Trust vs Foundation for International Estate Planning: Choosing Between Trust or Foundation

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In today’s complex legal and financial landscape, understanding the mechanisms for managing and protecting assets is crucial. Trusts and foundations, two predominant structures in wealth management and International Estate Planning, offer unique benefits and serve distinct purposes. This article aims to demystify these legal entities, providing a clear, concise understanding of trusts and foundations, their roles, and key differences. Whether you’re a prospective settlor, a beneficiary, or simply exploring International Estate Planning options, this insight into trusts and foundations will serve as a valuable guide in navigating these often-misunderstood legal structures.

Table of Contents

Understanding Trusts for International Estate Planning

A trust, finding its origin in common law, constitutes a legal framework wherein a designated party, known as the trustee, holds and administers property for the benefit of another party, termed the beneficiary. This structure is characterised by the involvement of three principal parties:

  • Settlor: This is the individual who initiates the trust. The settlor transfers their property into the trust and establishes guidelines for the usage of the trust’s assets and the identification of its beneficiaries.
  • Trustee: This party, which can be an individual or an organisation, is entrusted with the trust’s assets. The trustee, bearing legal ownership of these assets, is tasked with their management. This management must align with the best interests of the beneficiaries and adhere to the directives outlined in the trust deed and any ancillary documents, such as a non-binding ‘letter of wishes’ provided by the settlor.
  • Beneficiaries: These are the persons or entities for whose advantage the trust is established. While they do not hold ownership of the trust’s assets, beneficiaries are entitled to benefits from these assets as delineated in the terms of the trust.

Upon its formation, the trust operates as an independent legal entity. The trustee is bound by a fiduciary duty, necessitating actions in good faith and loyalty towards the beneficiaries. This duty includes the prudent management of trust assets, conforming to the trust’s designated purpose and stipulations. The specifics of these stipulations can encompass various objectives, such as the allocation of income, conservation of assets for future beneficiaries, charitable endeavours, or other settlor-defined goals.

Understanding Foundations for Asset Protection

A foundation is an entity that is legally established by an individual, a family, or a group, collectively referred to as the founder(s). Its primary function is to administer assets and execute specific purposes, which predominantly include charitable, educational, cultural, religious, or other social benefits. Possessing its own legal identity, a foundation is empowered to own property, engage in contractual agreements, and conduct activities under its name.

The foundational assets or capital are provided by the founder, who also delineates the goals of the foundation. Unlike personal ownership, the foundation is not owned by the founder, although the founder may have an influential role in its governance. This governance is steered by a charter and a set of rules laid down by the founder. Typically, a council or board is tasked with the oversight of the foundation’s operations, ensuring that its activities align with the established objectives. These objectives are clearly articulated, directing how the foundation allocates its resources and conducts its affairs. Foundations are dedicated to serving the community or specific causes in harmony with their stated goals, and they are obligated to adhere to the legal and regulatory norms of their respective jurisdictions.

Key Differences Between Trusts and Foundations

AspectTrustFoundation
Registration RequirementTypically, there is no registration needed to establish a trust.Foundations must be registered to exist and be effective.
Legal Entity Status and OwnershipA trust is not a separate legal entity. Due to this, the ownership of assets is split between the trustee and beneficiaries.A foundation is a separate legal entity with its own legal personality, capable of fully owning assets.
Control and Management The trustee is responsible for management of a trust according to the trust deed.Foundations are managed by a board of minimum three members, usually governed by a charter and rules.
Fiduciary Duty to BeneficiaryA trustee has a fiduciary duty towards the beneficiaries of the trust.The board does not owe any fiduciary duty to the beneficiaries of the foundation.
PurposeTrusts can be for persons or purposes. For example, a charitable trust is dedicated to a specific cause.A foundation must have a purpose, which can include persons.
SupervisionIn several countries, like Samoa, for instance, trusts may have a protector as a watchdog for the beneficiaries. The protector can have powers like removing/appointing trustees, modifying beneficiaries, and creating excluded persons.Foundations can have a supervisory person to supervise the board.
Special StructuresUnder Samoan law, trusts can be combined with a Limited Partnership, offering control to the General Partner of the Limited Partnership while providing value to the trust. Trustees are protected against the acts/omissions of the General Partner. Further, the Samoan International Trust Arrangement allows licensed Samoan Trustee Company to hold shares of a Samoan company without liability for the company’s management/control.In Samoa, foundations can also be combined with a Limited Partnership. As a registered legal entity, a Foundation offers different structural and liability dynamics.
Special powersCertain jurisdictions also allow for special powers to the settlor or the protector of a trust. For instance, a Samoan trust allows for such reserved powers and also permits anyone to give “prescribed directions” to the Trustees.As per Samoan laws, founders or others can have reserved powers, assignable to others. In the absence of assignment, powers vest in a guardian and are not lost/ waived off.

