Often we are asked What is the difference between a Trust and a Foundation?
A Private Foundation is very similar to a Trust in that it’s a 3 headed creature… a Foundation:
- A Foundation Is set up by a person called a Founder (a Trust is set up by/under the authority of a “Settlor”)
- A Foundation is managed day to day by a person called a Councillor or a Board/team of Councillors (a Trust is managed day to day by a Trustee or a board of Trustees)
- A Foundation typically has beneficiaries ie persons who are designed ultimately to benefit financially from the set-up of the Foundation (same as with a Trust, ie a Trust typically has beneficiaries ie persons who are designed ultimately to benefit financially from the set-up of the Trust)
BUT…
A Trust is not a legal entity it’s more like a contract ie an (asset management) arrangement between the Settlor (ie the person who authorised the set-up of the Trust) and the Trustee.
When a Trust owns/holds an asset the Trustee is considered the legal owner of the Asset.
BUT… (generally speaking) the beneficiaries of a Trust are considered at law to be the beneficial owners of the Trust assets ie they have what Lawyers call a “beneficial interest” in Trust assets ie a legally recognizable interest. Additionally in certain instances the beneficiaries of a Trust are entitled to receive a distribution from the Trustee.
Given the above some countries have introduced deemed distribution laws ie if you’re entitled to receive a distribution from an Offshore Trust – even if you’ve received nothing from the Trust – you are expected to declare/pay tax on your share of the Trust’s profits (ie you are, in effect, deemed to have already received a distribution from the Trust!)
A Foundation, unlike a Trust, is a separate legal entity. When a Foundation owns an asset the Foundation itself is presumed at Common Law to be both the legal owner AND the beneficial owner of any asset the Foundation holds. Moreover, the beneficiaries of the Foundation (a) hold no legal or beneficial interest in any asset held by the Foundation and (b) are not entitled to receive a distribution from the Foundation unless/until such time as the Foundation council actually resolves to pay them a distribution.
One jurisdiction (ie Seychelles) has taken that one step further ie they have actually codified that common law provision into statute. Section 71 of the Seychelles Foundations Act provides that the legal AND beneficial owner of the asset held by the Foundation IS THE FOUNDATION ITSELF.
(you can download a copy of the Legislation via this Link: https://fsaseychelles.sc/component/edocman/legislations/fiduciary/ifsp2 )
Why a Foundation is Superior to a Trust
Are you looking to set up an Offshore Trust?
If your reason for wanting to set up an Offshore Trust is to try and defer paying tax at home on the earnings of the Trust or any Company it may own (or to build a bullet proof fence around any assets to be held by the Trust) you might want to consider setting up a Foundation instead…
The disadvantage of a Trust is typically Offshore Trusts are caught by local Controlled Foreign Trust and/or etc laws. Put simply if you have the means to remote control an Offshore Trust or if you are a presently entitled beneficiary of an Offshore Trust usually you’re required to declare locally and pay tax on the Trust’s earnings.
A Foundation is very similar to a Trust in that it’s set up by a Founder (like a Settlor in the case of a Trust) and managed day to day by a Councillor (like a Trustee in the case of a Trust) who manages the Foundation property for the benefit of the beneficiaries of the Foundation.
Moreover, a Foundation may get you around such issues as it’s a separate legal entity in its own right (ie the Foundation actually owns the assets held by the Foundation – unlike a Trustee who holds property for someone else ie the beneficiaries) and by law the beneficiaries are not entitled to the income or capital of the Foundation until it’s actually received. What this means is you potentially may be able to defer having to declare the income earned by any investments held by the Foundation enabling you, in effect, to reinvest 100% of that income not just the after tax component.
This would enable you to access the power of compounding on those investment earnings meaning your net worth will grow MUCH faster than what it would were you to declare/pay tax each year on your non local investment income. For an explanation of what the Power of Compounding is check this link:
Would you like to know more? Then please Contact Us:
info@offshorecompaniesinternational.com
DISCLAIMER: OCI is a Company/Trust/LLC/LP/Foundation Formation Agency. We are not tax advisers or legal advisers. You are advised to seek local legal/tax/financial advice in regards to your local reporting/tax requirements before committing to set up or use an Offshore Company or other entity.
