Introduction
It’s essential to understand how to manage and safeguard assets in today’s complicated legal and financial world. Trusts and foundations are key tools for managing wealth and international estate planning. They both provide specific advantages and are designed for different uses.
The purpose of this article is to make these legal arrangements easier to understand. We will give you a clear and simple explanation of trusts and foundations, what they do, and the main differences between them. Whether you are thinking about creating a trust or foundation, are a beneficiary, or are just looking into international estate planning, this information about trusts and foundations will be a helpful guide to understanding these often confusing legal setups.
The Basics of Trusts in International Estate Planning
Trusts come from common law and are a legal way to manage assets. In a trust, someone called a trustee is given the responsibility to hold and manage property for the benefit of someone else, known as the beneficiary. There are generally three main people or groups involved in a trust:
- Settlor: This is the person who sets up the trust. They transfer their assets into the trust and decide how those assets will be used and who the beneficiaries will be.
- Trustee: This can be a person or a company that is given the trust’s assets to look after. The trustee legally owns the assets and must manage them in a way that is best for the beneficiaries. They must also follow the rules set out in the trust deed and any other instructions from the settlor, such as a ‘letter of wishes’.
- Beneficiaries: These are the people or groups who the trust is set up to help. They don’t own the trust’s assets, but they are entitled to receive benefits from those assets according to the trust’s terms.
Once a trust is created, it acts as its own separate legal entity. The trustee has a duty to act in good faith and be loyal to the beneficiaries. This means they must manage the trust assets carefully and according to the trust’s purpose and rules. These rules can cover things like how income is distributed, keeping assets safe for future beneficiaries, supporting charities, or other goals set by the settlor.
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Understanding Foundations for Asset Protection
A foundation is a legal entity created by a person, family, or group, known as the founder or founders. The main purpose of a foundation is to manage assets and carry out specific goals. These goals are usually for the benefit of the public, such as for charity, education, culture, religion, or other social causes. A foundation is a separate legal entity, which means it can own property, enter into contracts, and operate in its own name.
The founder provides the initial assets or funds to start the foundation and also defines what the foundation is meant to achieve. Unlike personal property, the founder doesn’t own the foundation, although they might have influence over how it’s run. The foundation’s operations are guided by a charter and rules set by the founder. Typically, a council or board is responsible for overseeing the foundation’s activities and making sure they align with its stated goals. These goals are clearly defined and dictate how the foundation uses its resources and conducts its business. Foundations are dedicated to serving the community or specific causes based on their stated goals, and they must follow the laws and regulations of the areas where they operate.
Key Differences Between Trusts and Foundations
| Feature | Trust | Foundations |
| Registration Requirement | No registration is needed to set up a trust in most cases. | Foundations must be registered to be legally recognized. |
| Legal Entity Status and Ownership | A trust is not a separate legal entity. Because of this, the trustee and beneficiaries share the ownership of the assets. | A foundation is a separate legal entity with its own legal identity. It can fully own assets. |
| Control and Management | The trustee manages the trust based on the trust deed. | A board, usually with at least three members, manages foundations. They are governed by a charter and rules. |
| Duty to Beneficiaries | A trustee has a duty to act in the best interests of the trust’s beneficiaries. | Foundation board members do not have the same duty to the beneficiaries. |
| Purpose | Trusts can be for people or specific goals. For example, a charity trust supports a particular cause. | Foundations must have a purpose, but this can include benefiting people. |
| Supervision | In some places, like Samoa, trusts can have a protector who watches out for the beneficiaries. This protector can have powers to remove or appoint trustees, change beneficiaries, etc. | Foundations can have a supervisor to oversee the board. |
| Special Setups | In Samoa, trusts can be combined with a Limited Partnership. This allows the General Partner of the Limited Partnership to have control while still benefiting the trust. Trustees are protected from liabilities of the General Partner. Also, Samoan International Trust laws allow licensed Samoan Trustee Companies to hold shares in a Samoan company without being liable for the company’s management. | In Samoa, foundations can also be combined with a Limited Partnership. As legal entities, foundations have different structures and liability rules. |
| Specific Powers | Some locations allow the settlor or protector of a trust special powers. For example, a Samoan trust allows these reserved powers and lets anyone give “prescribed directions” to the Trustees. | Under Samoan law, founders or others can keep certain powers, which can be given to others. If these powers are not given to someone else, they are passed to a guardian and are not lost. |
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Trust or Foundation: Which Option Suits You Best?
When you’re trying to decide if a trust or a foundation is better for you, it’s important to know what makes them different and how those differences fit your needs. Foundations can be a very good choice in a few situations. First, they are often preferred by wealthy people from countries that use civil law. In these places, the idea of a trust – where ownership is split legally and beneficially – might be unfamiliar compared to countries that use common law. Second, foundations are legal entities in their own right. This is unlike trusts and means they can hold full ownership of assets, both legally and beneficially. Because of this, beneficiaries of foundations don’t have a direct claim to the foundation’s assets. Foundations can also enter into contracts on their own, which is another difference from trusts.
Also, foundations might offer more privacy. Their rules can be written so they don’t have to share information with beneficiaries, which is different from trusts where more openness is usually expected. Trusts also offer good privacy and can help with keeping things going smoothly over time. Trusts usually don’t need to be publicly registered, which means wealth management can be kept very confidential. Additionally, in some countries, foundation beneficiaries don’t have any direct stake in the foundation’s assets, and the foundation board doesn’t have a duty to act in their best interests. This can make foundations useful for holding certain kinds of assets, especially those that might lose value or are high-risk.
Choosing between a trust and a foundation often depends on what you personally prefer, what experts advise, what you want to achieve, and the type of asset involved. Both trusts and foundations are very useful for managing wealth, planning for the future, and giving to charity. However, their slight differences can make one a better fit than the other depending on the specific circumstances. Understanding these subtle points is key to making a smart decision.
Foundations and Trusts: A Complex Decision
Deciding whether to use a trust or a foundation is a really important choice. It needs careful thought about your personal situation, what you want to achieve, and the types of assets you have. Both trusts and foundations can be useful tools for managing assets, planning your international estate, and doing charitable work. However, to be effective, they need to be used in the right way. Because these are legal structures with serious consequences, it’s really important to get expert advice that is specific to your needs. If you want tailored advice and to learn more about how these structures could help you, please reach out to Samoa Offshore Legal. Our team of experts is dedicated to offering complete legal solutions that match your goals and protect your legacy. Get in touch with us today to start on a well-informed and strategic approach to managing your assets.
