Trusts and Foundations: What’s the Difference?

People occasionally use the terms ‘foundation’ and ‘trust’ interchangeably. However, they are two distinctly separate ways of managing wealth. Knowing the difference between the two can help in estate planning, as one may have advantages over the other in terms of meeting specific objectives.

Attorney-at-law Dr Edgar Paltzer specialises in estate planning and in the structuring, implementation, legal maintenance and liquidation of both foundations and trusts.

What Is a Trust?

A trust is in essence an agreement between two people or two parties regarding ownership of assets. It is formed when the settlor, or owner of the assets, agrees to transfer the trust property (those assets) to a trustee, who can be an individual or an entity. The trustee typically holds the assets on behalf of a beneficiary or beneficiaries, such as young dependents or charitable organisations. However, it is also possible to establish a trust without beneficiaries.

What Is a Foundation?

A foundation, once established, operates in a similar way to a company in that it owns assets in its own right. Once assets have been transferred to the foundation, the foundation owns them. A foundation is governed by a council in the same way as a company may be governed by a board of directors. However, it operates as an ownerless structure with no beneficial owners, even where the assets of the foundation are held for beneficiaries.

Registration and Incorporation

In order for a foundation to exist, it must be registered and incorporated as its own legal entity. A trust does not need to be either of these things — it is a legal agreement between two parties.

Discretionary Powers

One thing trusts and foundations have in common is they can both be discretionary. This means the council (in the case of a foundation) or the trustee (in the case of a trust) can determine how and when assets are distributed to beneficiaries and in what quantities.

It is also possible for third parties to be appointed to oversee the management of funds within a trust or foundation, such as deciding where to invest. The settlor of a trust or the founder of a foundation may reserve the right to retain certain powers, such as adding or removing beneficiaries, changing instructions on how and where to distribute assets, or determining where to invest.