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Trusts vs Foundations: Choosing the Right Entity for Your Financial Goals

Trusts vs Foundations: selecting of a suitable estate planning vehicle for a particular individual is a complex task and requires a thorough understanding of the needs of the individual, his family situation, taxation of country of residence, etc. An estate planning vehicle is normally considered when an individual has young or inexperienced children, or children with special needs, or the individual wishes to distribute certain assets over time, and not immediately upon his death.

Trusts are common law estate planning vehicles, whereas foundations are their civil law equivalents. It should be noted that some common law jurisdictions have foundation legislation (Jersey, Wyoming), and civil law jurisdictions have trust legislation (Liechtenstein, Panama).

Choosing a Jurisdiction

In choosing a suitable jurisdiction, it is important to consider the quality of the trust or foundation laws and the court system, the taxation, the quality of the work force, the strength of the financial center of the jurisdiction, the economic and political stability of the jurisdiction, as well as the reputation of the jurisdiction and its standing with the Global Forum of the OECD and the FATF.

Trusts vs Foundations

In very general terms, Trusts are not considered to be separate legal entities. Legal ownership of trust property is held by the trustees whilst an equitable interest in trust property is held by the beneficiaries, which can provide beneficiaries with greater protection due to the nature of their equitable interests. On the other hand, foundations are typically considered to have separate legal personality, can contract in their own name, sue and be sued, etc. Foundations are considered to be the legal owners of assets held by the foundation, and not the founder or beneficiaries. The separate legal personality of foundations may be problematic from a tax perspective if the country of residence of the founder has CFC legislation.

Common Law Trust Jurisdictions

The leading trust international trust jurisdictions include the Bahamas, Bermuda, the British Virgin Islands, Canada, Cayman, Guernsey, the Isle of Man, Jersey, New Zealand, Singapore, Switzerland, the United Kingdom, and the United States. The laws of these jurisdictions vary considerably. In respect of perpetuities periods, the trust laws of the leading trust jurisdictions all now provide for lengthy trust periods, or unlimited perpetuities periods where the rule against perpetuities has been abolished. The existence of reserved powers legislation, which gives broad powers of trust administration to the settlor, can also be an important factor in the choice of a trust jurisdiction and is common in the modern trust jurisdictions.

Many leading trust jurisdictions have strong asset protection laws, including the Bahamas, Cayman, and South Dakota, which laws place time limits on claims brought by creditors of the settlor. However, Jersey, Guernsey and the Isle of Man do not have specific asset protection legislation for trusts and still apply the Statute of Elizabeth. Regarding confidentially, the vast majority of trust jurisdictions, the trust instrument remains a private document kept by the trustee and not filed with any authority. However, New Zealand and the United Kingdom has introduced a trust registry, and a number of jurisdictions have introduced central beneficial owner registries. 

In respect of beneficiaries right to information, most common law trust jurisdictions generally follow English law and the leading Rosewood case, which recognizes the right of beneficiaries to information. These rights may be restricted depending on various factors, such as the status of the beneficiary (discretionary versus fixed interest), the nature of information requested and the purpose of the request, prejudice to other beneficiaries, etc. In some jurisdictions, such as South Dakota, disclosure to beneficiaries may be restricted or prohibited in the trust instrument itself.

Civil Law Foundation Jurisdictions

The leading civil law jurisdictions with private foundation legislation include Liechtenstein, the Netherlands, and Panama. None of these jurisdictions have limitations on the duration of private foundations. Depending on the foundation charter, these jurisdictions typically allow broad powers in favor of the founder. Liechtenstein and Panama have specific asset protection rules that limit the rights of creditors to attach assets transferred to foundations.

In respect of confidentiality, civil law jurisdictions have commercial registers where the foundation charters are registered, which typically do not identify the founder and beneficiaries, and this information remains confidential in the internal documents of the foundation. Nonetheless, even though confidential information is not required to be filed by foundations, many of the foundation jurisdictions now require beneficial owner information to be lodged with central beneficial owner registries, which is public in some jurisdictions. In respect of the rights of beneficiaries of foundations to information, these are typically quite limited and can be restricted or eliminated altogether in the foundation charter.

Trusts are not considered to be separate legal entities, whereas foundations do have separate legal personality, which will impact significantly on tax planning. Due to the nature of the equitable interests held by beneficiaries, they typically have enforceable rights against trustees and greater protections, whereas beneficiaries of foundations have more limited rights. Although many trust jurisdictions have reserved powers legislation allowing broad powers in favor of the settlor, foundation jurisdictions typically allow broader powers in favor of the founder. Thus, foundations are favored over trusts by individuals wishing to retain a high degree of control, whereas trusts offer beneficiaries greater protection than foundations.

 

Differences between Trusts and Foundations

Topic
Trust
Foundation
Applicable law
Common law
Civil law
Creator
Settlor
Founder
Beneficiaries
Enforceable rights
Few Rights
Controlling body
Trustee
Foundation Council
Legal Personality
Not separate legal entity
Separate legal entity
Ownership
Trustee as legal owner, beneficiaries have equitable interest
Foundation as owner
Protector
Possible
Possible
Registration
Private Instrument
Public Deed
Main documents
Trust Deed, letter of wishes
Charter, Regulations
Irrevocable
Possible
Possible
Discretionary
Possible
Possible
Excessive Control
Invalidates trust, creates “sham”
Possible
Estate Planning
Superior
Inferior
Asset protection
Superior
Inferior
Tax planning
Superior
Inferior
Responsibility of Admin.
High degree of responsibility of Trustee
Limited

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