Estate planning: Foundations or Trusts?

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Estate planning: Foundations or Trusts?

When creating an estate plan, many decide to establish an entity to oversee their assets after they are gone, controlling the distribution of wealth and possibly create a tax haven for themselves and their beneficiaries. Traditionally, this would be a trust. But trusts are not recognised in certain jurisdictions. In those cases, some will give up the idea. However, there is another option. Foundations.

“Generally, people think that trusts are the only available solution for estates that need third-party management,” explains Richard Cayne of Meyer International. “But foundation structures can be an alternative, whether or not trusts are allowable.”

Foundations and trusts can be similar in purpose

A last will and testament is often enough for straight forward estate planning, but sometimes you may need more structure and oversight. Also, you may want to put instructions in place if you are incapacitated, allowing a third party to oversee your assets and take care of your family or business while you are unable. This is where foundations and trusts come in.

By using these structures, you can designate a third party to manage your assets (or a set of your assets), distributing them to your beneficiaries when and how you wish. While a will could do some of this, foundations and trusts offer greater flexibility as well as potential tax and litigation protections for your beneficiaries. You could also avoid going through the delays and fees of probate. Furthermore, these structures can start executing your instructions before you pass away. And they offer a level of confidentiality and privacy that wills cannot.

Both are created by a one party (foundation = founder, trusts = grantor) sets asides assets with instructions on how a board (foundations) or a trustee (trusts) should handle or distribute the assets (or profits from the assets) to benefactors (foundations) or beneficiaries (trusts).

The differences lie in legal systems

The main difference between foundations and trusts are how they are interpreted and accepted. What does that mean? Well, we need to discuss civil versus common law. Basically, common law countries (e.g. the UK, US, Canada, India) have codified rules and regulations, but they also rely on court precedents to enforce contracts and agreements. Civil law countries (e.g. France, Germany, Japan) rely more strictly on codified laws.

For some reason, civil law countries tend not to recognise trusts, but they do recognise foundations. This could be because a trust is a relationship created between the grantor and the trustee in which the trustee is obligated to abide by fiduciary principles, while a foundation is a legal entity that is governed by contracts enforced by law. Fiduciary principles are standards that could be often open to interpretation; contracts are usually legal obligations with strictly defined criteria under the law.

What does this mean for you?

First, you need to decide if you need a structure like a foundation or trust in your estate plan. Then, depending on where you (and the assets involved) are in the world, you may need to evaluate whether you need a foundation or a trust. But you should not do this alone. Find a trusted financial expert, like Richard, to help you determine if and what kind of foundation or trust is best for you.

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