More on Foundations vs Trusts vs Private Trust Companies
WHAT IS A FOUNDATION?
A Foundation is a separate legal entity formed by the dedication of property to specified purposes.
A Founder dedicates property to his/her chosen purpose (such as family or charitable purposes);
the foundation is registered and becomes a legal entity, giving clients the added comfort and
ensuring separation from the Isle of Man's trust law; and its affairs are conducted by a council
under the constitution.
ROLES WITHIN A FOUNDATION
- The Council comprises the individuals or companies who manage the foundation on a day to day basis and ensure the furthering of the foundation's purposes. They are subject to various duties in respect of this fiduciary role.
- The Enforcer is the person who ensures that any given purpose is being fulfilled by the council. One is only required if the founder stipulates it or if there is a non-charitable object in respect of which there is no beneficial object.
- The Registered Agent is a regulated person or company in the Isle of Man, who applies for the registration of the foundation and must subsequently ensure compliance with statutory requirements for the keeping of records etc. in the Isle of Man.
THE FOUNDATION INSTRUMENT
The foundation instrument is the public statement of the existence of the foundation. It includes the
name of the foundation and its objects. It must also list its council members and its registered agent.
The private internal constitution, including details of any beneficial objects, are kept off its face and are therefore not public.
THE FOUNDATION RULES
The foundation rules provide for the internal governance of the foundation. Where the foundation is a
private one, for the benefit of a family or other beneficiaries, the details will be set out here and not in
the foundation instrument. The rules also provide for how the council members, registered agent and enforcer (if any) may be removed, appointed and remunerated. It will also provide for what happens to the assets on the winding-up of the foundation.
BENEFITS OF USING A FOUNDATION
- It is a registered legal entity;
- Registration gives confidence: the foundation's very existence and identity is clear;
- Being a separate entity simplifies management;
- It can be used for private or public purposes;
- It can be used to hold and manage wealth for the purposes of the founder and his family, for commercial purposes or for charitable purposes;
- Private foundations can be supervised through the court, giving comfort to the founder and any beneficiaries;
- The founder can exercise control through reserved powers over the foundation;
- The founder can reserve powers or confer them on favoured, trusted people;
- The founder can, for example, control investment, distributions, the sale of foundation assets and the make-up of the council that administers the foundation;
- The foundation and his advisers can have a role;
- They can be appointed to the foundation council (and can even comprise the entire council);
- If not council members, they can still be given powers;
- It can last indefinitely;
- Trusts have only a limited lifespan in some jurisdictions, so the foundation offers more opportunities to plan for dynasties;
- 'Firewall' legislation insulates it from foreign law;
- Having the foundation run by professionals can enable property to withstand greater pressure than in family hands;
WHAT IS A TRUST?
Stated simply, a trust is an arrangement by which the owner of an asset, known as the settlor, passes legal ownership of assets to trustees. The trustees administer the assets subject to the defined terms of the trust deed and in accordance with the governing law.
Trusts have been in existence for centuries but their uses have evolved over time. However, even if
a particular trust usage may be well known, prospective settlors sometimes still have concerns about transferring the legal ownership of assets to third party Trustees.
In this regard, when considering the establishment of such a structure or the reorganisation of an existing situation, it is important to choose the right jurisdiction and a professional firm to act
on behalf of the settlor and beneficiaries.
The chosen jurisdiction must have a good solid reputation and be supported by robust legislation -
the effect of good legislation means that a high level of security is offered together with confidentiality and clarity in terms of the tax position.
A trust may be established during a settlor's lifetime, or upon death under the terms of a will. Sentient International is able to offer a portfolio of trusts, each one designed to meet a specific need.
TYPES OF TRUST
- Discretionary - This type of trust is commonplace and is designed to allow trustees full discretion over the income and capital of a trust for the benefit of all the beneficiaries. However, whilst the trustees have discretion to apply the funds, they are bound by the provisions of the deed, and whilst not legally obliged to follow it they are often guided by the content of the letter of wishes. Beneficiaries of a discretionary trust do not have the legal right to benefit but merely a right to be considered for benefit, thus providing maximum flexibility.
- Interest in Possession - In this type of trust, a beneficiary may have an absolute current right to the income from a trust but no right to the capital until a certain age, date or event occurs.
- Accumulation and Maintenance - This concept allows the trustees to use the income and capital of the trust to maintain beneficiaries until an event occurs and the beneficiary becomes entitled to the property of the trust. It may be that over time an Accumulation and Maintenance Trust becomes an Interest in Possession Trust, once a beneficiary becomes of a certain age.
- Purpose - A purpose trust is typically established to fulfill a particular commercial purpose rather than for the benefit of a particular beneficiary or class of beneficiary.
- Protective - Commonly used for children, those with disabilities or for someone who the settlor wishes to support financially, but whom the settlor considers incapable of handling their own affairs.
- Charitable - This concept is often established on the death of a family member and used to honour their life through the donation of funds to charity.
- Corporate - This type of trust is used for tax efficient corporate pension structures, such as employee incentive arrangements.
Private Trust Companies
A Private Trust Company offers a robust structure to families and their trusted advisors, looking to retain control in the decision making process as well as an active role in the management of their family assets and trust affairs.
BENEFITS OF A PTC
- Flexibility – It offers flexibility surrounding the dealings of a family’s assets, which ordinarily would be more complicated if settled within a usual trust structure. A PTC can be tailored to the needs of a family and can also hold both personal and business assets in the same structure (although both asset classes can be segregated in separate trusts with the PTC acting a sole trustee, if preferred.)
- Control – It provides the Settlor and/or family greater control of the assets to that of a usual trust structure, with the maximum degree of control sitting with them when it comes to trustee decision making.
- Functionality – It can be a useful structure for the purpose of wealth protection and succession planning as it avoids probate and local inheritance law. It can also afford the ability to introduce younger family members to the running of the family office.
- Asset Protection - It can be a useful tool for asset protection, acting as a shield for some core assets and providing protection against political risk and potential creditors. In the event of liquidation or attack by creditors, the assets held by a Private Trust Company are not part of that company’s own general funds. The trust company holds any assets in a fiduciary capacity for the beneficiaries of the trust and as a result has no direct financial interest in the trust assets.
THE PRIVATE TRUST COMPANY STRUCTURE
The sole purpose of a Private Trust Company ('PTC') is to act as the sole trustee of one, or a number of connected, private family trust(s). The PTC is owned by the Settlor, family members or more commonly by a Purpose Trust.
- A Purpose Trust is one with no beneficiaries and that operates purely on a non-commercial basis. Created with the sole purpose of owning the shares in a PTC, a Purpose Trust ensures that ownership of the shares falls outside of the Client’s estate.
- Typically, the Client (or the Head of the family) would be appointed as the Protector to the Purpose Trust, giving them the power to effectively block distributions to its beneficiaries.
- The Enforcer, an independent person to the Trustee(s), is required to ensure that the Trustee(s) carry out the objects of the Purpose Trust.
- The Settlor and the Trustee(s) of the Purpose Trust incorporate and appoint Directors to a PTC.
- A PTC will typically be formed as a company limited by shares and has the same legal form as any 'normal' company. It is also often a pre-requisite that the PTC is based in a nil or low tax jurisdiction.