FAMILY & ASSET PROTECTION
Book Your Free ConsultationFor most people who have accumulated wealth in their lifetime, the number one objective is to preserve such wealth and assets for the next generation or indeed generations. Most people in the English-speaking world are familiar with the concept of trusts being used to achieve this aim although less familiar with private interest foundations (PIF’s), which were originally the civil law equivalent but have now been adopted by well know tax planning jurisdictions such as Jersey, the Isle of Man and Gibraltar. To decide which of the two possibilities work best for an individual or family will depend on a number of factors including fiscal residence, asset location, personal circumstances and local tax treatments.
WHAT ARE TRUSTS & PRIVATE INTEREST FOUNDATIONS?
Trusts and private interest foundations both seek to separate assets from their original donor in favour normally of named or unnamed beneficiaries, which would normally be close relatives such as children and/or charities. The key benefit in both cases is that assets can be protected for the benefit of such beneficiaries but unlike a direct distribution the original donor will be able to control when, how and under what circumstances distributions will be made even beyond their lifetimes.
Apart from their original and primary functions trusts and private interest foundations can also be used for the following:
Protecting assets before a marriage
A wealthy individual can donate surplus assets to a trust or private interest foundation before getting married which will mean such assets will not form part of his or her assets base should there be a future divorce or separation.
Separating surplus assets before immigrating to countries such as the United States of America
Just as with a marriage a wealthy individual can donate surplus assets to a trust or private interest foundation before migrating to the US, which may prove very beneficial especially if the intended beneficiaries are not US citizens or green card holders. The latter point is crucial as all US citizens or green card holders, whether resident or not in the US, must make declarations to the Internal Revenue Service (IRS) each year on all their worldwide assets. However, if their asset base has been reduced before migrating then only the remaining assets should be subject to any US taxes.
Changing the Ultimate Beneficial Ownership (UBO) of Assets
Where a properly constructed trust or private interest foundation has been set-up then the beneficial owner of the donated assets is no longer the donor but either the self-owing private interest foundation or in the case of trusts technically no one save that the trustees administrating the trust have control of the donated assets per any applicable written instruments. The fact that trusts and private interest foundations can often change the UBO of assets can be very useful in tax planning as most anti-avoidance, controlled foreign company and related rules are dependent on who or what is the UBO.
TRUST TERMS & INSTRUMENTS
A trust will normally have the following:
Settlor
A settlor who literally settles on the trust the relevant assets.
Trustees
These are the individuals or companies that will carry out the wishes of the settlor.
A deed of trust
This is literally the document that outlines how the trust will be run, for how long and for whom.
A protector
This may be the settlor who wishes to ensure that the trustees strictly adhere to his wishes during his lifetime or it may be (at any time) independent professionals (normally paid) to likewise ensure adherence to the deed of trust.
The beneficiaries
These are the people or class of people and/or charities that are the intended beneficiaries from the donations made by the settlor.
PRIVATE INTEREST FOUNDATION (PIF) TERMS & INSTRUMENTS
A PIF will normally have the following:
- A founder who literally settles on the PIF the relevant assets.
- The PIF itself, which for the purposes of most legal jurisdictions (if properly set-up) is considered to be a separate self-owning legal entity similar in most ways to a limited company but not having any shareholders bar itself
- A Foundation Council (FC) – These are the individuals or companies that will carry out the wishes of the Founder.
- The Foundation Regulations – These are literally the documents that outline how the PIF will be run, for how long and for whom.
- A protector – This may be the founder who wishes to ensure that the FC strictly adhere to his wishes during his lifetime or it may be (at any time) independent professionals (normally paid) to likewise ensure adherence to the deed of Regulations.
- The beneficiaries – These are the people or class of people and/or charities that are the intended beneficiaries from the donations made by the founder.
WHAT ARE DIFFERENCES BETWEEN TRUSTS & PRIVATE INTEREST FOUNDATIONS?
There are a number of differences, which can additionally change depending on jurisdiction but at their core a trust is historically a construct of the common law system (i.e. countries that have followed the English legal system such as the United States, Canada, Australia, Ireland and New Zealand) whilst a PIF is a construct of the Continental civil law system used by countries such as France, Germany, Italy, Spain etc. There is also a view, at least where donors come from common law countries that PIF’s have a degree of extra flexibility especially as founders can have reserved rights to change the regulations, beneficiaries and even determine (end) the very existence of a PIF and still be deemed valid at law.
