Trust and Foundation – Know the Difference

Trust and Foundation – Know the Difference

When you hear the words ‘trust’ or ‘trust fund’, ‘foundation’ or ‘private foundation’, the first thing that may come to mind is a wealthy family with lots of inherited wealth passed down from generation to generation. However, you don’t have to be a member of the Rockefeller or Gates families to set up and benefit from a trust.

Both a Trust and a Foundation are tools that offer you alternatives in managing your assets, whether you are trying to protect your wealth from taxes or for the simplest reason of passing your wealth on to your children.

Both the trust and foundation are tools that serves mainly for the same reasons as many people have them to minimise hassles and fees for their loved ones, or to create a legacy of charitable giving. They definitely serve and function better than a will, which only distribute your assets after you die, but these beautiful wealth management tools i.e. Trust and Foundation offer a number of important planning benefits that is not included in a will, such as allowing your heirs to effect a relatively speedy conclusion to settling your estate, or enjoying and protecting the ‘assets and wealth’ while you are still alive.

Working with a wealth expert, you can establish the ideal wealth management structure to minimise taxes, protect assets and spare your children from having to go through the often-lengthy process of probate court in order to divide up your assets after you die. Worse still if in the event of a sudden and untimely death, such as one due to coronavirus or a sudden heart attack or aneurysm, an individual’s last wishes can be carried out as planned and most importantly, smoothly.

Having either a trust or foundation in place also enables you to control not only to whom your assets will be disbursed, but also how the money will be paid out — definitely a crucial point if the beneficiary is a child or a family member whose ability to properly handle money is questionable. This can easily be resolved if there is a trust or foundation in place to carry out your wishes as directed or recorded in such vehicles.

Now the usual question is; which to choose – a Trust or a Foundation? Below is a brief comparison to enlighten on the differences and the best advice is to consult a wealth expert to guide you on the best option for you.

5 Differences Between a Trust and a Foundation?

  1. A foundation needs to be registered to exist and to be effective, unlike a trust is under the care and custody of an appointed Trustee. Hence, a foundation is a corporate and separate legal entity, simply means that it has its own legal personality.
  2. In a trust, there is a split between the ownership of the assets, where it is being owned by the trustee. In the foundation, there is no such split. The foundation owned only and fully all the assets of the foundation.
  3. Although a foundation has to be registered, it is different from a corporation. A corporation issues shares while a foundation doesn’t have shares. A foundation is not owned by anyone, unlike a corporation, and foundation is fully autonomous. However, to establish a foundation in Labuan, it is required to elect a Labuan Trust companyas the resident secretary.
  4. Any individual can setup a trust or a foundation. The so-called founder is the first person to contribute a non-dominant to the foundation. But once the founder has done the initial endowment, then anyone can contribute to the foundation then onwards. The value of the initial endowment differs in the jurisdiction in which the foundation is being registered in. For example, in Panama, it is USD 10,000 and it does not need to be in cash. It can be in the form of shares of another company. In Labuan, a foundation can be set-up with just a paid-up capital of as low as USD 1.00.
  5. In terms of responsibilities, for a trust, the trustee has a fiduciary duty towards the beneficiaries of the trust. For a foundation, there is no such duty. However, the founder can keep control of each other’s assets endowed to the foundation and the control can be exercised using several tools. One of the tool is the foundation charter, which indicates the will and wishes of the founder. The founder may elect his council / board members to govern and managed his foundation. The founder of the foundation can also be the protector of the foundation and the role of a protector is someone who has the right of veto of those action of the board. For example, if the board did not act according to the chapter, the by law stipulates that the protector has the right to veto. Same goes for a trust, you can also have a protector. However, in certain jurisdiction, the founder cannot be a board member or a protector. In order to circumvent this restriction, you can assign a nominee founder.

Why a Private Foundation?

For objectives such as protect your assets against your creditor. You can use it to manage your situation in advance like a living will. You can use it to protect your assets against political instability. You can also use it to safeguard your business. In a lot of family businesses, there are a lot of heirs. To prevent the heirs from fighting each other, in order to ensure continuity in the business, you can set up a foundation to make it the owner of the business and the heirs become the beneficiary. This can possibly ensure the continuity of family business. In the case of a Labuan Foundation, the Labuan Foundations Act (LFA) 2010 is structured to prevent the assets of the foundation from being attacked on the basis of forced heirship rule and it also prevents spousal claims on the assets of the foundation in the event of death to the founder. You can also setup a foundation to distribute benefit to your employees and ensure that their wellbeing is taken care of.

Technically, a foundation cannot have commercial activities, but the foundation can receive dividends from a company that it owns. A foundation can own its own bank account. So technically the foundation does not do business but to fulfil its purpose, it can receive dividends and profits from business.

Under the right situations, setting up a private or charitable foundation can have a lot of advantages too. Some of these benefits comprise of –

  • Tax Savings

For a private foundation, setting up in a low tax jurisdiction is definitely beneficial and even better if it is white list and a well-regulated one. By shifting assets to a Charitable Foundation, you can frequently prevent income, capital gains, and estate taxes which would alternatively require to be paid by you or your estate.

  • Asset Protection

As assets endowed / shifted to a Private Foundation will no longer be taken into account as your own property, this by default relieves you from such ownerships and protects your assets from creditors. Setting up a charitable foundation helps safeguard your charitable gifts/assets from the threats of loss, must you face a lawsuit or incur another substantial liability.

  • Improved Certainty

Properly registered and established Foundations are acknowledged by state and federal courts around the country, and you can utilise your foundation documents to set up precise rules for your distributions to your beneficiaries and charitable donations. Therefore, when you have a foundation specifically for your wealth distribution and charitable giving, you can feel safe that your final wishes will be executed rightly.

  • Allow Alterations

The beauty of a foundation is that it allows alteration, be it adding or removing certain clauses or wishes. The founder is free to make changes as and when he wishes. However, the trust structure has specific limitations in this aspect. In particular, when setting up a trust for charitable intents, the trust will frequently require to be unalterable. This means that you will not be able to take the assets out of the trust must you require to do so in the future.

It is best to identify your objectives and wishes on how you would like your wealth to be distributed and used in favour of yourself, your family and charitable bodies, if any. Speak to our private wealth experts at QX Trust via +60 3 9212 6940 or consultant@qx-trust.com for a complimentary consultation to establish a secured and functional wealth management tool that meets your wishes. Alternatively, do visit our website at www.qx-trust.com for more information.