Trusts and foundations are two separate legal entities that can be used in wealth planning to protect and distribute assets both during life and at the end of life. While both essentially act as wealth management tools, there are many key differences between the two.
Attorney-at-law Dr Edgar Paltzer has experience in the establishment of both foundations and trusts. Knowing the differences between the two and taking legal advice can help when determining which is the right choice for your wealth management requirements.
What Is a Trust?
While there are various types of trusts, they all have similar properties in that they are an agreement between three parties about how assets should be utilised or distributed.
The first party is the trustor, who may also be called the grantor or settlor. This is the party who owns the original assets under the agreement. The trustor grants rights to a second party, known as the trustee, to hold the title to those assets. The third party in the agreement is the beneficiary (or beneficiaries), for whom the assets are being held. A definition of trust beneficiaries can be seen in the embedded short video.
Living trusts are used to manage assets during the trustor’s lifetime, while testamentary trusts determine how assets will be distributed upon the death of the trustor. Trusts can be irrevocable, which means once established they cannot be changed by anyone including the trustor, or they can be revocable, meaning the trustor has the right to make changes during their lifetime.
What Is a Foundation?
A foundation has some similarities with a trust in that it is essentially designed to hold assets for beneficiaries. These beneficiaries may be individuals, or they could be charities or other non-profit organisations. The embedded infographic lists some of the world’s largest philanthropic foundations by value.
The primary difference with a foundation is that it is incorporated – the foundation acts as a separate legal entity which can own assets in its own right. A foundation is typically managed by a council, similar to the board of directors of a corporation, and this council is subject to the constitutional documents of the foundation.
You can learn more about how to start a private foundation by viewing the PDF attachment to this post.