Foundations vs. Trusts
A Foundation is a non-governmental and non-profit organisation which is usually created by an individual or a business and whose funds are managed by its own Trustees or Directors, either as a non-profit corporation or as a charitable trust. One common type of a Foundation is a Family Foundation.
Definition – Benefits – Use
Many successful wealthy families commonly referred to as “High-Net-Worth Individuals” (HNWI), after achieving a certain level of success and building a resume of professional accomplishments, there comes a time when they start wondering what the next challenge in their life may be. Many times, the answer is indeed being engaged in the community by charitable giving for essential causes.
A Private Foundation is ideal for HNWI who wishes to donate and/or make contributions to the society by providing a structure and a vehicle so as to formalise their philanthropic goals in order to create a legacy of family charitable giving. Sometimes families use a Family Foundation as a forum in which younger family members can work toward common goals or as a means of instilling the value of charitable giving in future generations of a family.
Foundations may be also used as a way to accelerate tax deductible charitable contributions simultaneously with sustaining family control over the resources and funds.
Furthermore, a Foundation may donate funds and support to other organisations, or to provide the source of funding for its own charitable purposes and its purpose is to carry educational, religious, humanitarian or charitable activities which serve public interest.
There are several benefits for establishing a Foundation as follows:
- The Donor has control over his/her philanthropic vehicle with regards to the distribution and maintenance of the assets.
- A Foundation may establish an annual pay-out amount that provides and covers administrative expenses while preserving its endowment.
- Through a Foundation, a family is assured that their charitable mission becomes a reality.
- A Donor may have an operation he/she is able to command with employees that he/she has hired.
- Prestige and name perpetuation.
- Involving the next generation.
- Tax deduction.
When considering whether to establish a Foundation, there are a lot of things to think about such as: (i) the amount of volunteer help (ii) expected life of the Foundation and (iii) size of the annual budget that must be funded by an endowment or on-going contributions.
However, it is fair to say that a Foundation is the civil law equivalent to a trust, offering private individuals a flexible framework within which to make provision for their families whilst at the same time protecting assets from future creditors. It would be worth to note that usually a Foundation and more specifically an Offshore Foundation is created where a jurisdiction cannot recognise Trusts, and since it is said to be a corporate alternative to a trust, it keeps the main characteristics of a trust while holding additional benefits on a corporate scale.
The below are the practical uses of a Foundation, depending on the jurisdiction its establishment:
- To protect family business providing continuity to next generations.
- To protect individuals who are incapable of managing their own assets such as minors, disabled or the elderly.
- To carry on scientific, philanthropic, religious, humanitarian purposes, or to manage funds or assets for the benefit of these activities.
- To manage profit sharing as well as pension plans of employees.
- As a sophisticated and efficient alternative of the testament or will.
- As a holding of shares, participations or interests in private or public corporations.
- As a vehicle for the collection of royalties.
- As a vehicle to invest in shares, bonds, mutual funds, bank deposits or other assets.
- As a vehicle to own real estate or other assets of considerable value such as art works.
- As a vehicle to protect assets against excessive taxes, claims by creditors, political instability or forced heir ship.
- To operate bank accounts in any part of the world.
Nevertheless, there are some common structural elements that are the first observed under legal scrutiny or classification:
- Formalities to meet for establishment.
- Purpose of the foundation.
- Economic activity.
- Supervision and management provisions.
- Accountability and Auditing provisions.
- Provisions for the amendment of the statutes.
- Provisions for the dissolution of the Foundation.
- Tax status of corporate and private donors.
- Tax status of the foundation.
Legal Form, conditions & comparison with a Limited Liability Company
A Private Foundation has certain characteristics in common with an ordinary Limited Liability Company. It is, for instance, a separate legal entity established and registered with the relevant Authority in the jurisdiction of its establishment. It also has Council of Members which is responsible for its day-to-day management. As a separate legal entity, the Foundation also owns its own assets, with almost the same way like a company. Neither the Founder, nor the beneficiaries, nor any of the members of the board have any personal liability for the debts or liabilities of the Foundation.
Unlike a company, however, a Foundation does not have shareholders but the control and oversight of the Foundation's activities are vested in its Founder. In addition to this, unlike a company, a Foundation can make provision for succession to assets belonging to the Foundation.
A Foundation includes a body of regulations that should be followed. Unlike the Memorandum of Foundation, the regulations remain private and confidential; they are not filed in any public registry. Therefore, it is within the regulations that individuals typically express their wishes regarding beneficiaries and distribution of foundation assets. Furthermore, in this private document, a protector may be appointed, whose role is to monitor the activities of the Foundation Council. The Regulations may be amended at any time. The by-laws are private and not available to the Public Registry. In order for a third party to identify the beneficiaries, he must obtain a court order so as to be able to find out such confidential information. The foundation’s name may be in any language and must include the word “Foundation”.
