Trusts vs. Foundations: Which Is Better?admin
Even if you are not a legal or financial expert, the chances are that you have heard of both trusts and foundations. Both of these are available to private individuals but not everyone can tell the difference between them, let alone know which is the best option.
A trust is a legally binding arrangement created (in lifetime, or on death) by a settlor when assets are placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose.
A trust has the main following characteristics:
- The trust assets constitute a separate fund (the trust fund) and are not a part of the trustee’s own estate nor of the settlor’s estate upon death.
- Legal title to the trust assets stands in the name of the trustee (‘legal owner’).
- Equitable title to the trust assets stands with the beneficiaries.
- The trustee has the power and the duty, in respect of which he is accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust instrument and the common law fiduciary duties.
- A trust does not have separate legal personality.
- Assets managed/administered with fiduciary principles and powers in the trust instrument.
- Managed by the trustee.
- Established in writing by Deed / Declaration
A foundation is an incorporated legal entity which can be used to hold assets and will have a number of uses in wealth structuring and succession planning. As a concept it is neither a company as such, nor a trust, although it has features of both.
A foundation has the following main characteristics:
- Exists by way of incorporation/registration with the relevant registration body in the jurisdiction concerned.
- Has its own legal personality separate from that of the Foundation Council and the Founder
- Managed by a Foundation Council (similar to a Board of Directors of a company)
- Established by way of a Foundation Charter & By-Laws
- Can sue and be sued in its own name
The Bottom Line
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.
So, what is better? Trusts and foundations differ in a number of important respects but can both be used to achieve similar objectives. Both can be effective structures to achieve succession planning, asset protection, charitable or philanthropic aims. They are both flexible tools that allow arrangements to remain private.
When deciding which structure to use, each circumstance will need to be considered on its merits, taking into account factors such as the aim of the structure, the country of establishment, and the level of control required to be retained.
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