Building Legacy On A Foundation - Part II

Author:Mr Millie Chan
Profession:Labuan IBFC Inc

This paper is written against the backdrop of my previous article entitled "Building Legacy on a Foundation, Part I" published in InsightPlus issue of October 2017. Part II seeks to contrast key features of a private foundation with those of a common law trust. While both structures are similar in many respects, it is their differences that can distinguish them as the suitable vehicle of choice in a particular estate plan.

Differences between Foundations and Trusts

It is helpful to bear in mind that the differences in the characteristics and functionalities between a private foundation and a common law trust arise chiefly from two fundamental distinctions, namely, the legal traditions that birthed the respective concepts (civil law vs. common law), and the status of the structures (legal personality vs. legally recognised relationship). (i) Ownership of Assets As a legal personality, a foundation owns its assets absolutely and indivisibly. In general, the civil law tradition does not countenance split ownership of assets. A trustee, on the other hand, only claims legal ownership of the trust assets while the beneficial ownership rests in the beneficiaries. The split in legal and beneficial ownership means that these properties do not form part of the trustees' own estate. They must be accounted for as a segregated fund. (ii) Duration  A foundation can exist indefinitely as a legal entity, unless the applicable legislation or its constituent document limits its duration. The original common law position vis-à-vis trusts on the other hand imposes a rule against perpetuity in respect of the ownership of trust assets. Nevertheless, several jurisdictions have taken the step to abolish this rule against perpetuity. For example, a trust established pursuant to the Labuan Trusts Act 1996 (LTA 1996) can exist for unlimited period. (iii) Contracting A foundation contracts in its own name and can sue or be sued in its own name. A trust, not being a legal entity, is represented by the trustee for all intents and purpose. Hence, the trustee contracts personally. The unfortunate consequence is that the trustee will be personally liable for any breach of contract to the extent of the trustee's own estate. In some jurisdictions, special legislations have been introduced to limit the trustee's liability. In practice, it is also common to negotiate with the other contracting party to accept a restricted liability, for example...

To continue reading