February 2025
TRUSTS
Trusts have formed the basis of succession and wealth planning for hundreds of years. Allowing for the administration and management of a persons or family’s affairs from the perspective of succession planning; asset protection; inheritance actions; active asset management and planning. This planning and structure and wealth administration can and does continue after the lifetime of the settlor.
A trust is formed when the legal owner of assets (the settlor) transfers legal ownership of those assets (the trust property) to individuals or a corporation (the trustee), typically for the benefit of certain persons (the beneficiaries). Once a trust is established, 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 trusts. Trusts for the benefit of beneficiaries, as described above, are the most common. However, trusts can also be established for purposes (charitable or non-charitable or both) with no beneficiaries.
A trust can therefore delay the time at which children become entitled to family wealth – it can prevent significant wealth passing to children or indeed adults before they are responsible enough to use the money wisely or are perhaps not in a position to manage and control any distribution.
Separating assets from an individual’s personal wealth also provides advantages of asset protection as well as significant taxation savings, subject to laws of the particular jurisdiction where the Settlor and/or beneficiaries are resident.
Trusts are not separate legal entities and constitute a contractual relationship. When an individual, called a Settlor transfers assets, known as the Trust Capital to a trustee or trustees, who will manage and control the assets, involving; protecting, preserving and enhancing the assets until all or part of the trust fund is distributed to one or all the pre-selected beneficiaries.
Legal title to the assets is given up by the settlor and held by the trustees, the beneficiaries will have a beneficial interest in the trust fund. The trustees therefore hold the assets on behalf of the beneficiaries. The management of the assets is governed by a Trust Deed which sets out the powers conferred on the Trustees as to how the assets are to be managed and how they are to be ultimately
distributed. From a distribution perspective the Trust could either be a Vested Trust or a Discretionary Trust. Vested Trusts are set up in such a way that the deed will instruct the trustees to pay out capital and income to relevant beneficiaries in a pre-determined manner and at a pre-determined time.
FOUNDATIONS
A foundation is a relatively new concept to common law jurisdictions, which have traditionally used trusts for asset holding and succession planning. As with a trust, a foundation can also and does in fact allow for Estate planning, asset protection, wealth structuring and succession planning.
Foundations are a less familiar concept than trusts. 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 (albeit without shareholders) 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 (its constitutional documents) 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 (charitable or non-charitable) and/or be for the benefit of one or more beneficiaries. Foundations have no beneficial owners and are therefore ’ownerless’ structures (even where the foundation property is held for the benefit of beneficiaries)
A foundation is an incorporated legal entity which can be used to hold assets and will have several uses in wealth structuring and succession planning. The foundation can also allow for significant financial advantages due to its unique structure, including taxation and regulatory advantages. As a concept it is neither a purely company nor a trust, although it has features of both. It can control the time at which funds are paid out to beneficiaries and provides for the separation and protection of assets from creditors.
Foundations are effectively orphan structures, so a legal entity but with no shareholding. They are extremely useful where a structure may have called for a Purpose or Charitable Trusts, or companies limited by Guarantee with commercial intent. They can equally be used for charitable or non-charitable purposes. There are also no requirements for a foundation to have beneficiaries.
There is a growing trend to utilise a foundation as an ultimate holding vehicle which separates underlying assets from an individual’s personal wealth and therefore falls outside his/her estate for inheritance tax purposes. It is also by definition the ultimate holding company shareholder for privately run business operations that can protect shareholders’ or partner’s’ family interest by foundations set up for each shareholder or partner.
Trust or Foundation?
The use of Trusts in the context of succession and wealth planning as well as philanthropy is well established. Foundations, on the other hand, are relatively new (certainly to common law jurisdictions such as Jersey, Isle of Man, DIFC and ADGM in the UAE) and as a result there are fewer of them. However, they are being increasingly used as structures for succession planning and philanthropy. The question often asked is: which should I use? Is one preferable to the other?
