Trusts and civil law family foundations are both tools that can be used in wealth planning to protect assets and retain control of where and how those assets can be spent, even after death. They have some similarities, but each has different criteria and advantages, so knowing the difference is essential when deciding who will receive assets.

Dr Edgar Paltzer counts structuring and counselling – for example, as a protector of trusts and a board member of foundations – among his preferred areas of practice at his law practice in Switzerland. One of the main differences is that a foundation is a legal entity registered in a company register, whereas a trust can be effective without being registered, depending on what type of trust is established. There are several other key differences that will determine which of these entities is best suited for purpose.

The main similarity shared between trusts and foundations is that they are both typically established by a settlor or founder as a way of ensuring that assets are passed on to their chosen beneficiaries. They are often established as ways of ensuring philanthropic giving can continue even after the death of the settlor/founder. The infographic attachment looks at some of the statistics for global philanthropic giving from 2018.

Establishing a Trust

Trusts have been around for a comparatively long time and have a strongly established use as a tool for philanthropy, wealth planning and succession. A trust is usually established to ensure that beneficiaries will receive the benefits of an estate or asset, but without them legally owning that asset.

The assets in question are managed on behalf of the beneficiaries by a trustee or group of trustees, who are responsible for running the trust effectively and managing it in a fiduciary way towards the beneficiaries.

One of the reasons people might choose to establish a trust rather than directly gifting assets to beneficiaries is that the beneficiary is too unexperienced to be able to effectively manage their own investments.

People may also choose to set up a trust for beneficiaries to preserve the benefits for more than one generation or, in the international context, to reduce certain tax burden.

Some of the different types of trust that can be established are outlined in the PDF attachment to this post.

Establishing a Foundation

There are fewer foundations in common law jurisdictions than there are trusts, partly because foundations are a civil law concept. A foundation, once established, becomes an entirely separate legal entity responsible for and wholly owning all the assets placed within it.

A foundation is incorporated, but it is not the same as a corporation. It is fully autonomous and not owned by anyone, only by itself. To set up a foundation, there must be clearly defined purposes for where any money raised or profits made will go. These purposes are in common law jurisdictions often charitable, but they do not have to be.

A founder, contrary in the case of trusts, can retain varying degrees of control over a foundation once it has been established. The foundation when pursuing its purposes does not necessarily have to have beneficiaries.

Shared Features

Despite their differences, there are lots of shared features that apply to both trusts and foundations. Each arrangement is flexible and can be discretionary, in that the trustees or overseers can be given the power to decide where the money goes. Each can appoint a third party to help with management, who may be given specific responsibilities in an area where they hold expertise. Weighing up the similarities and differences between trusts and foundations is essential to determine which will provide the best solution for a transfer of wealth to family members or other beneficiaries, or as a philanthropic gesture.

A definition of philanthropy can be seen in the short video attachment.