Difference between trust and foundation

Firstly, what is a trust?

A trust is essentially an agreement between two parties, the settlor and the trustee, and it does not need to registered to be effective. Pursuant to a trust deed, the settlor will transfer his properties to the trustee, where the trustee will then hold on to all the properties but for the sole benefit of the beneficiaries, which are to be listed in the trust deed. There is also the wishes letter from the settlor, however this letter is non-binding.

What is the main distinction between a trust and a foundation?

The first difference is a foundation needs to be registered to exist and to be effective, unlike a trust as mentioned earlier. A second difference is that a foundation incorporated, it is a legal entity, its own legal personality.

In a trust, there is a split between the ownership of the assets, where it is being owned by the trustee. In the foundation, there is no such split. The foundation owned only and fully all the assets of the foundation

Although a foundation has to be registered, it is different from a corporation. A corporation issues shares while a foundation doesn’t have shares. A foundation is not owned by anyone, unlike a corporation, and foundation is fully autonomous. However, to establish a foundation in Labuan, it is required to elect a Labuan Trust company as the secretary.

This means that anyone can setup a trust or a foundation. The so-called founder is the first person to contribute a non-dominant to the foundation. But once the founder has done the initial endowment, then anyone can contribute to the foundation then onwards. The value of the initial endowment differs on the jurisdiction in which the foundation is being registered in. For example, in Panama, it is $10,000 and it does not need to be in cash. It can be in the form of shares of another company.

In terms of responsibilities, for a trust, the trustee has a fiduciary duty towards the beneficiaries of the trust.  For a foundation, there is no such duty. However, the founder can keep control of each other’s assets endowed to the foundation and the control can be exercised using several tools. One of the tool is the foundation charter, which indicates the will of the founder. The founder may, in certain jurisdiction, on-board another member. A foundation is managed by a board, consisting three or more members. The founder of the foundation, in certain jurisdiction, can also be the protector of the foundation and the role of a protector is someone who has the right of veto of those action of the board. For example, if the board did not act according to the chapter, the by law stipulates that the protector has the right to veto. Same goes for a trust, you can also have a protector. However, in certain jurisdiction, the founder cannot be a board member or a protector. In order to circumvent this restriction, you can assign a nominee founder.

What can you use a foundation for?

For objectives such as protect your assets against your creditor. You can use it to manage your situation in advance like a living will. You can use it to protect your assets against political instability. You can also use it to safeguard your business. In a lot of family businesses, there are a lot of heirs. To prevent the heirs from fighting each other, in order to ensure continuity in the business, you can set up a foundation to make it the owner of the business and the heirs become the beneficiary. This can possibly ensure the continuity of family business. In the case of a Labuan Foundation, the Labuan Foundations Act (LFA 2010) is structured to prevent the assets of the foundation from being attacked on the basis of forced heirship rule and it also prevents spousal claims on the assets of the foundation in the event of death to the founder.  You can also setup a foundation to distribute benefit to your employees and ensure that their wellbeing is taken care of.

Technically, a foundation cannot have commercial activities but the foundation can receive dividends from a company that it owes. A foundation can own its own bank account. So technically the foundation does not do business but to fulfill its purpose, it can receive dividends and profits from business.

What is the average duration of a foundation?

A foundation can be set up for a limited period of time or it can also be set up for forever. A foundation can be set up as revocable or irrevocable.

Does the foundation pay taxes?

Foundations do not pay tax nor audit.

Other differences include: