Considering setting up a Trust or a Foundation to protect family wealth and assets, and wonder what each entails? Our Business & Family Solutions team at Lighthouse Canton takes us through an overview of the two different estate planning options.
For further information about our Business & Family Solutions, request further information here.
Foundation
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Trust
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Fiduciary Responsibility
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The Foundation Council/ Board has no fiduciary responsibility towards the Beneficiaries. They can deal with the assets inwhichever manner they deem fit without any accountability to the Beneficiaries.
Potential Pitfall:
As mentioned above, since Beneficiaries have no claim to the assets and there is no fiduciary responsibility on the Council/ Board, they have absolute power on how to deal with these assets.
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The Trustee has a fiduciary responsibility towards the Beneficiaries. In the event the Trustee does not discharge their duties with careand skill or act in the best interest of the beneficiaries, the Trustee’s personal assets can be attached to make up for the loss suffered by the Trust/ Beneficiaries.
Benefit:
It is for this reason, i.e. to cover the abovementioned liability, that the licensed Trustee companies take out substantial insurance policies for each client mandate they take on.
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Duration
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A Foundation can be set up for a limited amount of time or have an infinite life
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Most family Trusts have a life span of maximum 150 years.Thereafter, the Trust can be converted into a charitable Trust with an infinite life span.
Exception:
Labuan and Hong Kong Trusts, as well as Dynastic US Trusts, have infinite life.
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Succession
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In this case, the Founder can be the only Council member. However,they will need to appoint other persons to cover the contingent events of incapacitation.
Family members can be appointed to the Council with the Founderbeing the head.
Potential Pitfalls:
Conflict amongst family members on the Council (after the Founder is gone) can result in breakdown of the working of the Foundation.
With there being no fiduciary responsibility and accountability to the Beneficiaries, the family arm that is not represented on the Council may not be treated fairly.
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As the independent Trustee manages all the affairs, the Settlor need not worry about succession or appointment of family members,especially when the Settlor is young and the family members are minor or inexperienced.
In some cases, family members may be living in certain countries become ineligible to be appointed as Trustees, as this may lead to huge tax exposure on the entire Trust income.
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Contract
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A Foundation contracts in its own name. This means, it can be sued or sue.
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A Trust itself is not a legal entity. Hence the Trustee contracts personally and is personally liable in the event of any breach of contract.
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Mobility
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A Foundation is formed based on the legislation of the country of establishment. Therefore, in principle, it cannot be relocated. However, the Labuan Foundations Act 2010 (LFA 2010) permits the re-domiciliation of a Foundation established.
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A Trust is mobile. The Trustee has the freedom to move to a designated new jurisdiction and continue to run the Trust. This ability is an important consideration in terms of ensuring asset protection.
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Operational Structure & Framework
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The Founder has some level of discretion in structuring the Foundation and how it will be operated.
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Trust is governed by abundance of case law (common law) that guides how a Trust should operate.
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DISCLAIMER This article, provided as a general commentary, is for informational purposes only and is not to be construed as an offer to sell or solicit an offer to buy any financial instruments in any jurisdiction. This article does not constitute, and is not intended to provide, any form of tax, legal and/or accounting advice. You should consult your financial advisors prior to taking any decision(s). This article is based on information from sources which are reliable but has not been independently verified by Lighthouse Canton Pte. Ltd. and its subsidiaries ("LC"). LC has taken reasonable steps to verify the contents of this article and accepts no liability for any loss arising from the use of any information contained herein.Information contained herein are those of the author(s) and does not represent the views held by other parties. LC is also under no obligation to update you on any changes made to this article.Lighthouse Canton Pte. Ltd. and its subsidiary, Lighthouse Canton Capital (DIFC) Pte. Ltd. are regulated by Monetary Authority of Singapore ("MAS") and Dubai Financial Services Authority ("DFSA") respectively. MAS and DFSA have no responsibility for reviewing, verifying and approving the contents of this article and/or other associated articles. The contents of this article may not be reproduced or referenced, either in part or in full, without prior written permission from LC. Please contact us should you wish to republish or reference this article.
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