Estate planning may be a morbid topic; especially in Asian culture where talk of ‘death’ remains a taboo subject. But estate planning is fundamentally important and lies at the very core of wealth management. Failure to plan your affairs in advance of death can mean leaving your estate in disorder, to be sorted out by your successors – often at great expense and inconvenience.
When talking to clients who are seeking advice on protecting their assets, the first question I ask is: “Do you have a Will in place?” I recently spoke to a client who had enquired about establishing a family trust. The family had assets of circa USD1 billion and he was the sole shareholder of a holding company that held a number of subsidiaries as well as private equity investments. He didn’t have a Will.
So, what will happen to all those assets when he passes away? It is astonishing to me that a family that has built up such wealth over so many years should have so little understanding of the potential consequences of dying intestate (without a Will in place on death). To add to the complexity, the rules on intestacy can differ in countries; as an example, the rules on intestacy are very different in Hong Kong and China,
A Will can be drafted relatively simply and it’s an important estate planning tool, but consideration must also be given to the complex nature of how assets are held by clients and the limitations of a Will. Many people do not want their assets to pass outright to their heirs, whether chosen by them or as prescribed by law, and prefer to make more nuanced arrangements.
The alternatives to a Will is for the individual to set up a Trust or a Foundation during their lifetime. These are probably the most satisfactory and flexible way of making arrangements of this kind, and the following article will highlight the key features and whether a Trust or a Foundation is more suitable.
Common Law Trusts
Families have been using trusts to preserve and manage their wealth for the benefit of their heirs for centuries. They were first created by knights before they departed for the crusades, so that their estates could be effectively managed by trusted people whilst they were away for long periods (with no guarantee that they would return at all). Although trust laws have evolved over time, the fundamentals remain the same and are widely recognised in common law jurisdictions.
There are three parties when a Trust relationship is established: the settlor, the trustee and the beneficiaries. Typically, the settlor will place assets into a trust and the trustee will act as the custodian with a fiduciary duty to manage the assets for the benefit of the beneficiaries.
A legal document called a ‘deed of trust’ or ‘trust deed’ is held by the trustees, which ‘governs’ the trustee (rather like a company’s Articles of Association, which set out rules for how a company should operate). A settlor can also draft an additional document, known as a ‘letter of wishes’, to guide the trustee in terms of how the trust assets should be managed. This is extremely important, especially when the settlor passes away. Finally, a ‘protector’ can be appointed to monitor and oversee the administration of the trust by the trustees.
The practical advantages of a trust are gained from the distinction that is drawn between the formal or legal owner of property, the trustee, and those people that have the use or benefit of the property, the beneficiaries. It is vital that the trustee remains independent and exercises proper control over the trust property. A trust may be deemed to be invalid if the settlor continues to exercise power over the trust assets by retaining benefit or control, or by giving directions to the trustees.
Civil Law Foundations
Foundations are used in civil law countries, which typically do not recognise the trust concept. Unlike a trust, a foundation is a legal entity that is established through a private or public instrument that is registered in the public registry of the relevant jurisdiction.
The ‘founder’ (like a settlor) is the person who deposits assets, known as an ‘endowment’, into the foundation. The assets transferred to a foundation become the assets of the foundation and cease to be the assets of the founder. These assets will then be managed and administered by a ‘foundation council’ (like a trustee) in accordance with a document titled the ‘foundation charter’ (like a trust deed).
Certain requirements apply to the appointment of the foundation council, which may vary from one jurisdiction to another. A foundation can also have named beneficiaries who may, depending on the charter, be able to receive income or capital according to the charter. Legislation to provide for Foundations has been implemented in several common law jurisdictions.
Trust or Foundation?
There are many similarities between trusts and foundations. Both can be established either during the lifetime of the settlor / founder or upon death; and both can offer the following benefits on death as part of estate and succession planning:
- Asset protection
- Wealth management
- Succession or legacy planning
- Protection of minors or vulnerable adults
- Tax Planning
It should be highlighted that a trust or foundation can also be applied to the corporate world. An entrepreneur who has built up a business will often be concerned to ensure that it continues after his or her death. If the shares in the company are transferred to trust or foundation prior to death, this can prevent the unnecessary liquidation of a family company and ensure that the individual’s wishes are observed. A good example of this is Yvon Chouinard, the founder of Patagonia, who established The Patagonia Purpose Trust to allow the company to operate upon his death based on his values and legacy to, ‘fighting the environmental crises and defending nature’.
Finally, the table below provides a comparison between a trust and a foundation.
|Typically used for commercial or charitable purposes
|Typically used for commercial or charitable purposes
|A Trust is not a legal entity
|A Foundation is a legal entity
|The parties include the Settlor, Trustee and Beneficiaries (Sometimes a Protector can also be appointed)
|The parties include the Founder, Foundation Council and may / may not have Beneficiaries.
|Governed by the Trust Deed
|Governed by the Foundation Charter
|The governing law for a trust may be changed generally without any registration process
|The governing law for a foundation cannot be changed without a registration process
The Sovereign Group holds nine trust licences, which allows us to provide trust services in the strongest trust jurisdictions such as the Isle of Man or Guernsey, as well as more flexible offerings in Hong Kong and Singapore. As a licensed trust and corporate services provider, Sovereign can also assist with establishing Foundations in jurisdictions such as including Guernsey, Malta and Gibraltar.
It’s important to consider carefully whether a Trust or Foundation (or a Will) is the most suitable vehicle for succession planning. Sovereign prides itself on providing tailored solutions; we will take time to consider your specific needs and requirements, before providing you with the necessary information to make an informed decision.