Using trusts and foundations

The use of trust and foundation entities is increasingly a solution adopted by many entrepreneurs. The benefits of such entities, whereby assets are moved from the ownership of the entrepreneur to either the trustees on behalf of the beneficiaries or to a foundation which is a standalone legal entity, include the following:

• Single administrative centre for assets
• Single ownership vehicle which is easier for lenders and potential purchasers to understand
• Ownership of family assets divorced from individual ownership of shared assets
• Potential asset protection and, even where not fully protected, raises the level of cost to pursue a claim thereby reducing spurious claims
• Allows for cross-generational planning
• Single administrative point for tax disclosures and tax planning, ensuring a more co-ordinated response for all family members.

The consequences

The trust or foundation will become the owner of the assets once they have been transferred from the entrepreneur. This means careful consideration needs to be given to the immediate consequences and the longer term position. In particular the entrepreneur and his advisers need to consider whether the transfers to a trust or foundation crystallise any capital gains tax or gift, wealth or donation taxes. Consideration also needs to be given to the taxation position on income and gains of the trust or foundation as they arise, and on distributions.

It is also necessary to consider reporting requirements for the settlor or founder and the beneficiaries on set up and on an annual basis. There may also bereporting requirements in the jurisdiction where the assets are located.

Other considerations

Trusts and foundations can be set up in various jurisdictions both offshore and onshore. In choosing between a trust and a foundation, and deciding which jurisdiction to use, it is necessary to consider your particular objectives, and the relevant legal and tax advice, taking into account the location of the settlor, beneficiaries and the trust assets. You may also have a preference between an Anglo-Saxon common law trust or the civil law foundation. Typical jurisdictions include the following:

Trusts

• Isle of Man
• United Kingdom
• British Virgin Islands
• Switzerland
• New Zealand

Foundations

• Panama
• Liechtenstein
• Isle of Man
• Jersey

Whilst it may be possible in some cases to obtain tax savings or at least tax deferral through the use of a trust or foundation, often they will be tax neutral, meaning no tax saving but no increase in the tax payable. Entrepreneurs need to look at their current asset base and consider the following points:

• Who are the current legal and beneficial owners of the various assets?
• What are the longer term plans? How old are the entrepreneur and any children? Will children take over the business or will they be passive owners of the business?
• Where are the various family members tax resident?
• What citizenships or visas do family members hold? Have they obtained US passports or green cards?
• What are the legal exposures of the children? If they are, for example, medical or financial professionals, do they have personal exposures from clients?
• Are any assets or family members subject to forced heirship or similar provisions?
• Should assets skip a generation and go straight to grandchildren or be held until grandchildren come of age?

Summary

Trusts and foundations are excellent tools for wealth and tax administration and planning, but there are many pitfalls. With increasing transparency and the move towards automatic exchange of information, care needs to be taken in the set up and on-going administration of trusts and foundations.

Entrepreneurs and their families need to receive detailed and appropriate tax and legal advice covering all the jurisdictions where family members and assets are located prior to the setting up of a trust or foundation.

However, with appropriate advice and guidance a trust or foundation can assist with the orderly administration and protection of an entrepreneur’s wealth and assets.