A Foundation may be created either directly or through a third party, such as a resident/registered agent. It is legally established when a Charter of the Foundation (which may alternatively be referred to as a Memorandum or Deed) has been drafted and filed at the Public Registry.
The following are some definitions so as to understand the legal form and the duties and/or rights of each individual within the Foundation:
(i) A Founder, who may be one or more individuals or corporations, is the person who establishes the Foundation and transfers his/her property into the said Foundation. The founder’s heirs do not have the right to revoke the creation of the Foundation, nor do they have the right to object the transfer of its assets. The founder can obtain control of the Foundation by retaining the power of appointment of the Foundation Council. A founder may be appointed as a member of the Foundation Council, as a Beneficiary or as Protector, and has the power to remove council members, beneficiaries or a protector if he desires. He can also assign these powers to another person in the Foundation.
(ii) A Foundation may also have a Protector, who plays the role of the ultimate controller and/or watchdog of the Foundation. The Protector can remain anonymous, depending on the jurisdiction of the Foundation’s formation.
(iii) The Beneficiaries are those that have been nominated to directly benefit from the formation of the foundation.
(iv) The Foundation Council Members are those individuals who implement and supervise the Foundation’s activity and purpose. The council makes all the decisions for the benefit of the Foundation and is charged with the responsibility of ensuring that the Foundation’s purposes are correctly fulfilled. The Council has the obligation to administer the foundation’s assets for the benefit of the beneficiaries.
However, establishing and maintaining a Foundation is a complex situation. There are various tax and local law compliance requirements and reporting costs connected with tax filings, audited financial statements, as well as annual federal filings and many state filings are required and are publicly available including the names and amounts contributed by major donors. Such compliance and reporting requirements as well as other costs associated with tax filings vary, depending on the jurisdiction of the Foundations’ establishment. For instance in Panama, there are no reporting requirements of taxes for Panamanian Foundations and the registered agent is not required to keep any records for the respective Foundation.
Foundations Vs Trusts
As mentioned above, the Foundation is often considered as an alternative to a Trust. A Trust is established through an agreement, which is called “Trust Deed” between a “Settlor” and a nominated “trustee” for the administration and management of the settlor’s assets, namely the “Trust Property” for benefit of the beneficiaries. Depending on the terms of the Trust, the trustee usually has discretionary powers and has the obligation to look after the trust on behalf of the settlor and as a result, the settlor loses all legal ownership of his assets once they have been transferred. The trustee shall carry out all the requirements as stipulated in the Trust Deed and subject to the type of the Trust formulated, the Trustee shall use his discretion to distribute the trust property as he deeds appropriate and for the benefit of the Beneficiaries. A Protector, the use of which is not obligatory, may be used for extra security and for the peace of mind of the Settlor. The protector will monitor and ensure strict compliance is met between the Trustee and the Trust Deed at all times.
Differences between Foundations and Trusts:
|Has its own legal personality||Established by an Agreement between the Settlor and the Trustee|
|Must be registered with a Public Registry||There is no requirement to register a trust to Financial Services Authorities|
|Has a corporate name and identity number. It has both private and public information, where the public information is available to external parties whilst the private information is kept strictly confidential||The Trust instrument remains confidential|
|A council member of a foundation must act at all times in the best interest of the foundation and holds a high level of duty of care in accordance with the foundation’s deed||The trustee of a trust must act with due diligence when carrying out the trust declaration requirements, however he has the capacity to use his discretion where needed depending on the type of trust created.|
|Perpetuity rules apply more to foundations – always established in perpetuity||A Trust has validity period – for some jurisdictions is 100 years|
|A foundation’s property need not be settled into the foundation from the initial outset for it to come into existence||Assets are transferred immediately upon the establishment of the trust|
|May be established as a non-profit making trust||A profit making operation|
|Usually recognised by Common Law jurisdictions/countries||Usually recognised only by civil law countries|
Having observed the differences between Foundations and Trusts, it would be worth to mention also their similarities as well which is the level of asset protection. Both Foundation and Trusts can be used as asset protection vehicles since the said assets are not exposed to third party claims and claims from creditors without proof and beyond all reasonable doubt. Moreover, it can be used in estate planning and if established in Tax Haven jurisdictions to enjoy tax benefits.
Our legal team at Eltoma Corporate Services would be happy to assist you in establishing a Foundation which will be tailored to your business needs.
Article by Pinelopi Pilatsi, LLB, LLM
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