Trusts & foundations

Trust or foundation: the main difference

A trust is a relationship, not a legal person. The settlor transfers assets to a trustee, who holds them for the beneficiaries under the terms of the trust deed. Trusts come from the common law tradition and are well understood in jurisdictions such as Cayman, the BVI and Belize.

A private foundation is a legal person in its own right. The founder endows it with assets, and a council manages them for the beneficiaries or a stated purpose under the charter. Foundations come from the civil law tradition and can feel more familiar to families from Europe, Latin America and parts of Asia. Panama and Liechtenstein are well-known foundation jurisdictions.

Some families combine the two, for example a foundation that owns the shares of a trust company. The right choice depends on where the family lives, the assets involved and how each home country treats the vehicle for tax.

• Trust: assets held by a trustee under a deed; no separate legal personality
• Foundation: a legal person governed by a council under a charter
• Both: need clear governance, careful drafting and proper administration

Tax and reporting

A trust or foundation does not remove tax by itself. Tax is decided mainly by the residence of the settlor, founder and beneficiaries and by where the assets are. Many countries have specific rules that tax distributions, attribute income to the settlor or require annual reporting of foreign trusts.

International transparency standards apply too. FATF Recommendation 25 requires countries to make sure adequate, accurate and up-to-date beneficial ownership information on express trusts is available to authorities. Under the OECD Common Reporting Standard, a trust's settlors, trustees, any protector and its beneficiaries are treated as its controlling persons, and financial institutions report them where the standard requires, for exchange between tax authorities.

For these reasons we work only alongside qualified legal and tax advisers in the family's home countries. If you do not have one, we can introduce advisers for you to engage directly.

Governance that works in practice

A structure only works if its rules are clear and followed. A letter of wishes explains to the trustee or council how you would like discretion to be used. A protector can be appointed to approve major decisions, such as changing trustees or adding beneficiaries.

Most families also want a plan for what happens when the founder can no longer take part. Deciding this early, with the next generation involved, avoids disputes later.

Administration after set-up

Trusts and foundations need ongoing care: minutes of decisions, accounts, records of distributions, beneficial ownership updates and renewal fees for any underlying companies. A structure with weak records is much harder to defend if a court, tax authority or family member challenges it.

We keep the records, prepare the annual administration file, remind you of deadlines and coordinate with the trustee or council. Everything is kept in your portal, so the family and its advisers see the same documents.

Choosing a jurisdiction

Look for a jurisdiction with modern trust or foundation law, experienced courts and a stable political system. Consider whether your home country recognises the vehicle, and whether banks and custodians you use are comfortable with it.

Practical points matter as much as law: the availability of licensed trustees, the running cost and the language of the documents. We set these out for each shortlisted jurisdiction so you and your advisers can compare them.

Trustee services are provided by a trustee licensed in the chosen jurisdiction. In Hong Kong, for example, acting as trustee of an express trust by way of business is a trust or company service that requires a TCSP licence from the Companies Registry.