Trusts have their roots in the common law in USA, UK and countries of the former British Commonwealth while foundations have their origins in civil law in Europe, Russia, Central & South America and Asia.
However, there are some notable differences between a trust and a foundation and many features seen in companies are common.
* Although based upon common concepts, some features of both foundations and trusts can vary according to the laws of the jurisdictions where they are registered. The illustrations given here are based on the most recent forms of these entities.
Potential uses of a foundation
Generally a foundation will be considered as an alternative to common law trusts by clients in jurisdictions that use civil law.
- Foundations are an alternative to Trusts – especially if civil law is preferred to common law.
- However there are notable differences between a trust and a foundation. Foundations have many features seen in companies.
- A foundation is an incorporated, self-owning, legal entity which, like limited a company, is a separate legal personality and is therefore capable of holding assets, suing and being sued.
- A foundation cannot directly engage in commercial trading, however it can have a trading subsidiary.
- Individual beneficiaries do not have an interest in the Foundation or its assets.
- For those that seek privacy, a Foundation’s rules are confidential
Such clients may not be comfortable with using a common law trust structure that is unfamiliar to them.
For those that seek privacy, a Foundation’s rules are confidential – though the Foundation’s founding instrument is a matter of public record. The provision of any information to the beneficiaries can be denied. In this way, the Council (and Enforcer) may go about their business for the benefit of the Foundation without interruption and undue influence from the beneficiaries.
Individual beneficiaries do not have an interest in the Foundation or its assets. This may be used to refute any claim by the tax authorities that the beneficiary has a taxable interest in the Foundation.
A Foundation can be akin to a family trust in order to benefit successive generations of family members, allowing the Foundation’s founder to benefit his children and grandchildren in a controlled way, both during his life and long after his death.
Foundations are allowed to be set up for a specified purpose, along the same lines as a purpose trust.
The basic features of a Foundation
Consider the key components mentioned for a trust as settlor, trustees, protector, beneficiaries, trust deed and letter of wishes. Then consider the equivalents for a foundation.
This is the person who causes the foundation to be established (similar to the settlor of a trust).
Every foundation must have a registered agent, who may be a natural person or a corporate service provider. It is the registered agent who must apply to the Companies Registrar in an appropriate jurisdiction (the “Registrar”) in order for the foundation to be established.
This is the body charged with the day-to-day administration of the foundation, similar to the board of directors of a company or the trustees of a trust. The registered agent may be, but is not obliged to be, a member of the council.
This is a person that may be charged with policing the council to ensure that it acts in accordance with the foundation’s objects. The role is comparable to that of the protector of a trust.
It may be the case that there are no beneficiaries, for example if the foundation’s sole object is to hold assets. This is a matter entirely for the founder’s discretion. Even if there are named beneficiaries, they have no right to receive distributions and no automatic right to information or documents about the foundation
Similar to a limited company, a foundation need only have two official documents. These are the ‘foundation instrument’ and the ‘foundation rules.’ The foundation instrument is similar to a company’s Memorandum of Association and must set out the name of the foundation, its objects and the members of its council. The instrument is a public document. The foundation rules, comparable to the Article of Association of a company, contain the substantive provisions concerning the management and running of the foundation. The rules are a private document and do not need to be filed with the Registrar.
Trusts and Foundations
Against this background there are a number of similarities between trusts and foundations, the principle ones being that:
- Assets can be transferred or donated to both
- Both can be revocable
- Both can be created during the founder’s/settlor’s lifetime or on death
- Both can be unlimited in duration
- Both provide for the appointment of a Protector or Enforcer
- A foundation can have the Founder as member of the Council, who can exercise control over the assets of the foundation. In a similar way, the settlor of a trust can retain certain powers such as to direct Investments
- Trusts and foundations are created, inter alia, for asset protection; and
- succession planning.
Different to Trusts, Similar to Companies
There are some notable differences between a trust and a foundation and many features seen in companies are common.
A trust does not have a separate legal identity from its trustees. A foundation is an incorporated, self-owning, legal entity which, like a limited company, is a separate legal personality and is therefore capable of holding assets, suing and being sued.
- Trustees contract personally in their own name, whereas the council members of a foundation contract in the name of the foundation.
- Members of the Foundation Council act on behalf of the foundation, in a similar role to directors of company, and unlike trustees they do not assume personal obligations.
- The Foundation Charter is a public document, although the Articles remain private. The Memorandum and Articles of a company are available in the public domain. However Trust documents remain private.
- Changing the jurisdiction of a trust is straightforward, whereas a Foundation needs to be re-domiciled. A company remains within the jurisdiction of incorporation.
- The powers of a Foundation Council are generally more limited than those of a trustee, who potentially has unlimited capacity (subject to the overriding requirement to act in the best interests of the beneficiaries).
- A foundation does not require an owner so there is no need for succession planning.
Foundations and Companies
The main difference between limited companies and foundations is that the latter cannot directly engage in commercial trading that is not incidental to its objects. It can, however, easily get around this issue by holding a trading subsidiary.
As an incorporated entity, a foundation can transact in its own name but it has no ‘owner’ as such, so the person who establishes the foundation (known as the ‘founder’) cannot be liable for its debts.
The founder of a foundation can retain greater control over the objects and administration of the foundation compared with the settlor of a trust. Furthermore, foundations can exist in perpetuity, unlike trusts.
Establishing a foundation
It is the registered agent who will apply to the Registrar of an appropriate jurisdiction to establish a foundation. On behalf of the founders he will need to submit an application form to the Registrar accompanied by a copy of the foundation instrument and the applicable fee. The proposed name of the foundation must contain the word ‘foundation’ and must not be identical or too similar to the name of an existing company or charity. The Registrar has discretion to approve or reject proposed names.
The foundation instrument must indicate the purpose of the foundation in the form of a “objects clause” or as expanded in a statement. This represents an important explanation that will be available in the public domain. Accordingly the drafting of the objects of a foundation is a key process.
In order to secure the good administration of the foundation, it is critical that the rules are drafted according to the founder’s wishes. Most jurisdictions require the rules to be drafted by a duly approved local lawyer. If the founder wishes to retain a high level of control over the running of the foundation, then the appointment of an enforcer is an important consideration. It is even possible for the founder to appoint him/her self as enforcer
Support from a Court
Courts in the jurisdiction of a foundation normally have certain powers in relation to the supervision of foundations (similar in nature to its supervisory jurisdiction over trusts), These powers will include the power to:
- order a person to comply with an obligation under the local laws used to establish a foundation or under the instrument or rules of a foundation;
- order the amendment of the instrument or rules;
- give directions in respect of foundations;
- protect interests of certain persons under a foundation;
- dismiss or appoint the registered agent of a foundation;
- take action on behalf of others in respect of a foundation.