CONSIDERATIONS FOR ENSURING YOUR WEALTH REACHES THE INTENDED PARTY

By Turner Little

Planning for the future and securing your legacy is a critical aspect of wealth management, and something many do not give enough attention to. Individuals can often accumulate substantial wealth and assets over a lifetime, and so it becomes paramount to establish a comprehensive strategy to safeguard those assets and ensure they are passed onto the intended beneficiaries. In the article, we will compare trusts and foundations, and explore the key considerations in estate planning, future beneficiaries, succession, tax planning and the viability of structures both in the UK and offshore.

Both trusts and foundations are legal structures used in estate planning, but each has very different and distinct characteristics and purposes. They often share some similarities, especially in the broader context of managing assets and facilitating the transfer of wealth. Below are some key differences and similarities between the two entities.

Purpose and focus

Trusts often hold and manage assets for the benefit of specific individuals or entities, known as beneficiaries. These can serve various purposes, including asset protection, wealth transfer and charitable giving. These include revocable living trusts, irrevocable trusts, charitable trusts, and testamentary trusts. The trust is managed by a trustee, ensuring proper administration and distribution according to the terms of the trust. Foundations also involve the holding and management of assets; however, these are typically established for charitable, educational, or philanthropic purposes as opposed to the benefit of specific individuals. The focus is on supporting specific causes, organisation, or projects that align with the foundation’s mission.

Beneficiaries

Trusts have specific beneficiaries named in the trust document who are entitled to receive the trust’s assets or income. Foundations do not have specific beneficiaries; instead, they exist to fulfil a charitable or philanthropic purpose. The beneficiaries are typically the broader community or a specific charitable cause.

Control and governance

Trusts are managed by a trustee who holds legal title to the trust assets and is responsible for administering the trust according to the terms set forth in the documentation. The settler can retain control over the trust during their lifetime (revocable) or relinquish control (irrevocable). Foundations are governed by a Foundation Council (the equivalent to a Board of directors on a Company or Trustees on a Trust) who oversee the foundation’s activities. The founder may have a role in the foundation’s governance, should they wish to, but the day-to-day operations are typically handled by the Foundation Council operating strictly within the rules laid down in the Foundations Charter.

Flexibility and privacy

Trusts offer a high degree of flexibility in terms of structuring and customising the terms and conditions based on the settler’s preferences and wishes. Trusts provide a level of confidentiality regarding the details of asset ownership and distribution, which can be appealing for some individuals seeking to keep their financial affairs private.

Foundations may have less flexibility compared to trusts, as the activities are often guided by the charitable or philanthropic purpose outlined in the foundation’s charter. Similar to trusts, foundations offer a high level of privacy and confidentiality to the individuals involved.

Duration

Trusts can have a specified duration or continue for the lifetime of the beneficiaries. Some trusts are designed to last for multiple generations, while others have a more limited lifespan. They can also be terminated based on certain conditions outlined in the trust documents.

Foundations can have a perpetual existence, especially if they are endowed. This means they have a continuous source of funding to support the chosen activities. However, some foundations may have a limited duration or specific conditions for termination.

Tax implications

Trusts can vary based on factors such as the type of trust, its purpose and the jurisdiction. Some trusts provide tax advantages, while others may have tax consequences. Trusts designed for estate tax planning often offer tax advantages. Irrevocable trusts, for example, can help reduce the taxable estate by removing assets from the settler’s estate. 

In the UK for example, tax exemptions are offered up to £325,000.Foundations often enjoy tax benefits for the charitable activities, such as tax exemption status, and contributions to foundations may be tax-deductible in many jurisdictions. Often this provides a great incentive for donors.

Succession planning

Trusts can play a role in succession planning by allowing the seamless transfer of assets to heirs or beneficiaries without the need for probate. Planning for future beneficiaries and succession when considering trusts and foundations adds a layer of foresight and strategy to estate planning, ensuring that the wealth transition is not only seamless but also aligned with the intentions of the individual establishing the trust or foundation. Foundations, particularly those with a perpetual existence, involve succession planning in terms of ensuring continuity in fulfilling the foundation’s mission. This may include specifying the process for appointing new trustees or directors 

Planning ahead also helps to minimise the risk of family disputes – if the settlor initially states the wealth is to be left to a grandchild and another is born at a later date, they may wish to add a caveat into the trust or foundation that the initial intended beneficiary, and also any subsequent siblings, are all to benefit equally from the assets.

UK vs offshore

When considering the best placement of your trust or foundation, it is important to consider offshore options too. This involves careful consideration of various factors, including legal framework, tax implications and individual preferences. Each jurisdiction offers distinct advantages and considerations, and the decision is ultimately highly individualised and depends on the specific goals and circumstances of the individual. 

In conclusion

Overall, it is important to note that the similarities and differences noted above may vary depending on the specific type of trust or foundation, and the jurisdiction in which they are established. When considering trusts or foundations in estate planning, it is crucial to consult with legal and financial professionals to understand the specific implications, benefits and requirements associated with each structure based on your individual goals and circumstances – there is not a ‘one size fits all’ approach.

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