When discussions come up about asset protection, I’m inevitably asked Which is Better a Trust or Foundation for ongoing protection. The answer is that it depends on what you are looking to protect and what your level of legal risk is likely to be. Subsequently, read on to find out which structure might be better for your circumstances.
- What is an Offshore Trust
- The Major Benefits of an Offshore Trust
- What is an Offshore Foundation
- Major Benefits of a Private Interest Foundation
- How Do They Both Work for Asset Protection
- Best Jurisdictions for Trusts and Foundations
- Best Offshore Trust Location – Cook Islands
- Best Offshore Foundation Location – Liechtenstein
- Conclusion on Which is Better a Trust or a Foundation
- Other Offshore Related Articles That May Be of Interest
What is an Offshore Trust
Probably the first thing we should do is actually define what makes something an offshore trust. A trust is primarily a legal agreement, normally between individuals, that takes assets from the “Settlor” and gives over ownership and control to the “Trustee” to be used for the benefit of the “Beneficiaries”.
Now, this might sound like a whole lot of legal mumbo jumbo but what is actually means in practice is that a legal agreement, called a trust deed, is drawn up that defines how and when a trustee is allowed to act, and it also clearly gives them the obligation that any actions must only be to the benefit of the beneficiaries. This is known as a fiduciary relationship and breaching it comes with stiff penalties to the trustee.
The Settlor (Person who started the trust) then places assets into the trust and the trustees then manage those assets to benefit the people listed as beneficiaries in the trust deed. The core idea of a trust is that you give up any ownership and control of your assets so that they can be managed for your benefit without you having to retain ownership.
From an asset protection perspective, this effectively makes you resilient against any potential legal issues as you no longer have or own those assets. Effectively, your estate or total assets would normally not be able to be attached to any lawsuit even if you lose the case. Subsequently, you are effectively protected from the inherent legal risk of any judgments against you. Obviously, there are some exceptions to this rule and it is never quite that clear but this is the basic idea of executing a trust.
It’s important to note that a trust is a legal agreement between the Settlor and the Trustees and, as such, is not a legal entity like a company or foundation and does not retain a specific legal personality as a stand-alone entity.
The Major Benefits of an Offshore Trust
- Ability to use assets you don’t actually “own”
- Asset protection against lawsuits and creditors
- Potential Tax Relief and Sheltering
- Estate Planning – No forced Heirship in Many Cases
- Easy to Setup and Limited Requirements
There is a reason that offshore trusts remain a key component of asset protection plans for the wealthy. They are easy to set up and retain wide acceptance in common law jurisdictions the world over and also adds a veil of privacy over asset ownership.
What is an Offshore Foundation
In recent years, Private Interest Foundations (PIF) have become a vehicle of interest for those looking to divorce themselves from their assets and increase their asset protection options. Foundations have sprung up in many offshore jurisdictions with the primary locations of choice presently being Panama and Liechtenstein.
Although they retain many of the same characteristics of an offshore trust, they differ in the fact that they are actually an established legal entity. They normally have a constitution known as a foundation charter which spells out the aims of the foundation and how the foundation “Council” will operate.
In a similar way to Trustees, the Foundation Council members are required to operate according to the wishes of the founder. A strong obligation exists in law for them to only undertake activities that benefit the individuals or causes that are listed in the Foundation Charter. In this way, the founder can effectively direct their actions through the initial charter.
The founder initially moves assets into the direct ownership of the Foundation and in this way effectively gives up ownership and any rights to them. This can act as a buffer against any potential legal action given that the founder no longer has any ownership of the aforementioned assets.
Foundations benefit from being separate legal entities and having actual legal personalities. This means it is much easier to open bank accounts and operate the entity on a global basis. Banks are becoming more comfortable dealing with private foundations given that they have many of the same characteristics of companies.
