Two of the most powerful financial vehicles available for asset protection and estate planning are Trusts and Foundations. Both of these vehicles provide a means to protect your assets while you are alive, and to secure them for easy transfer to your heirs upon death.
While these two instruments have many similarities and common uses, there are also important distinguishing characteristics that set them apart. Deciding which is the ideal choice for you depends on various factors related to your personal circumstances and needs.
In this article, we will start by giving a brief overview of what exactly a trust and a foundation is. We will then examine some key differences between them, look at the benefits that they both provide, and then discuss which is the best choice.
Table of Contents:
At its simplest, a trust is an agreement between three parties: the grantor/settlor, the trustee, and the beneficiary/ies. When a trust is formed, the grantor of the trust transfers ownership of assets into the trust which are then managed by the trustee for the future benefit of the beneficiaries. There are various types of trusts; each with their own unique terms and structures. These include:
Some trusts, such as an asset protection trust, are ideal for use as personal asset protection vehicles because they allow the grantor to simultaneously be the sole beneficiary of the trust. Other trusts, such as revocable living trusts, are better suited as estate planning vehicles as they allow for easy transfer of assets to the grantor’s beneficiaries upon death, whilst avoiding probate procedures.
Revocable trusts are those where the terms of the trust can be altered or terminated altogether by the grantor (i.e., the grantor effectively retains ownership and control of the assets in the trust). In contrast, an irrevocable trust cannot be changed or terminated by the grantor of the trust once it is in effect, and thus the grantor gives up all personal control and ownership of the assets once they are transferred to the trust (except in rare cases such as in the case of a well-structured Asset Protection Trust).
In general, trusts are used for estate planning, asset protection, tax optimisation, and financial privacy.
A foundation (often referred to as a “Private Foundation”), is a special type of tax-exempt organisation that does not qualify as a stand-alone public charity, but rather it typically makes donations to other charities. These donations are called “grants”.
A foundation is allowed to make grants for the following purposes:
The final point is important, because it means that foundations can in fact be used in estate planning to transfer assets to individual beneficiaries. However, in order to maintain its tax-exempt status, a foundation must benefit the public in some way. This usually involves some type of charitable donations. Foundations can be used to optimise taxes due to their tax-exempt status, and offer an ideal vehicle through which to give charitable donations, transfer funds to individual heirs, and protect the assets which are transferred into the foundation.
The 501(c)(3) of the Internal Revenue Code outlines strict requirements that a foundation must adhere to in order to maintain its status as a tax-exempt entity.
A trust is an agreement between three parties: the grantor, the trustee, and the beneficiary. The trustee is responsible for overseeing the assets in the trust and acting in the best interest of all parties involved. Certain types of trusts allow one party to hold more than one of the three roles above (e.g., grantor and trustee in the case of a revocable trust; or grantor and beneficiary in the case of an asset protection trust).
A foundation, on the other hand, is its own stand-alone legal entity. It is a non-profit organisation that qualifies for tax exemption. It benefits charities and/or individuals by providing direct grants with the foundation’s assets. It may also engage in other activities aside from issuing grants. The person who forms a foundation is known as the founder, and it is typically managed by a board of directors / counsel.
Trusts are usually used for:
Foundations are used for:
Trusts are taxed differently depending on the specific type, as well as the jurisdiction in which they are established. Irrevocable trusts are taxed as stand-alone legal entities. They have their own tax number and are taxed in accordance with the tax rates applicable to trust funds in the jurisdiction in which they are based. Revocable trusts are often taxed as pass-through entities, and the grantor is therefore responsible for paying tax on the assets in their own personal capacity. However, both may allow for greater tax efficiency compared to personal ownership of the assets in question.
Foundations are exempt from most types of taxation in majority of jurisdictions. They are non-profit organisations which offer tax optimisation as one of their primary advantages. In order to qualify for tax exemptions, a foundation must:
While trusts and foundations differ quite significantly in their nature, uses, and relative advantages, there are some benefits which are common to both. These include:
Deciding between setting up a trust or a foundation depends very much on your specific circumstances and objectives. Both can be used as powerful asset protection and estate planning tools. However, offshore asset protection trusts in the Cook Islands and Nevis have been shown to provide superior levels of privacy and asset protection, so they would be the best choice if this your main priority. Foundations can provide excellent tax efficiency, and are an ideal vehicle through which to give charitable donations, transfer wealth to loved ones, or uphold a family legacy.
Whichever you feel is right for you, it is best to consult with an expert attorney who can help you establish and structure your trust or foundation in the most cost-effective, timely, and advantageous manner. These are highly complex instruments that, when used properly with the guidance of a professional, can generate significant benefit to both you and your beneficiaries.
Without a customised legal strategy, you put yourself at risk.
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*Note for U.S. citizens: US citizens are limited in their tax reduction possibilities due to FATCA and CFC laws. Opening an offshore company can increase privacy and asset protection, but you can not eliminate your taxes without giving up your citizenship. If you are a US citizen you are obligated to pay taxes on all worldwide income. Read more here about FATCA and CFC laws.
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