With the enactment of the Foundations (Jersey) Law 2009, many high-net-worth families in Asia are looking for the best way to protect their long-term financial positions, with growing scrutiny on whether trusts or foundations are the way forward
Since the enactment of the Foundations (Jersey) Law 2009, legal practitioners have diligently assessed the real-world ramifications of this legislation concerning clients. This scrutiny concerns distinctions between foundations and trusts, with the aim of determining the most suitable vehicle to address each client’s unique requirements.
Lately, the author has witnessed a notable surge in inquiries originating from high-net-worth families from Asia regarding the choice between Jersey trusts and Jersey foundations, particularly when philanthropic objectives are at the forefront.
Trusts have a longer history, serving as integral tools in the realms of succession, wealth management and philanthropy. Meanwhile, foundations are relatively new within common law jurisdictions like Jersey and have emerged as increasingly popular instruments for both succession planning and philanthropic endeavours.
However, foundations have also been used for the same purpose in civil law jurisdictions since the Middle Ages. In the discourse of estate planning, pertinent questions often arise: Is there a clear preference between trusts and foundations? Which one should individuals opt for? This article aims to shed light on the distinctions between trusts and foundations, providing insights into the scenarios where one might be more advantageous than the other.
TRUSTS: AN OVERVIEW
The concept of a trust has been an integral part of common law jurisdictions since the 12th century. A trust materialises when the legal owner of assets, known as the settlor, transfers the legal ownership of those assets, forming the trust property, to designated individuals or a corporate entity, known as the trustee. This transfer typically aims to benefit specific persons known as beneficiaries.
Once a trust is established, legal ownership of the trust property vests in the trustee, while beneficial ownership belongs to the beneficiaries. A trust, therefore, isn’t a distinct legal entity; it’s a relationship.
Trusts can take various forms, with those established for the benefit of beneficiaries being the most common. However, trusts can also serve charitable or non-charitable purposes and may not necessarily have beneficiaries.
FOUNDATIONS: AN OVERVIEW
Foundations are a less familiar concept compared to trusts and are sometimes described as a blend of a trust and a company. In essence, a foundation exhibits corporate characteristics, possessing a separate legal personality, albeit without shareholders, and holding its property independently, like a company.
A foundation operates under the governance of a council, guided by its charter and regulations (its constitutional documents), similar to how a company adheres to the oversight of its board of directors, governed by its constitutional documents.
In certain respects, foundations share similarities with trusts. Like a trust, a foundation has a founder who contributes property to be held by the foundation, analogous to a settlor providing property to be managed in line with trust terms. Also, like trusts, a foundation must define one or more objects, which may include a purpose, whether charitable or not, and/or the benefit of one or more beneficiaries.
It is crucial to note that foundations lack beneficial owners, rendering them “ownerless” structures, even when the foundation property is intended to benefit the beneficiaries.
Flexibility. Both trusts and foundations offer remarkable flexibility. They can both operate on a discretionary basis, permitting the trustee/council to determine which beneficiaries will receive benefits, when, under what conditions, and more. Additionally, third parties may be appointed to oversee and monitor the trustee/council in their management of trust/foundation assets, often with protectors overseeing trusts and guardians overseeing foundations.
Settlors, particularly those with substantial wealth, may opt to establish private trust companies (PTCs) to serve as trustees for family trusts. This approach allows settlors to appoint themselves or family members to PTC boards, offering an alternative avenue for family participation in trust administration, compared to protectors or reserved powers. Increasingly, foundations are also being employed in a similar fashion to act as trustees (referred to as private trust foundations) for family trusts.
Unlimited duration. Both Jersey trusts and foundations can be established with an unlimited duration, making them ideal for dynastic private wealth structures designed to preserve family wealth across generations.
Privacy. In the case of trusts, there are no requirements for registration or public disclosure of trust-related documents or information, ensuring complete confidentiality. While some limited information about foundations may be publicly available, there is typically no obligation to disclose the identity of the founder and beneficiaries, or the foundation’s objectives. Consequently, both trusts and foundations can maintain a high degree of privacy.
BENEFITS OF TRUSTS
There are specific scenarios where trusts may be favoured over foundations.
Ease of establishment. Trusts are relatively straightforward to establish. A valid trust is formed when the settlor’s intention and the trustee’s commitment to create a trust, the designated trust property and the trust’s objects (beneficiaries or purposes) are sufficiently defined. A trust may be created on the transfer of the initial trust property from the settlor to the trustee. While trusts do not require written documentation, it is typically advisable.
Legal precedent. Trusts are widely recognised and have a longstanding presence in most common law jurisdictions. Their extensive history has led to a robust body of trust law and established case law, providing a level of predictability and security. Jurisdictions like Jersey have implemented “firewall” legislation to safeguard trusts against foreign jurisdictional challenges, further enhancing trust reliability.
Tax treatment. In most jurisdictions, the tax treatment of trusts is well established, offering clarity and predictability. In contrast, foundations, being a newer concept, may face more ambiguity in certain jurisdictions, potentially making trusts a more appealing choice for some families.
BENEFITS OF FOUNDATIONS
Foundations also have their merits and may be preferable in certain contexts.
Civil law jurisdictions. Foundations can be an attractive alternative to trusts, especially for individuals from civil law jurisdictions where the trust concept (i.e. the separation of legal and beneficial ownership) is unfamiliar or not permitted by law.
Separate legal personality. Foundations possess separate legal personality, enabling them to hold both legal and beneficial titles to their property. This autonomy allows foundations to enter into contracts directly with third parties, a distinction from trusts where the trustee, rather than the trust itself, enters into contracts. Additionally, foundations are increasingly used for philanthropic endeavours, especially in jurisdictions that do not recognise trusts.
Enhanced privacy. Foundation regulations can be crafted to eliminate the requirement for beneficiaries to receive information about the foundation. This offers a higher level of confidentiality compared to trusts, where beneficiaries typically have access to certain basic trust information.
Fiduciary duties. Beneficiaries under a Jersey foundation hold no interest in the foundation’s assets and are not owed fiduciary duties by the foundation council or guardian. This differs from trust beneficiaries, who are owed fiduciary duties by their trustees. As a result, foundations may be preferred for holding specific asset types, such as those with depreciation or high-risk characteristics.
TRUST OR FOUNDATION?
Ultimately, the choice between a trust and a foundation depends on various factors, including the individual preferences of the settlor/founder and their advisers, the intended purpose of the structure and the nature of the assets to be held. Both trusts and foundations serve as highly valuable tools in wealth management, succession planning and philanthropy. The decision to opt for a trust or foundation hinges on the specific needs and objectives of the individual or family involved.