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 (typically a protector in connection with trusts and a guardian in connection with foundations). Similarly, a settlor of a trust can reserve powers for himself or grant them to other persons such as certain key members of their family in connection with their trusts. Often, these will be the powers to direct the investment of trust assets (for example if a settlor or family member has specific expertise in that area); powers to direct distribution of trust assets to beneficiaries; and powers to add or remove beneficiaries of the trust. The same is available to the founder of a foundation, who may wish to reserve for himself certain key powers in connection with the foundation.
For settlors who are very wealthy, they may choose to incorporate their own private trust company (PTC’) to act as trustee of the family’s trust(s). Using a PTC allows settlers to appoint themselves or family members onto the board of such PTC, if appropriate. This provides an alternative means for family participation in the administration of the trusts to the use of protectors or reserved powers. It is becoming increasingly common for foundations to be used in a similar way to act as a trustee (a private trust foundation) of a family’s trust(s).
Both trusts and foundations can exist and operate in perpetuity, there may be certain jurisdictions where Trusts have a limited of 50 or 100 years. This makes them well suited for use as dynastic private wealth structures as they can hold family wealth over many generations.
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. Some limited information in relation to foundations will be publicly available, but there is no requirement that the identity of the founder, beneficiaries or purposes of a foundation be publicly available. Accordingly, both trusts and foundations can be private arrangements.
There are a few areas where a trust may be preferred over a foundation. First, trusts are relatively easy to establish. A valid trust will be established provided the following elements are sufficiently certain: the intention of the settlor and the trustee to create a trust, the property to be subject to the trust and the objects of the trust (beneficiaries or purposes). A trust comes into existence when the first trust property is transferred from the settlor to the trustee. The trust does not have to be, but usually (and preferably) is, in writing. A foundation by contrast is an incorporated entity so there are more formalities involved with the establishment of a foundation. “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.’’
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 and have been in use since the middle ages. There is therefore a very strong body of law that has built up over the centuries around trusts. This makes the trust a reliable structure with few unknowns. There is well established case law surrounding the protection of assets held within trusts. Jersey, for example has established ‘firewall’ legislation which protects trusts from attack from foreign jurisdictions and it has been tried and tested over many years. By comparison, foundations are relatively new to common law jurisdictions and, whilst Jersey foundations also benefit from similar firewall provisions, there is a larger body of civil law cases providing support for Trust protection as opposed to foundations.
Thirdly, the tax treatment of trusts will be well established in most jurisdictions. However, as a foundation is a newer concept, in certain jurisdictions the tax treatment of foundations is less clear. This might make a trust a more attractive option for many families.
There are however a few areas where foundations may be preferred over trusts. First, foundations provide an attractive alternative to trusts for wealthy individuals from civil law jurisdictions where the concept of a trust (the split of legal and beneficial ownership referred to above) is not familiar.
Secondly, foundations are incorporated and have separate legal personality. Both the legal and beneficial title to foundation property is held by the foundation itself. This means that any beneficiaries of foundations do not have any interest in the foundation property. Also, 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. Further, foundations are increasingly being used as philanthropic vehicles holding significant wealth that is then applied to philanthropic purposes. The fact that the foundation is incorporated often makes it a more attractive choice to a trust, particularly if the philanthropic or business activities are taking place in jurisdictions that do not recognise trusts. Thirdly, the regulations can be drafted so that there is no requirement for beneficiaries of a foundation to be provided with any information about the foundation. This contrasts with a trust, where a beneficiary would ordinarily be entitled to certain basic information in relation to a trust.
Finally, a beneficiary under a Jersey foundation has no interest in the foundation’s assets and is also not owed fiduciary duties by the council of the foundation or the guardian of a foundation. This differs to a beneficiary of a trust who is owed fiduciary duties by its trustee. This can make a foundation an attractive vehicle to hold certain types of assets, such as those that are depreciating or high risk.
There are a few subtle 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.
