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Trust or Foundation: what's right for you?

If you are considering ways to protect your assets or succession planning for the future, trusts and foundations are both valuable solutions. But there are a number of similarities and important differences between both options so you need to find what's right for you.

Jersey has been a prominent player in the field of administering trusts since the 1960s. In addition, the foundation brought into force by the States of Jersey during July 2009 is an important new type of legal entity that is a hybrid of a trust and a company. The foundation is a flexible alternative to the traditional common law trust for tax and succession planning. So what does this mean in practice? The foundation is particularly appealing to those from civil law jurisdictions which have forced heirship provisions in their succession legislation.

There are many other similarities and differences that will define which one is best for you.

Main similarities are:

  • Both may be created for asset protection, succession planning and wealth preservation.
  • The Settlor/ founder can transfer assets to both.
  • Both can be set up during the founder/ settlors lifetime
  • Both entities have the ability to be revoked (with appropriate drafting).
  • A Protector or Enforcer can be appointed for both (with the exception of some jurisdictions).
  • With certain types of trust, such as a Jersey reserved powers trust, a third party (usually but not necessarily the settlor) is able to retain powers in respect of the trust, although care needs to be taken to ensure that the reservation of any particular power does not create adverse tax consequences. This is similar in a foundation where the Founder, as a member of the Council, can exercise control over foundation assets.

Notable differences are:

  • A trust does not have separate legal identity from its trustees. In contrast a foundation has an independent legal identity and holds assets in its own name. The foundation therefore goes through an incorporation procedure, whereas the trust doesn't, it is established upon the execution of the trust instrument and transfer of assets from the Settlor to the trust. As a trust does not have separate legal personality the trustee must hold trust assets, however a foundation, being a legal person, owns its own assets.
  • Foundation Regulations (which governs the foundation) are private but the Foundation Charter (containing basic information) is a public document. In contrast, the trust instrument remains private.
  • The beneficiaries of a foundation do not have equitable rights over the assets of a foundation, whereas beneficiaries of a trust do have equitable rights.
  • The foundation is usually established with the sole purpose of holding wealth or assets and in some jurisdictions legislation prevents any commercial activity being conducted by foundations.
  • A foundation should comply with the wishes of the founder, whereas the trustee should act in the best interests of the beneficiaries.

The foundation is a flexible alternative to the traditional common law trust for tax and succession planning.

 

So what would you choose?

While the foundation is a rival concept to the trust, and has many advantages, it is a fact that the trust concept will continue to be widely used in international tax and wealth planning for two reasons.

  • Many countries do not recognise the concept of trusts but this can be an advantage because countries that do not recognise the trust concept cannot enact specific anti-avoidance legislation against trusts;
  • Even where countries recognise and enact anti-avoidance legislation against trusts it's possible to advise with certainty in relation to such legislation and its impact on settlors and beneficiaries; Trusts have been widely used as family succession planning vehicles for many years in prestigious jurisdictions, and this will continue.

A well-known problem confronting would-be settlors of trusts is that they must transfer ownership and control of their valuable assets to third party professional trustees who they may not know well.

The private family trust company (PTC) is a good way to address this problem. A PTC in Jersey will act as a trustee to a family trust/trusts and the composition of the board will often be influenced by the needs of the family, so may include certain family members and trusted advisers. Underlying the trust, the structure will be designed to suit best the various tax, legal and family considerations.

PTCs in Jersey do not need to be licensed with the Jersey Financial Services Commission but do need to be managed within Jersey by a licensed trust company (e.g. Jordans Trust Company (Jersey) Limited). Jersey can therefore be viewed as a jurisdiction that is supportive of the establishment and use of PTCs.

So, trust or foundation?

Either choice can provide a solution for succession, asset holding and privacy issues. It very much depends on your individual situation. That's why we take care of finding the best solution that addresses each individual's unique circumstances.

You can find out more about our Trust and Foundations services here.

 

This issue's author


Connie Clark


Connie Clark

Managing Director
T: 01534 630112
E: connie_clark@jordans-jsy.com

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