Broadly speaking, in a private client situation where you’re looking at helping to structure an asset as part of a client’s overall wealth management, you are likely to be able to use either a trust or a foundation to achieve a similar outcome.
So how do you decide which fits best?
There may be obvious deciding factors, for instance in a situation where great care needs to be taken with certain beneficiaries because of their young age or vulnerability. Or with certain third parties who may be more comfortable with a trust with its hundreds of years of case law, as against foundations which have been around for a shorter period of time (in the Common Law world).
Indeed, in Civil Law countries there may be parties with a familiarity with foundations who refuse to get their heads round the split of legal and beneficial ownership inherent in a trust.
Frankly, it may well come down to how much prior knowledge a client has, and what kind of structure the relevant investment manager and tax advising team are more well-versed in.
The various elements, looked at via the prism of Gibraltar law, regulation and industry practice, generally come down to the following:
The Differences
| Trusts | Foundations |
• Private arrangement between settlor and trustee for benefit of beneficiaries. Gibraltar allows for the voluntary registration of trusts, but this is completely optional and has no bearing on the constitution of a trust if all other legal considerations as to certainties have been met. • No legal personality. Assets are vested in the name of the trustee and the trust is not a distinct legal person capable of suing and being sued. • It is best practice to have a professional regulated trustee, but not a regulatory requirement. • In Gibraltar a discretionary trust can exist for a period of 250 years. • Trust beneficiaries are ordinarily entitled to certain trust information. | • A statutory body which needs to be registered with the Registrar in order to come into existence. There is an element of information which is available to the public. • Has legal personality and owns foundation assets in its own name. Can sue and be sued. • In certain jurisdictions, Gibraltar being one of them, a foundation must have a regulated foundation councillor on its council. Other lay councillors may also form part of the council (jurisdiction permitting). • A foundation can be made to have a limited duration, but can also be created so as to carry on until its purpose has been fulfilled. • The foundation can be drafted such that some beneficiaries may not have an automatic right to information. The rights of these disenfranchised beneficiaries are safeguarded by the requirement for a Guardian to be appointed in those cases. |
The Similarities
| Trusts | Foundations |
• Assets are introduced to the trust by the settlor. • The settlor may wish to have an overseer in the form of a Protector (even though this is not a statutory role, but one that can be made a fiduciary). • Trusts can be used for asset protection, wealth management, ‘skipping a generation’, philanthropy and a long etc. • In certain circumstances, a purpose trust can be set up for charitable or defined non-charitable purposes. • Local taxation is dependent on source, and on the residence of beneficiaries. • Accounting at international standards. • A trust can own a company which in turn owns distinct assets. | • Assets are introduced to the trust by the founder. • The founder may wish to have an overseer in the form of a Guardian (even if not strictly required in law, if there are enfranchised beneficiaries). • Similarly, foundations can be used for asset protection, wealth management, ‘skipping a generation’, philanthropy and a long etc. • Similarly, foundations can be set up for purposes, with no beneficiaries (with a Guardian in place). • Similarly, local taxation is dependent on source, and on the residence of beneficiaries. • Again, accounting at international standards. • A foundation too can own a company which is the one holding assets separately. |
So can any conclusion be reached?
The decision on structuring will need to take into account all the circumstances of the client and family concerned, be carefully discussed with all advisers in the round, and the most appropriate vehicle crafted accordingly.
Please get in touch and see how we can work together.
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