Use of foundations over trusts.

Foundations and trusts are both powerful tools for asset protection, succession planning and charitable giving. Although they serve similar purposes, their legal structures, ownership models and practical uses differ in important ways. While trusts have long been used in common law jurisdictions, foundations have emerged as a flexible and increasingly popular alternative, especially for clients seeking greater control, confidentiality and a structure that is more universally recognised across legal systems.

Components of a foundation

A foundation is a legal entity that holds and manages assets in accordance with its charter and regulations. Unlike a trust, a foundation has its own separate legal personality and can own assets in its own name.

It is composed of several key components:

• The founder, comparable to a settlor in a trust, is the individual who donates assets to the foundation. Once transferred, these assets no longer form part of the founder’s personal estate and become the property of the foundation.
• Beneficiaries are individuals or entities who may receive benefits from the foundation’s assets. However, they hold no legal or beneficial ownership over those assets.
• Council members act as the functional equivalent of trustees or a board of trustees. They are responsible for managing the foundation’s assets and overseeing its operations in accordance with its charter and regulations.
• Similar to a trust structure, a protector may be appointed to supervise the foundation’s administration. The protector ensures that the foundation is operated in accordance with the founder’s intentions and may hold powers to intervene or provide direction where necessary.

A foundation is governed by two main documents. The foundation charter is usually a public document available for inspection. The foundation regulations remain private and can outline the founder’s intentions and the mechanisms for distributing assets.

Practical uses of foundations

Foundations offer several advantages for individuals and families looking to manage and protect wealth across generations:

• Allows for a private relationship, meaning, for example, the founder’s wishes are not publicly registered
• Can be used for wealth protection
• Is recognised in all common and civil law jurisdictions
• Is suitable for holding assets that can be passed on from one generation to the next, aiding in estate planning
• Assists with inheritance tax planning and the avoidance of forced heirship rules
• Facilitates the maintenance of corporate control and the separation of voting and economic benefits
• Can be utilised for charitable use

Distinguishing features

A key feature of a foundation is that once a founder donates assets to it, those assets no longer belong to the founder; instead, the foundation itself becomes the sole legal owner. Although the founder retains no ownership interest in either the foundation or its assets, they may still be named as a beneficiary.

Similarly, beneficiaries do not hold any ownership rights over the foundation’s assets and can only receive benefits through unconditional distributions made according to the foundation’s charter or regulations.

This differs from a trust, where ownership is divided. Trustees hold the legal title to the trust assets, while beneficiaries hold the beneficial interest. These rights and obligations are set out in the trust deed and, for a discretionary trust, are exercised at the trustees’ discretion.

Family succession

Benefits of a foundation for family succession

A foundation offers significant advantages for family succession, and can be alternatives to structures like the Cayman Islands STAR trusts and British Virgin Islands VISTA trusts, particularly under the Special Trusts (Alternative Regime) Law 1997.

Crucially, assets held within a foundation do not belong to the founder and are therefore excluded from their personal estate upon death. This unique characteristic facilitates the seamless transfer of assets across generations, bypassing the often costly and time-consuming processes of probate and, where applicable, estate tax.

Consequently, a foundation ensures probate-free succession and allows for the achievement of both beneficiary and purpose-driven objectives without the complex fiduciary obligations that can arise with traditional trust structures.

Considerations for using a trust in family succession

Utilising a trust for family succession necessitates several assumptions and considerations. Primarily, it requires the settlor to identify a trustee with consistently high standards of competence, administration and responsiveness.

Furthermore, it assumes that beneficiaries are in harmony, and that the trustees will operate under a clear and continuous mandate from either the settlor or a protector. A trust also presupposes that trustees will adopt a flexible approach to adapt to changing circumstances within the parameters of the trust deed.

A delicate balance must be maintained between the settlor’s relinquished control and the trustees’ sensitive administration. Importantly, the primary interest in a trust ultimately lies with the beneficiary, and courts will prioritise decisions that are in their best interests.

Core aspects of a foundation in family succession

Foundations also enhance control and governance. Unlike a trust, there is no requirement for a professional trustee; instead, councillors can be chosen by the founder and replaced if their performance is unsatisfactory.

Additionally, the governing documents of a Seychelles foundation, such as its charter or regulations, can include rules that remove a beneficiary’s rights if they dispute the foundation itself, any transfer of its assets or decisions made by the council, founder or protector.

The founder can maintain ongoing input to the council and, depending on the founder’s reserved rights, can still have some influence over how the foundation is run.

Notably, while a settlor typically cedes control over assets once a trust is established, a foundation allows the founder, even if not a beneficiary or protector, to serve on the council, thereby retaining influence throughout their lifetime.

A foundation offers a distinct approach to administration and conflict resolution, particularly after the founder’s passing. Upon the founder’s death, the remaining council members continue to administer the funds in strict adherence to the foundation’s charter and regulations.

Crucially, both before and after the founder’s death, the foundation is primarily managed to achieve its stated purposes and objectives, which may not always align directly with the immediate interests of currently identified beneficiaries.

Furthermore, unlike trusts where trustees typically resort to court intervention to resolve disputes between themselves and beneficiaries or a protector, the continuous involvement of the founder in a foundation often allows such conflicts to be addressed and resolved at the founder level, potentially streamlining dispute resolution.

Conclusion

Foundations offer a compelling alternative to trusts for individuals and families seeking long-term asset protection, succession planning and control. With no division of ownership and the ability for founders to retain involvement, foundations provide a simpler and more globally recognised structure, especially appealing in cross-border situations. While trusts still serve a valuable role, particularly in common law jurisdictions, foundations are increasingly being used for their versatility, privacy and alignment with the founder’s long-term vision.

How Acclime can help with setting up a foundation or trust

Choosing between a foundation and a trust depends on your family’s goals, asset types and long-term plans. At Acclime, we guide clients through every stage of this decision: explaining the structural differences, drafting customised charters and regulations and helping set up governance that aligns with your wishes. Whether you are looking to protect wealth, manage family succession or create a cross-border holding structure, our experienced team can help you establish and manage a foundation or trust tailored to your specific needs.