What is a Foundation?
A foundation is the dedication of property for a specific purpose. It can be established by individuals or other legal persons (such as companies) and has the benefit of its own legal personality. A foundation is created by the transfer of assets by the founder to achieve a specific purpose or purposes. That purpose is typically to manage wealth for a particular family or families across generations, though the purpose may also be charitable. Historically Foundations have been popular with clients from civil law jurisdictions as they are clearly defined and recognised by the local law. An additional very important feature of foundations is that they have allowed the founder to retain rights under the charter or regulations which can be extensive.
What is a Trust?
A trust is an arrangement whereby a person “the settlor” transfers the legal title of assets to another person “the trustee” so that they can be used to benefit other persons. The trustees must hold the assets for the persons named as the beneficiaries or for the achievement of a specific purpose (Purpose Trusts). The arrangement is formalised by a trust deed though the settlor’s name need not be included. The trust is peculiar to Anglo-Saxon legal systems due to the courts’ recognition of the separation between “legal” and “beneficial” ownership. When trustees are appointed, they are under a legal duty through both the trust deed and legislation to hold and distribute the assets for and on behalf of the beneficiaries. The result is that beneficiaries can enjoy the assets without having to own them in their own name. This can be advantageous for asset protection, tax mitigation and succession planning.
In case of use of a Trust, how to reassure the settlor that his wishes will be followed and that the assets are safe?
In order to ensure that the settlor no longer has direct influence over the trustees, avoiding the risk of having the trust considered to be a sham, a Protector is often appointed and this is often the settlor’s trusted adviser, such as a lawyer, accountant or other close adviser. The settlor can discuss issues with the protector in confidence and the Protector can then discuss these issues with the trustees. Typical examples of when the Protector’s consent may be required:
- When significant distributions are made from the trust assets
- The addition or exclusion of beneficiaries
- When specific trust assets are to be sold
- Changing the governing law or forum of the trust
- Approving the termination of the trust
- Replacing the trustees
The list is not exhaustive and there is no defined list of roles that the Protector can have.
Letter of Wishes
This is an instrument that the settlor gives to the trustees to guide them on how he would like them to exercise their discretion. It often includes details such as who should benefit from the trust during the settlor’s lifetime and also how he would like the trust assets to be dealt with after his death. The Letter of Wishes is a confidential document and is not part of the trust documentation. It can be amended at any time to reflect changes in the settlor’s views or circumstances.