FOUNDATION VS TRUST PURPOSES,

SIMIL ARITIES & DIFFERENCES OF

THESE ESTATE PL ANNING VEHICLES
February 2011

T RUS T S

PR IVAT E FOUNDAT I O NS

Trusts are a legal concept developed in

common law jurisdictions, the laws and
principles of which are found in statute
and judicial decisions.

Foundations are a civil law concept,

primarily governed by the statutory laws
of the relevant jurisdiction.

LEGAL STRUCTURE & OWNERSHIP

A trust is created when a person (the

settlor) transfers property to another
person (the Trustee) to deal with that
property for the benefit of a third party
(the beneficiary). The trust is not a legal
entity and therefore does not have legal
personality. It is a private arrangement
between the trustees, settlor and
beneficiaries. There is no requirement to
register a trust.

A foundation is a legal entity with legal

personality. For a foundation to exist, the
[name/ details] of the foundation as well
as its statutes have to be registered with
the Foundation register in the jurisdiction
in which the foundation is incorporated.

There is a split in legal ownership of

the trust assets, whereby the trustees
legally own and hold the assets in their
own name but for the sole benefit of the
individuals or institutions designated as
beneficiaries in the trust deed.

Assets donated by the founder to the

foundation are owned by the foundation
in its own name. These assets may be held
directly by the foundation or consist of
shares in an underlying company. Assets
are then endowed to the foundation
which is governed by regulations issued
according to the desires of the economic
founder.

The trust is governed by the terms of the

trust deed. A non-binding letter of wishes
might also be issued by the settlor to guide
the trustees.
The beneficiaries are defined in the trust
deed. They may be natural persons,
companies or charities. The beneficiaries
may include the settlor.

Generally speaking, beneficiaries are

designated by the founder in a separate
document or by-law. They may be natural
persons, companies or charities. The
founder may also be a beneficiary.

A trust may be revocable or irrevocable.

The duration of a trust is sometimes
limited by the governing law, although
some trust jurisdictions have abolished
their rules relating to maximum duration
(perpetuity). Charitable and purpose
trusts may be of unlimited duration.

Where there is a civil law mandate,

the foundation can be dissolved and
liquidated on the instructions of the
founder. A foundation may be set up for
an unlimited period of time.

CONTROL & ADMINISTRATION

The control and administration of the

trust assets is exercised by one or more
trustees in accordance with the terms
of the trust deed and the law of the
trust. Trustees may be individuals or
corporations.

In a foundation, the power of control and

administration belongs to the foundation
board, which is appointed by the founder.
Such board can comprise individuals or
corporate members.

Once the trust has been settled, the settlor

no longer has any rights in respect of the
trust, unless these are reserved expressly
by the trust instrument. The settlor may
express his wishes in a non-binding way
as to how the discretionary powers of the
trustees are to be exercised.

The founder may maintain control

over the foundation through a written
mandate. The founder frequently acts
as principal and instructs the foundation
board on all relevant matters.
The foundation board is required to act
in the interests of the founder and the
beneficiaries.

The trustee, as the legal owner of the

assets, has a fiduciary duty to act in the
best interests of the beneficiaries.

Any person may be granted a proxy by

the foundation.

A protector or other advisor may be

designated in the trust deed, which will
also designate such persons powers and/
or duties.

A Foundation may have a protector or

advisory board with similar powers to
those used in a trust context.

ASSETS, MANAGEMENT & DISTRIBUTIONS

Bankable and non-bankable assets can

be held by a trust. There is no minimum
amount as long as there is an asset of
some value.

Bankable and non-bankable assets can

be held by a foundation. The minimum
amount usually required is CHF 30,000.

The trustee is legally responsible for the

management of the assets and must act
in the best interests of the beneficiaries.
The trustee is liable to the beneficiaries if
it fails to carry out its duties. The extent
of the trustees liability, if in default, varies
between jurisdictions and may be limited
to a certain extent by the terms of the
trust deed. The usual standard is liability
for gross negligence or wilful default.

Management is usually restricted as

to who may act as a member of the
foundation board. Directors of the
Foundation do not owe direct fiduciary
duty to the beneficiaries and must act in
accordance with the by-laws.

The trustee can carry out any commercial

activities and make any investments as
long as they are in the best interests of the
beneficiaries.

Distributions are typically made in

accordance with the instructions of the
founder and regulated through
the by-laws.

Distributions made by the trustees must

comply with the conditions set by the trust
deed and take into account the wishes of
the settlor.

PURPOSES

Trusts are mainly used as a vehicle to

hold business and personal assets for
estate and tax planning purposes as well
asset protection (e.g. in case of divorce,
incapacity, political risk etc.). Trusts may
also be created for charitable purposes.
Moreover, a trust may be used to
facilitate commercial transactions such
as purchases of real estate, opening and
administering bank accounts, investing in
stock markets and mutual funds, and the
entering into of international agreements.

Foundations are also created for

succession purposes but less frequently
used for tax planning. A private
foundation is not suitable for the pursuit
of commercial purposes. A foundation
can only be run in a commercial manner
if this facilitates the attainment of its
non-economic purpose or when required
for the preservation or administration of
assets.
Foundations may also be used to manage
and administer the distribution of money
and family properties, for philanthropic
or ecclesiastic purposes, or to be the
holding entity that operates as the
corporations owner.

CONFIDENTIALITY & BENEFICIARIES RIGHTS TO INFORMATION

Trusts are private arrangements between

the settlor and the trustee and trustees are
subject to a duty of confidentiality. The
beneficiaries are only known internally
and are not registered anywhere.

Total anonymity is guaranteed through

a foundation. Although the statutes are
registered, the regulations and therefore
the beneficiaries are only known
internally.

The assets are often held in the name of

an underlying company which is owned
by the trustees.
The beneficiaries usually have a right
to information relating to the trusts
documents and the accounts. This may be
more restrictive in some jurisdictions and
may be restricted to some extent by the
trust deed.

The beneficiaries rights to information

can be limited or in special cases
excluded.

FLEXIBILITY & PORTABILITY

Trusts can easily be transferred between

common law jurisdictions as the
governing law of the trust can usually be
changed from one jurisdiction to another
without too much difficulty. Moreover,
changing the place of management is not
normally a problem.

Foundations are generally tied to one civil

law jurisdiction and therefore, although
the possibility of transferring a foundation
to another jurisdiction exists, it is more
restrictive than with trusts. In addition,
the articles and by-laws may limit this
flexibility.