Trusts vs Foundations: What are the Deciding Factors?

Trusts in General

Trusts are a familiar concept, but it is worth going back to basics briefly.  A trust is formed when the legal owner of assets (the settlor) transfers legal ownership of those assets (the trust property) to individuals or a corporation (the trustee), typically for the benefit of certain persons (the beneficiaries).  Once a trust is established, the legal ownership of the trust property will vest in the trustee, and the beneficial ownership of the property will belong to the beneficiaries.   

There are different types of trusts. Trusts for the benefit of beneficiaries, as described above, are the most common.  However, trusts can also be established for purposes (charitable or non-charitable or both) with no beneficiaries.    

Foundations in General

Foundations are a less familiar concept than trusts.  They are sometimes described as a hybrid of a trust and a company.  A foundation resembles a company in that it is a body corporate (albeit without shareholders) with separate legal personality that owns its own property like a company.  A foundation is governed by a council in accordance with its charter and regulations (its constitutional documents) in much the same way that a company is managed by its board of directors in accordance with its constitutional documents. 

A foundation also shares similarities with a trust. It has a founder who provides property to be held by the foundation in the same way that a trust has a settlor who provides property to be held subject to the terms of a trust.  Also like a trust, a foundation must have one or more objects which may be a purpose (charitable or non-charitable) and/or be for the benefit of one or more beneficiaries. 

Foundations have no beneficial owners and are therefore ’ownerless’ structures (even where the foundation property is held for the benefit of beneficiaries). 

 Features that Trusts and Foundations have in Common

 Flexibility

Trusts and foundations are very flexible arrangements.  They can both be discretionary in that it will be for the trustee/council to determine which of the beneficiaries are to benefit, when, on what terms and so on.  It is also possible for a third party to be appointed to oversee and monitor the trustee/council in their management of the trust/foundation's property (typically a protector in connection with trusts and a guardian in connection with foundations).

Similarly, a settlor of a trust can reserve powers for himself or grant them to other persons such as certain key members of their family in connection with their trusts.  Often, these will be the powers to direct the investment of trust assets (for example if a settlor or family member has specific expertise in that area); powers to direct distribution of trust assets to beneficiaries; and powers to add or remove beneficiaries of the trust.  The same is available to the founder of a foundation, who may wish to reserve for himself certain key powers in connection with the foundation.

For settlors who are very wealthy, they may choose to incorporate their own private trust company (PTC) to act as trustee of the family's trust(s).  Using a PTC allows settlors to appoint themselves or family members onto the board of such PTC, if appropriate.  This provides an alternative means for family participation in the administration of the trusts to the use of protectors or reserved powers.  It is becoming increasingly common for foundations to be used in a similar way to act as a trustee (a private trust foundation) of a family's trust(s).

Unlimited Duration

Both trusts and foundations in Jersey can be of unlimited duration.  This makes them well suited for use as dynastic private wealth structures as they can hold family wealth over many generations.   

Privacy

There are no requirements to register a trust or for any document or information in connection with the trust to be placed in the public domain, so the arrangement may be kept completely private.  Some limited information in relation to foundations will be publicly available, but there is no requirement that the identity of the founder, beneficiaries or purposes of a foundation be publicly available.  Accordingly, both trusts and foundations can be private arrangements.

 Benefits of a Trust

There are a few areas where a trust may be preferred over a foundation.

First, trusts are relatively easy to establish.  A valid trust will be established provided the following elements are sufficiently certain:  the intention of the settlor and the trustee to create a trust, the property to be subject to the trust and the objects of the trust (beneficiaries or purposes).  A trust comes into existence when the first trust property is transferred from the settlor to the trustee.  The trust does not have to be, but usually (and preferably) is, in writing.  A foundation by contrast is an incorporated entity so there are more formalities involved with the establishment of a foundation.

Secondly, a trust is a familiar concept and with that comes confidence in a long- established concept.  Trusts are very familiar to most common law jurisdictions around the world and have been in use since the middle ages.  There is therefore a very strong body of law that has built up over the centuries around trusts.  This makes the trust a reliable structure with few unknowns.

There is well established case law surrounding the protection of assets held within trusts.  Jersey has established 'firewall' legislation which protects trusts from attack from foreign jurisdictions and it has been tried and tested over many years.  By comparison, foundations are relatively new to common law jurisdictions and, while Jersey foundations benefit from similar firewall provisions to Jersey trusts, there is relatively little case law in relation to foundations.  This can mean that some families prefer to use trusts to foundations.

Thirdly, the tax treatment of trusts will be well established in most jurisdictions.  However, as a foundation is a newer concept, in certain jurisdictions the tax treatment of foundations is less clear.  This might make a trust a more attractive option for many families.

Benefits of a foundation

There are also a few areas where foundations may be preferred over trusts.

First, foundations provide an attractive alternative to trusts for wealthy individuals from civil law jurisdictions where the concept of a trust (the split of legal and beneficial ownership referred to above) is not familiar. 

Secondly, foundations are incorporated and have separate legal personality.  Both the legal and beneficial title to foundation property is held by the foundation itself.  This means that any beneficiaries of foundations do not have any interest in the foundation property.  Also, as foundations have separate legal personality, they can enter into contracts with third parties themselves.  This differs from a trust which is not a separate legal entity and therefore it is the trustee of a trust rather than the trust itself which enters into contracts.  Further, foundations are increasingly being used as philanthropic vehicles holding significant wealth that is then applied to philanthropic purposes.  The fact that the foundation is incorporated often makes it a more attractive choice to a trust, particularly if the philanthropic activities are taking place in jurisdictions that do not recognise trusts

Thirdly, the regulations can be drafted so that there is no requirement for beneficiaries of a foundation to be provided with any information about the foundation.  This contrasts with a trust, where a beneficiary would ordinarily be entitled to certain basic information in relation to a trust.

Finally, a beneficiary under a Jersey foundation has no interest in the foundation's assets and is also not owed fiduciary duties by the council of the foundation or the guardian of a foundation.  This differs to a beneficiary of a trust who is owed fiduciary duties by its trustee.  This can make a foundation an attractive vehicle to hold certain types of assets, such as those that are depreciating or high risk.

Conclusion - Trust or Foundation? 

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.