Trust vs Foundation

What is it?

A trust is essentially an agreement between two parties, the settlor and the trustee, and it does not need to register to be effective.

Pursuant to a trust deed, the settlor will transfer his properties to the trustee, where the trustee will then hold on to all the properties but for the sole benefit of the beneficiaries, which are to be listed in the trust deed.

There is also the wishes letter from the settlor, however this letter is non-binding.

A foundation is a separate legal entity that is created by incorporation and is thereafter registered.

The founder puts in the initial assets.

The value of the initial endowment differs on the jurisdiction in which the foundation is being registered in. For example, in Panama, it is $10,000 and it does not need to be in cash. It can be in the form of shares of another company.

Additional Assets

Any person can gift assets into the trust subject to completing the AML/ KYC.

Any person can contribute assets to the foundation.

Asset Ownership

A trustee only has legal ownership over the trust assets. Beneficial ownership stays with the beneficiaries.

Foundation owns all the assets as legal and beneficial owners.

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Potential Pitfall
Beneficiaries have no claim to the assets.

Operational and Structural Framework

Trust is governed by abundance of case law (common law) that guides how a trust should operate.

The founder has some level of discretion in structuring the foundation and how it will be operated.

Succession

With an independent trustee managing all the affairs, the Settlor never has to worry about succession or appointment of family members, especially when such Settlor is young and the family members are minor or inexperienced.

In some cases, family members may be living in countries because of which they become ineligible to be appointed as trustees else they made lead to huge tax exposure on the entire trust income.

In this case, the founder can be the only Council member. However, he does need to appoint other persons to cover the contingent events of incapacitation.

Family members can be appointed to the Council with the Founder being the head.

infoPotential Pitfall 1:
Conflict amongst family members on the Council (after the Founder is gone) can result in breakdown of the working of the foundation.

infoPotential Pitfall 2:
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.

Taxation

Trust is a pass-through entity from a tax perspective. Distribution from a trust can be segregated into capital and income.
Under common law, capital distributions are not subject to tax in the hands of the beneficiaries, while income distributions may be subject to tax depending upon the residency of such individual.

Foundation may pay no tax on its earnings, depending upon how it is set up.

infoPotential Pitfall:
Since a foundation is a separate legal entity, distributions from a foundation (capital or income) may be treated as distribution from a company and thereby subject to tax in the hands of the beneficiary.

Fiduciary Responsibility

The Trustee has a fiduciary responsibility towards the Beneficiaries. In the event the Trustee does not behave responsibly, the Trustee’s personal assets can be attached to make up for the loss suffered by the Trust/ Beneficiaries.

Bookmark outlineBenefit:
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.

The Foundation Council/ Board has no fiduciary responsibility towards the Beneficiaries. They can deal with the assets in whichever manner they deem fit without any accountability to the Beneficiaries.

infoPotential 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.

Contract

Trust itself is not a legal entity. Hence the trustee contracts personally and is personally liable at the event of any breach of contract.

A foundation contracts in its own name. This means, it can be sued or sue.

Duration

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.

Bookmark outline Exception: Labuan and Hong Kong Trusts have infinite life. Dynastic US trusts also have an infinite life.

Foundation can be set up for a limited amount of time or have an infinite life

Mobility

A trust is mobile. The trustee has the freedom to move to a designated new jurisdiction and continue to run the trust.

This is most important in terms of protecting assets in case of malicious litigation and ensuring asset protection.

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.