Trust or Foundation: Which is Right for You?

When considering the choice between a trust and a foundation, it’s crucial to understand their distinct advantages and how they align with your specific requirements. Foundations are particularly appealing in several scenarios. Firstly, they are a favoured option for wealthy individuals from civil law jurisdictions where the concept of a trust, which involves the split of legal and beneficial ownership, may not be familiar, unlike in common law jurisdictions. Secondly, foundations possess their own legal identity, allowing them to hold both legal and beneficial titles to their properties, which is different from trusts. This means beneficiaries of foundations do not have an interest in the foundation property, and the foundations can engage in contracts independently, unlike trusts.

Further, foundations may offer the advantage of privacy, as their regulations can be drafted to exclude the requirement of providing information to beneficiaries, contrasting the usual transparency expected in trusts. In terms of privacy and continuity, trusts also offer significant advantages. They are typically not required to be registered publicly, allowing for a high degree of confidentiality in wealth management.  Additionally, in certain countries, beneficiaries have no interest in the foundation’s assets and are not owed fiduciary duties, making foundations suitable for holding certain types of assets, particularly those that are depreciating or high-risk.

The decision between a trust and a foundation often comes down to personal preferences, the advice of professionals, the intended purpose, and the nature of assets involved. Both structures are extremely useful in wealth management, succession planning, and philanthropy, but their subtle differences can make one more suitable than the other in specific situations. Understanding these nuances is key to making an informed decision.

Foundations and Trusts: The Choice is Tricky

The choice between a trust and a foundation is a significant decision that requires careful consideration of individual circumstances, goals, and the nature of assets involved. Both trusts and foundations offer strategic solutions for asset management, international estate planning, and charitable endeavours, but their effectiveness lies in their appropriate application. As legal structures with profound implications, it is vital to seek professional guidance tailored to your unique situation. For personalised advice and to explore how these structures can benefit you, we invite you to get in touch with our law firm. Our team of experts is committed to providing comprehensive legal solutions that align with your objectives and secure your legacy. Contact us today to embark on a path of informed and strategic asset management.

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Raea Khan Circle
Director Lawyer
Raea Khan

Raea is Managing Director and Principal Lawyer for PBl Law Group. Raea assists clients with major projects, property developments, construction and strata law.

He has worked in Western Australia and Queensland assisting with expansion projects in the energy and resource sector and now predominately advises clients in Strata and Community Association matters.

He is a member of the Australian College of Strata Lawyers where majority of his work is advising developers and owners corporations with dispute related minor and major defects, strata governance and common property litigation. He is proficient at leading negotiations and meetings.

Raea has a particular interest in the commercial aspect of any dispute and always tries to weigh up the risk, reward and benefit of legal proceedings at each different stage.

Raea enjoys all forms of competitive sport, including Crossfit and actively participates in Triathlons, representing Australia as an age group athlete. He was a member of Red Head Surf Lifesaving club.

  • Strata Law
  • Construction & Major Projects
  • Commercial and Business Law
  • Planning & Environment Law