Comment: The role of trusts and foundations in wealth planning

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Comment: The role of trusts and foundations in wealth planning

Trusts and foundations offer a range of succession, wealth planning and philanthropic solutions for individuals and families. Donna Brehaut sets them in context, and assesses their merits.

Asset protection and taxation are likely to be among the important factors when considering the merits of establishing such structures, however there are certain scenarios where a foundation may be the vehicle of choice - with, for example, their characteristics being particularly favourable for families that are more accustomed to civil law jurisdictions.

Indeed, recent case law in the Channel Islands has brought the treatment of foundations into line with that of corporate entities and has helped their legal standing and credibility.

Asset protection and taxation are likely to be among the important factors when considering the merits of establishing such structures."

Overview
Broadly, a trust is a relationship between three parties: the settlor (who creates and transfers property to the trust), the trustee (who receives the assets) and the beneficiaries. Once a trust is established, the legal ownership of trust property will vest in the trustee, who has a fiduciary duty to hold and manage the trust fund in the best interests of the beneficiaries. In doing so, the trustee will need to take account of the provisions of the trust deed and any non-binding ‘letter of wishes' from the settlor.

Foundations on the other hand are separate legal entities incorporated on the instructions of a founder. A foundation is particularly attractive for clients from civil law jurisdictions, which normally do not recognise any distinction between legal and beneficial ownership. A foundation owns any property transferred to it by the founder and is managed in accordance with a charter and rules. In common with a trust, a foundation must have clearly defined objects, which can be either charitable or non-charitable.

Foundations have no beneficial owners, but the founder may choose to reserve certain powers, for example the power to manage investments or to make distributions. Reserved powers may also be found in trust deeds, although their nature and extent varies considerably.

Caution should be exercised when incorporating reserved powers in a trust deed, since in extreme cases they could be such as to render the trustee a mere nominee of the settlor, thereby negating the tax and asset protection benefits of the structure. Ultimately, the extent to which the settlor wishes to reserve powers (for themselves or another person) may reflect a range of factors, and these will need to be considered in the round.

The diagram below outlines the parties to both structures.

 

Governance and rights
Foundations and trusts are both flexible arrangements. Typically, they operate on a discretionary basis (with the council/trustee determining what benefits are to be provided, and to whom). However, it is also possible for a particular beneficiary to be given a right to income arising from part or all of the underlying fund.

Both structures have the ability for a third party to be appointed to oversee the duties of the trustee or council - a protector in the case of a trust and a guardian in the case of a foundation. A protector or guardian may have powers of veto in respect of distributions. The extent of his or her powers will be incorporated into the trust deed or rules.

It is important to consider beneficiary rights to information in the context of trusts and foundations. Whilst a trust beneficiary would ordinarily be entitled to certain information concerning the trust, the regulations of a foundation can be drafted so that there is no requirement for beneficiaries to enjoy such a right.

The Guernsey's Foundations (Guernsey) Law, 2012 differentiates between enfranchised and disenfranchised beneficiaries in this respect. It should be noted that where there are disenfranchised beneficiaries, a guardian must be appointed. These provisions allow for family governance and succession planning in view of protecting the interests of the next generation.

When reviewing the issues of residence and governance, it is important to note that it is not necessary for a trustee to be resident in the jurisdiction of its proper law. For example, the trustee of a Guernsey law trust might reside in Switzerland.

However, in such a case it will still be desirable for the trustee to have a good understanding of Guernsey law, so that they can properly discharge their duties under the trust deed. Conversely, a foundation is registered upon incorporation and must have a physical registered office in the place of incorporation.

Legal treatment
A foundation is often described as a hybrid of a trust and a company. The directors of a company oversee and manage the company's activities, just as the council does for a foundation. Separate legal personality is also a key similarity, with both companies and foundations needing a physical registered office. This is another reason why civil law jurisdictions may opt for a foundation rather than a trust, as the corporate structure is more clearly understood.

In the recent case B and C v D, E, F and others [2020] JRC 169, the Royal Court of Jersey was asked to consider whether endowments to a Jersey Law foundation in the sum of £11.4 million in accordance with what was determined to be incorrect tax advice could be set aside ab inito on the grounds of a mistake.

Although the Court set aside the endowments made by the Founders as void, it was concluded that the Court had no grounds to set aside the Foundation ab inito under the Foundations (Jersey) Law 2009. This case brings the treatment of a foundation into line with that of a corporate entity and is a welcome case law example concerning Jersey law foundations. This judgement provided greater certainty that foundations are considered to have separate legal personality. As Guernsey's Foundations (Guernsey) Law, 2012 is similar it is understood that the Guernsey Court would take a very similar approach.

While there are many similarities between trusts and foundations, there are also important differences. Trusts are generally better suited to the needs of families based in common law jurisdictions like the UK, where the tax rules typically accommodate such structures and there is a body of case law on which reliance can be placed.

Equally, for those residing in civil law jurisdictions (many of which do not even recognise the concept of trusts) foundations will usually be better understood and more compatible with local tax regimes. As in the B and C v D, E, F and others [2020] JRC 169, the Courts in Channel Islands appear to support that foundations have separate legal personality and is a welcome example of case law that gives foundations standing and credibility.

However, each family circumstance will need to be considered on its merits, taking into account legal and taxation rules, cultural norms and any practical considerations arising from residence in a particular country as well as what is trying to be achieved from a succession, wealth planning and philanthropic perspective when considering the most appropriate structure.

Donna Brehaut is a trust manager at Saffery Champness Registered Fiduciaries, in Guernsey