Trust in general

Trusts origins derive from a common-law arrangement and are formed when the legal owner of assets transfers ownership of those assets to individuals or a corporation, typically for the benefit of certain persons; once a trust is created, the legal ownership of the trust property will vest in the trustee, and the beneficial ownership of the property will belong to the beneficiaries.

There are different types of trust. Trust for the benefit of beneficiaries, as described above, are the most common. However, trusts can also be established for purposes with no beneficiaries.

Foundations in general

Foundations are a less familiar concept than trust. They are sometimes described as a hybrid of a trust and a company. A foundation resembles a company in that it is a body corporate with separate legal personality that owns its own property like a company. A foundation is governed by a council in accordance with its charter and regulations in much the same way that a company is managed by its board of directors in accordance with its constitutional documents.

A foundation also shares similarities with a trust. It has a founder who provides property to be held by the foundation in the same way that a trust has a settlor who provides property to be held subject to the terms of a trust. Also like a trust, a foundation must have one or more objects which may be a purpose and/or be for the benefit of one or more beneficiaries. Foundations have no beneficial owners and are, therefore ’ownerless’ structures.

Common features Trusts and Foundations have

Flexibility

Trusts and foundations are very flexible arrangements. They can both be discretionary in that it will be for the trustee/council to determine which of the beneficiaries are to benefit, when, on what terms and so on. It is also possible for a third party to be appointed to oversee and monitor the trustee/council in their management of the trust/foundation’s property.

Unlimited duration

Both trusts and foundations can be of unlimited duration. Which makes them well suited for use as dynastic private wealth structures as they can hold family wealth over many generations.

Privacy

There are no requirements to register a trust or for any document or information in connection with the trust to be placed in the public domain, so the arrangement may be kept completely private. Both a trust and a foundation can be private arrangements.

Benefits of a Trust

First, trusts are relatively easy to establish. A valid trust will be established provided the following elements: the intention of the settlor and the trustee to create a trust, the property to be subject to the trust and the beneficiaries. The trust does not have to be, but usually is, in writing.

Secondly, a trust is a familiar concept and with that comes confidence in a long- established concept. Trusts are very familiar to most common law jurisdictions around the world. There is therefore a very strong body of law that has built up over the centuries around trusts. There is well established case law surrounding the protection of assets held within trusts. By comparison, foundations are relatively new to common law jurisdictions. This can mean that some families prefer to use trusts to foundations.

Thirdly, the tax treatment of trusts will be well established in most jurisdictions. This might make a trust a more attractive option for many families.

Benefits of a Foundation

First, foundations provide an attractive alternative to trusts for wealthy individuals from civil law jurisdictions where the concept of a trust is not familiar.

Secondly, foundations are incorporated and have separate legal personality. As foundations have separate legal personality, they can enter into contracts with third parties themselves. This differs from a trust which is not a separate legal entity and therefore it is the trustee of a trust rather than the trust itself which enters into contracts. The fact that the foundation is incorporated often makes it a more attractive choice to a trust, particularly if the philanthropic activities are taking place in jurisdictions that do not recognise trusts

Thirdly, the regulations can be drafted. This contrasts with a trust, where a beneficiary would ordinarily be entitled to certain basic information in relation to a trust.

Conclusion

There are a few differences that can mean one structure may be preferable in certain circumstances than the other. It will often come down to the personal preferences of the individual establishing the trust or foundation and/or those advising them. It may also come down to what the trust or foundation is to be used for and what assets it will hold. The key is that both foundations and trusts are extremely useful structures in the context of wealth and succession planning and philanthropy.