In part one of this series, we outlined the role trusts can play in succession planning for Middle Eastern families’ diverse international assets – if you haven’t already you can read that article here. Like trusts, foundations based in carefully selected jurisdictions can play an important part in organising family wealth. Also like trusts, they are often under-utilised by GCC families and their advisors due to a lack of understanding of what these structures can offer. Here, we undertake a brief explanation of what foundations are and how they differ from trusts.
Although foundations can be established to embrace a wide range of purposes and objectives, broadly speaking they fall into one of three categories. Charitable foundations are formed to serve the philanthropic interests of the founder, corporate foundations are used to ensure the continuity of business control or pensions schemes, and private foundations are used for succession planning and family governance matters. This article will focus on the third of these, the private foundation.
The Differences Between Trusts and Foundations
Like trusts, foundations are designed to hold an endowment provided by the founder for a specific purpose for the benefit of the beneficiaries, and so are set up for the specific benefit of their beneficiaries. Neither trusts or foundations have shareholders. Beyond that, however, the exact nature and purpose of trusts and foundations begins to diverge slightly.
For a start, foundations are independent self-governing legal entities established by an official body in the jurisdiction where they are set up. A private foundation is therefore an independent self-governing legal entity, while a trust is a legal obligation between two parties. Due to this, a private foundation is registered and publicly recorded by the government, much like a company, while the specifics of a trust are not normally readily available to the public. Another difference is that the assets of a private foundation are placed into the foundation on behalf of the beneficiary and not in the custody of any one person; while the assets of the Trust are placed in the custody of a trustee on behalf of beneficiaries. Finally, trusts may be used for certain commercial activities while a foundation cannot.
The Role of Foundations in Wealth Structuring
Overall, a foundation offers something of a half-way house between the benefits of a company and those of a trust. Where privacy or a commercial function are important to the purpose of the structure, a trust is likely to be the most beneficial. Where there is greater benefit to having an independent legal entity, a foundation offers an alternative to a company.
Ultimately, however, when it comes to the succession planning of complex family assets for middle eastern families, neither a trust or a foundation alone is going to offer everything that a competent and well-informed family advisor needs to build a robust ownership structure. In most cases, a network of trusts, foundations, and companies will be required to derive the maximum benefits in terms of governance, compliant tax efficiency, and multi-generational wealth preservation. The third part of this series will therefore look at private trust companies (PTCs) and their role in completing the broader picture of how to structure GCC family wealth.
This article is part 2 of 3, and you can find the first blog on trusts here. Subscribe to our newsletter and/or bookmark our blog to ensure you don’t miss our study of private trust companies as part of the succession planning framework.
Alternatively, you can download our Complete Guide to Structuring Middle Eastern Family Wealth right now. It contains 26 pages of detailed explanation of the best uses of family office, trust, foundation, and company structures.