Additionally, most private interest foundations have a role called a protector who has the right to oversee the foundation’s operations. Primarily, their job is to ensure that the council members are acting appropriately, and they retain the ability to dismiss the members at will. Subsequently, this acts as a safeguard for the initial founder.
Major Benefits of a Private Interest Foundation
- It is an actual legal entity
- It is normally highly tax effective
- Ease of international banking
- A protector can be appointed to oversee the council members
- High levels of privacy
How Do They Both Work for Asset Protection
Trust and Foundations both work well to provide a shield against vexatious litigants and lawsuits. Effectively, they protect the settled assets by divorcing the settlor from ownership or control of the assets and by playing them under the control of either trustee’s or council members.
In practice, there is significantly more settled case law around the use of offshore trusts in common law jurisdictions. This is mainly due to the fact they have been commonly in use for hundreds of years in most British law based jurisdictions.
In contrast, Foundations, or at least their popularity, are relatively new in the past 20 years and this means there is less certainty around their legal status. This isn’t to say that they are not as strong as an offshore trust, but they have not had to face as many legal assaults upon their validity.
Which is Better a Trust or Foundation Given the Major Differences?
Regardless, both trusts and foundations provide excellent asset protection for the average entrepreneur. In fact, locations such as Liechtenstein are strongly supportive of private foundations, and they have proved highly useful entities over the past 10-20 years.
In short, they both provide asset protection in different ways with trusts providing a direct legal pathway for assets between settlors and the beneficiaries whilst foundations may be less direct but provide strong legal standing as an actual entity.
Best Jurisdictions for Trusts and Foundations
I could literally write pages on the difference between the various offshore jurisdictions and their treatment of trusts and foundations. However, I will save you that sadistic reading experience and simply give you my top location for an offshore trust and a foundation.
Best Offshore Trust Location – Cook Islands
If you have read some of my other offshore articles you will know that I’ve often recommended the Cook Islands as the gold standard for Asset Protection Trusts. Nothing has changed in this regard and the island nation still retains that top position.
The Cook Islands is one of the few jurisdictions around the world that was set up specifically with the offshore sector in mind. The trust laws are well codified and provide the settlor with nearly every benefit and protection that you can think of.
The costs are probably on the higher side but an extra few thousand dollars of cost should not even be a concern when you are going offshore. It’s important that you set everything up properly the first time so that it will stand against any legal challenge.
The overall cost of a Cook Islands Asset Protection Trust is around US$10,000.
Best Offshore Foundation Location – Liechtenstein
Despite Panama offering some great options for private interest foundations, Liechtenstein still pips them in reputation and longevity. The small country has some of the best, and most private, banking and offshore laws in the world. This has meant that private foundations domiciled there have stood up against significant legal challenges over the years and that there is a whole industry set up to support their operations.
Subsequently, it is an easy choice to select Liechtenstein as the primary place to form a private foundation. This is especially more so given the easy access to banking facilities that you may find difficult in other jurisdictions such as Panama.
The overall cost of a Liechtenstein Private Foundation is around €30,000 making it significantly more costly than other options.
Conclusion on Which is Better a Trust or a Foundation
Ultimately, both offshore trusts and foundations provide excellent levels of asset protection and privacy to the entrepreneur looking to protect their assets. They both have similar characteristics with the Foundation seemingly edging the trusts out given their legal status as an actual entity with legal personality.
However, I have to edge towards the Offshore Asset Protection Trust as being superior to the foundation due to the fact that it is legally well accepted in most common law jurisdictions. This means that there is a large body of case law supporting their validity.
Additionally, given the role of the trust deed, there is a direct fiduciary responsibility and connection between the settlor and the trustee. This legal protection should not be underestimated and gives you plenty of rights in the event of a dispute over the treatment of the trust assets.
For this reason, I would suggest you take a serious look at a Cook Islands Trust if you are looking to protect assets for any reason. If you require any assistance in this regard, please contact our consulting arm for a confidential discussion on your needs.
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