of the jurisdiction in question, a trust can also provide a degree of tax efficiency with respect to gift, estate and inheritance taxes.
Trusts – How They Work
To begin with, there are three key people when it comes to a trust relationship. The settlor, the trustee and the beneficiary.
- The Settlor – places assets such as property in a trust.
- The Trustee – becomes the custodian of these assets and is legally responsible for their management and disposal according to the trust deed.
- The Beneficiary – benefits from the assets placed in the trust. For example, beneficiaries may inherit assets and investments placed in the trust after the settlor’s death.
Advantages of Using a Trust
The advantage of Trusts is that they protect assets in a number of ways. In some cases, it’s to protect them against creditors, from disclosure, and to prevent improper use.
Trust Law Jurisdictions
Trusts came into existence centuries ago under English law. As a result, trusts are mainly found in countries that inherited English common law. Countries such as North America, Australasia, the UK and its overseas territories and Ireland.
The concept of a trust is not recognized in a number of other jurisdictions. However, there are equivalents in civil law countries which is known as ‘the foundation’ which we’ll discuss further below.
The main difference between trusts and foundations are the legal concepts that underpin them. However, essentially, they carry out similar roles and are generally deployed to protect assets and manage successions.
As we discussed above a trust is a legal relationship between the settlor, the trustee and the beneficiary. A foundation is a legal entity more like that of a company. Therefore, it is usually registered in the jurisdiction concerned.
Foundations are formed by a founder who provides the initial assets to the foundation. This is referred to as the endowment. The assets are held by a foundation for the purposes as set out in its constitution. They are then administered according to contractual, rather than fiduciary, principles.
Instead of the trustee, a foundation has a council whose role is similar to a company board. The responsibility of this council is to fulfil the purpose of the foundation as laid out in its constitutive documents.
Foundations can also name beneficiaries who may receive income or other entitlements from the endowment under the foundation’s regulations. A key point of difference between foundations and trusts is that foundations don’t need beneficiaries, whereas this is a requirement in trusts. Furthermore, foundation beneficiaries tend to have weaker legal rights than trust beneficiaries who have more resources to legal remedies, including through the courts to assist their interests in a trust.
As mentioned previously, foundations tend to be found in civil law countries. Countries in Europe such as Austria, Liechtenstein and the Netherlands are prominent foundation jurisdictions. Further afield, Panama would be a noteworthy foundation jurisdiction. To cater to increasing wealth in emerging economies, many common law jurisdictions have legislated to introduce foundations.
Should you have any further questions or queries on Trusts. Please don’t hesitate to contact us.