Trusts Versus Foundations
This article compares and contrasts two key mechanisms for managing wealth: trusts and foundations.
Trusts – An Introduction
Trusts can be thought of as a safety deposit box for a person’s assets. Indeed, trusts are often an integral component to wealthy families’ asset protection, wealth management and succession planning strategies. Depending on the circumstances and the rules of the jurisdiction in question, they can also provide a degree of tax efficiency, particularly with respect to inheritance, estate and gift taxes.
How Trusts Work
There are three key people in a trust relationship: the settlor, the trustee, and the beneficiary.
Typically, the settlor places assets such as property in a trust. The trustee then 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, they may be entitled to income from property rents or other income-bearing investments. Beneficiaries may also inherit assets and investments placed in the trust after the settlor’s death.
What Are The Advantages Of Using A Trust?
Trusts protect assets in a number of ways. This can be, in some cases, to protect them against creditors, from disclosure, and to prevent improper use.
Trust Law Jurisdictions
Trusts emerged centuries ago under English law. As such, trusts are mainly found in countries that inherited English common law, such as those in North America, Australasia, the UK’s Overseas Territories, and of course, the UK itself.
The concept of a trust is not recognized in a number of other jurisdictions. However, an equivalent form exists in civil law countries, the foundation, which is summarized next.
The legal concepts underpinning foundations are quite distinct from those underpinning trusts. However, effectively, they perform similar roles and are mainly deployed to protect assets and manage successions.
Whereas a trust is a legal relationship between settlor, trustee, and beneficiary, a foundation is a legal entity more akin to a company. Therefore, it is usually registered in the jurisdiction concerned.
Foundations are formed by a founder who provides the foundation’s initial assets. This is known as the endowment. Assets are held by a foundation for the purposes set out in its constitutive documents and are administered according to contractual, rather than fiduciary, principles.
Instead of a trustee, a foundation has a council whose role is similar to a company board. The council is responsible for fulfilling the purpose of the foundation according to its constitutive documents.
A foundation can also name beneficiaries who may receive income or other entitlements from the endowment under the foundation’s regulations. However, a key difference between foundations and trusts is that foundations don’t need beneficiaries, whereas trusts do. Further, foundation beneficiaries tend to have weaker legal rights than trust beneficiaries, who have more resort to legal remedies, including through the courts, to assert their interests in a trust.
As mentioned, foundations tend to be found in civil law countries. Prominent foundation jurisdictions in Europe include Austria, Liechtenstein, and the Netherlands. In Central America, Panama is a notable foundation jurisdiction. However, to cater to increasing wealth in emerging economies, many common law jurisdictions have legislated to introduce foundations.