Foundations - Part 2 - Odin Fiduciaries

Foundations – Part 2

By Nigel Rotheroe

In our previous article, titled Foundations – Part 1, we considered foundations at a basic level. Part 2 considers, from an Isle of Man perspective, comparing and contrasting the differences between a trust and foundation before considering which vehicle to use

	Trust	Foundation
Definition	A trust is not a legal entity, but rather a private legal arrangement where the ownership of someone’s assets (the “Settlor”, “Disponer” in Ireland) is transferred to someone else (the “Trustee”) to look after and use to benefit another person (a “Beneficiary”).	A foundation is an independent legal entity which holds assets separately from the Founder’s personal wealth. A foundation is capable of holding assets, entering into contract, suing and being sued. A foundation is not a company; it does not issue shares or any legal title of ownership. A foundation is governed by its objects and rules. A person vesting assets into a foundation other than a founder is known as a “dedicator”.
Taxation	The taxation of the capital, income and/or gains of a trust varies from jurisdiction to jurisdiction and whether the person receiving any benefit from a trust is in a jurisdiction which recognises the legal concept of a trust or not. Trusts managed and controlled in the offshore [international finance] centres generally are not subject to any local taxation.	In the UK a foundation is generally treated as if it were a trust for tax purposes. In civil law jurisdictions a foundation is likely to be treated as a company. The powers vested in the enforcer can affect the residence of a foundation for tax purposes, but as with trusts, those managed and controlled in the offshore [international finance] centres generally are not subject to any local taxation
Typical Purposes	Succession planning Wealth management and protection Confidentiality and continuity Flexibility Charitable purposes Employee benefits Commercial transactions	Succession planning Wealth management and protection Confidentiality and continuity Legal separation of assets from founder’s personal estate e.g. protection against personal liability Charitable purposes Holding shares in a private trust company ‘Orphan’ or off-balance sheet structures Holding wasting assets e.g. aircraft or superyachts
Working	The trustee holds the assets of a trust, pursuant to the terms of any trust deed for the benefit of individuals or institutions known as the beneficiaries. The trustees will legally own and hold the assets initially transferred to them by the settlor and others in their own name. Subsequently they will hold other assets as the trust continues to grow through investment. Alternatively assets can be held through underlying companies, nominees and custodians.	Assets donated by the founder to the foundation (a “dedication”) are owned by the foundation in its own name. These assets may be held directly by the foundation or consist of shares in an underlying company. A foundation is governed by its objects and rules
Settlor/Founder	The settlor separates himself from the assets previously owned. In a discretionary trust arrangement the settlor may express his wishes to the trustee as to the trust’s administration and beneficiaries. Whilst the settlor may make recommendations and requests to the trustees these are not contractually binding on the trustees.	The founder is able to maintain control over the foundation if desired through a written mandate. The founder may act as principal and may instruct the foundation council on all relevant matters. The founder is not required to maintain any level of control over the foundation and in certain circumstances it may be desirable that he does not have any on-going control. The extent of any influence to be exercised by a founder will be stipulated within the rules of the foundation.
Trustee/Council	The trustee will normally be located in a common law jurisdiction where the legal system has a tradition of trusts and expansive case law. The trustee, as the legal owner of the assets, has a fiduciary duty to act in the interests of the beneficiaries and where appropriate to account for income and expenditure.	The foundation is managed and administered by its council. The council can comprise natural or corporate members. The council acts in accordance with the objects and rules of the foundation.
Protector/Enforcer	A protector may be appointed by the settlor of a trust to oversee the activities and actions of the trustee. The protector may have the power to sanction and veto decisions of the trustee and may also hold the power to appoint and remove trustees.	An enforcer may be appointed in relation to a foundation whose role is to ensure that the council acts in accordance with the foundation’s objects. An enforcer is only required to be appointed for foundations whose objects are to carry out a specific non-charitable object.
Registered Agent	A trust does not require a registered agent.	Every foundation must have a registered agent. This may be a natural person or a corporate entity. In the Isle of Man a registered agent must hold a class 4 licence issued by the Isle of Man Financial Services Authority. The registered agent is responsible for applying to the Isle of Man Companies Registry to establish the foundation. The registered agent may be, but is not required to be, a member of the council.
Beneficiaries	The beneficiaries may include the settlor. The beneficiaries are defined in the trust deed and may be a natural person, companies or charities. Distributions are made by the trustees in accordance with the trust deed having regard to the wishes of the settlor.	The founder may be a beneficiary. Beneficiaries are typically appointed by the foundation council and may be natural persons, companies or charities. Distributions are typically made in accordance with the instructions of the founder, which are incorporated within the foundation objects and rules.
Forced heirship laws	Established and planned correctly, a trust can present a way of escaping the forced heirship provisions of civil law countries. Situs of assets and place of trusteeship are important.	Civil law foundation jurisdictions will generally respect the forced heirship laws of the founders domicile.
Revocability	A trust may be revocable or irrevocable. If irrevocable, the settlor has relinquished control of the assets in favour of the trustee. Revocable trusts imply retention of control by the settlor.	In the presence of a civil law mandate, revocability is assured; the foundation can be dissolved and liquidated on the instruction of the founder, if permitted within the foundation rules.
Lifespan	Depends on trust jurisdiction; the Isle of Man has unlimited life span.	Unlimited life span
Registration	A trust is a confidential agreement. There is no register of trusts in the isle of Man.	The foundation is registered on a register in the country of domicile. In the Isle of Man the Foundation Instrument is a public document however the Foundation Rules are not public.
Portability	Control and management of a trust can easily be transferred to another jurisdiction, whilst maintaining the original governing law or adopting that of the jurisdiction to which control, and management is transferred.	Dependent on the foundation rules, a foundation can be relocated from one jurisdiction to another.
Flexibility	Highly flexible in terms of the way the trust operates over time.	Flexibility of activities is restricted through the foundation objects and rules.
Body of law and precedent	Case law and precedent developed over many countries.	Less developed body of law and consequently less practical precedent.
Management	Settlor’s ability to choose trustees at outset and his freedom to appoint/involve trusted advisors both during lifetime and post-death (through appointment of a protector).	Management is usually restricted as to who may act as a member of the foundation council through the foundation rules.
Protection of Beneficiaries	Trustees must act in accordance with Trust law and precedent and at all times in the best interests of the beneficiaries.	Members of the foundation council must act honestly and in good faith and exercise the standard of care of a reasonably prudent person. The duty to act in good faith is fiduciary in nature. The council must act in accordance with the foundation objects and rules.
Bringing to an end	Generally done by a determination of the Trustees if all funds are to be appointed out of a trust and there is no likelihood that any future funds will be “settled” onto the “trusts of the trust”.	Undertaken in the same manner as a company.

It is always important to seek professional advice before one establishes a trust, but even more so with a foundation in view of their nature and the differences between the tax treatment in jurisdictions; which could also be said of trusts as well for countries like France and Egypt which do not recognise the concept of a trust.