Foundation and Trust Comparison
| Foundation | Trust | |
| Legal Entity | A Foundation is a separate legal entity. | A Trust is not a separate legal entity, it is a contract. |
| Contracts and Asset Holding | A foundation can contract and hold assets in its own name. The foundation holds the legal and beneficial title to the assets. | Trustees contract in their own name as opposed to the Trust itself. Legal ownership of the trust fund sits with the trustees and beneficial ownership with the beneficiaries |
| Litigation | A foundation can sue and be sued in its own name. | The trustees would sue and be sued in their own names, as opposed to action being taken by or against the Trust. |
| Establishment | A foundation does not require to be set up based on any capital contribution and is merely registered. | A Trust needs to be ‘settled’ with an asset. |
| Commercial Activities | A foundation can conduct a trade or business operation. | A trust can also conduct commercial business activities but with certain limitations. |
| Registration | A foundation must be formally registered with the relevant Registrar in its jurisdiction. The foundation document (the charter) will be a public document. In practice, most of the information is contained in the regulations of the foundation which is a private document and very little information is included in the charter. | There are three basic requirements to establish a trust, stemming from English case law. For a trust to be valid it must: – Demonstrate that at the time of creation there was an intention by the settlor to create a trust; – Identify the trust fund and the beneficiaries. – To be valid a trust must have beneficiaries. |
| Privacy | Foundation is not required to publicly reveal the identity of the guardian, founder or beneficiaries. | A trust does not need to be registered and no trust documentation needs to be made public. |
| Beneficiaries | A foundation does not need to have any beneficiaries. | A trust requires beneficiaries; an exception to this is a purpose trust, where there are no beneficiaries, but an enforcer appointed to ensure that the trust is managed in accordance with stated purposes. |
| Beneficiary Rights | Beneficiaries of foundations have very limited rights unless the founder wishes to provide for rights to be granted under the foundation’s regulations. | Beneficiaries of a trust have a beneficial interest in the assets and therefore have legal rights which can go as far as forcing the trustees to take an action through the court or expressing their collaborative wish for an action to be taken which would be difficult for a trustee to refuse unless there were compelling reasons to do so. |
| Information Disclosure | Beneficiaries of a foundation do not have any beneficial interest in a foundation unless the foundation council or the regulations confer some entitlement on them (such as a right to receive income). | Beneficiaries also have rights to certain information about the trust. They are not entitled to disclosure of information as of right but have a legitimate expectation of disclosure. A beneficiary’s rights to information are based on the fiduciary duty of the trustees to keep the beneficiaries informed and to provide accounts. |
| Council and Trustees | The council has similar duties and functions to the board of directors of a company. The members of the council of a foundation must act for the benefit of the foundation. | Trustees have far wider duties which ensure the protection of the beneficiaries but may prohibit the actions that a trustee may take or in some instances assets they may hold. |
Pricing
Pricing for structures usually has five components when deciding to set-up:
a) Once-off set-up fee;
b) Annual maintenance and administration fee;
c) Compliance, secretarial & regulatory fees;
d) Accounting fees and
e) Bank account set-up fee.
The following fees are an average taken from a number of service providers.
Trusts: Set-up- US$3 500-US $6 000
Annual Maintenance US$3 500 – US$6 000
Annual Compliance US$2 000
Accounting (most cases optional) US$2 500-US$3 000
Bank Account opening: US$750-US$1 500, difficulty and type dependent
Foundations: Set-up- US$4 500-US$8 000
Annual Maintenance US$4 500 – US$8 000
Annual Compliance US$2 000
Accounting (most cases optional) US$2 500-US$3 000
Bank Account opening: US$750-US$1 500, degree difficulty dependent
Companies: Set-up– US$2 500- US$3 500
Annual Maintenance US$3 000- US$5 000
Annual Compliance US$1 500
Accounting (most cases optional) US$1 500-US$2 000
Bank Account opening: US$750-US$1 500, degree of difficulty dependent
