By Ilias Georgopoulos, Global Head of Private and Institutional Asset Owners
Across the world today, families are increasingly prioritising estate and succession planning. It’s easy to see why – over the next two decades, more than $80 trillion is expected to be passed down to younger generations.
While a will and lasting power of attorney (LPA) can be a good place to start in this area of wealth management, high-net-worth families often require more sophisticated tools, particularly families that have complex, multi-jurisdictional holdings. This is where trusts and foundations come in.
These vehicles offer more control and flexibility than simple estate and succession planning tools, allowing families to tailor their plans to their specific needs and transfer wealth across generations smoothly. Here’s a concise look at how these structures work.
Trusts and foundations explained
While trusts and foundations both have a well-acknowledged role to play in wealth management, they have key differences. And it’s important to understand these nuances.
A trust is a legal arrangement that involves the transfer of legal ownership of assets from the owner (or ‘settlor’) to a trustee, who manages the assets for the benefit of the beneficiaries. This type of structure is not a separate legal entity; however, there is separation of legal ownership (which is held by the trustee) from the beneficial interest (enjoyed by the beneficiaries). Trusts originated in 12th century English common law and are often used in estate planning today to protect wealth from creditors, family disputes, and taxes. They are usually not required to be registered and can be adapted over time.
As for foundations, these are corporate-like structures that have their own legal identity and can own property and enter contracts in their own name. Unlike trusts, they do not separate legal ownership; the foundation holds the assets transferred to it by the ‘founder’ (i.e. the assets are no longer owned by the founder). Primarily found in civil law jurisdictions, foundations are a relatively new development. Typically, they need to be registered locally to exist.
Time-tested wealth management structures
Both trusts and foundations are time-tested wealth management structures. Yet they have evolved over the decades to address the unique needs of those seeking wealth preservation and/or transfer.
One of the key attributes of these structures is that they are highly adaptable – which is important in today’s rapidly changing, interconnected world. Both can be used to manage and distribute assets according to the wishes of the creator (settlor for a trust, founder for a foundation). As a result, they can be a very effective way to pass on wealth to future generations, as they allow families to customise investment strategies, beneficiary designations, and distribution schedules. They can also be used to achieve other goals, such as philanthropy or business succession.
Another advantage is that they can offer a degree of asset protection, shielding assets from creditors or potential legal challenges. For example, many trust jurisdictions today offer ‘firewall’ provisions. These are designed to protect trusts and trustees from foreign law and forced heirship claims. So, these structures can provide peace of mind for their creators.
In many jurisdictions there are also tax advantages. However, the specific tax benefits will vary depending on the jurisdiction and the type of trust or foundation that is established.
Trusts and foundations differ between jurisdictions
Some jurisdictions are more progressive than others in terms of trust and foundation frameworks. And there are some very innovative structures available to high-net-worth families today.
For example, the Cayman Islands – which has long been a pioneer in trust legislation globally – is known for its ‘STAR’ (Special Trusts Alternative Regime) trusts. Unlike traditional trusts that are focused solely on beneficiaries, STAR trusts are extremely flexible and can be established for specific purposes (charitable or non-charitable) or for the benefit of individuals, or a combination of both. STAR trusts can also exist indefinitely, making them suitable for long-term generational wealth planning. This contrasts with many other jurisdictions that impose limits on trust duration.
In terms of foundations, the Dubai International Financial Centre (DIFC) foundation has been popular with families from the Middle East in recent years. The DIFC foundation is an independent legal entity with its own legal personality that can enter contracts and hold assets in its own name. It does not have shareholders or members, is managed by the foundation council, and may be supervised by a guardian. It’s worth noting that the DIFC foundations regime took inspiration from best-in-class jurisdictions such as Jersey, Guernsey and the Netherlands, adapting it where needed for evolving demand.
Choosing the right vehicle
When it comes to choosing between a trust and a foundation, the best option will depend on several factors. The jurisdiction where the family or assets are based is going to be a major factor. For example, families in the U.S. might prefer trusts due to their clear legal recognition, while those in civil law countries such as France or the Netherlands may lean toward foundations. The specific goals of the family will also influence the decision.
It’s important to note that the laws governing trusts and foundations can be quite complex. They also vary substantially from jurisdiction to jurisdiction. It’s therefore crucial to seek professional advice from a qualified legal and financial expert to determine which option is most appropriate for your circumstances. An expert will be able to explain your options and help you determine which structure is best suited to your specific needs and goals.
Private funds are another option
It’s worth pointing out that there are other vehicles that can play a key role in succession planning. Private funds are a good example. These funds allow investors to channel capital into private assets such as family businesses, private equity, venture capital and real estate. And they are increasingly attracting sophisticated investors, including ultra-high-net-worth individuals and family offices, as they can offer flexibility, transparency, tax neutrality and a compliant legal framework.
IQ-EQ’s global guide to trusts and foundations
Those looking for more information on long-term wealth management structures may wish to download IQ-EQ’s comprehensive guide: Succession planning: a global guide to trusts and foundations for family offices. Designed to serve as a research guide for those interested in learning how trusts and foundations can be used to preserve wealth over multiple generations, it takes an in-depth look at the structures available in different jurisdictions worldwide today.
