Trust vs Foundation- what is the difference?

Even if you are not a legal or financial expert, the chances are that you have heard of both Trusts and Foundations. Both of these are available to private individuals such as you, but not everyone can tell the difference between them, let alone know which is the best option.

A trust is an agreement that is created through something called private writing. A trustee is nominated to control and look after the assets that have been placed into the trust, for the sole benefit of the trustees. For example, immovable property such as houses can be held in a trust, as an artwork or heirlooms. These items would be legally held by a third-party, usually, a firm or company but remain the property of the beneficiary that is nominated in the trust.

A foundation is an organisation that can be considered a fully autonomous legal entity which belongs only to itself. It is similar in some ways to a company but it has several characteristics of a trust. A foundation in Malta enjoys a separate legal personality from the moment the foundation is registered with the Registrar for Legal Persons and both a foundation and a trust cannot exist for longer than 100 years.

When it comes to trusts, they are established by someone called the settlor who rescinds their ownership of the property and legally allocates it to the trustee. Once this is done, they effectively relinquish any rights over the ownership or the management of the trust property. This person is expected to submit a list of conditions that apply to the trust property and the trustee keeps these in mind when they exercise their rights further down the line.

A foundation is created by a founder who must draw up a public deed with a notary. Unlike a trust, the founder is able to retain part of the control in the administration of a foundation and the decisions that need to be taken. The founder also has the right to oversee the acts of the appointed administrators and they can even be an administrator themselves.

When a trust is created, the trustee has the property in the trust in their name and looks after it for the beneficiary until the time comes when the property is ready to be passed on. The trustee must answer to the beneficiaries for every action that they take and a high level of care must be given when it comes to carrying out duties. A foundation is governed by administrators who administer in the best interest of the purpose for which the foundation was created.

In Malta, both trustees and foundation administrators are bound by fiduciary obligations which include confidence, trust, care, and acting for the benefit of another. At no time should the administrator or the trustee allow a conflict of interest or activity in a way that is not in the best interest of the beneficiary.

In addition to this, the trustee must keep the assets of the trust completely separate from their own personal assets. This is to avoid any issues should the trustee become insolvent as well as mitigating the risk of assets being used for purposes other than they were intended. This also means that the trust assets are protected from the claims of creditors that may be targeting the settlor or the beneficiary of the trust- in other words, the assets in the trust are protected until the time that they are released. When it comes to a foundation, as it has a distinct legal personality it acts similar to a limited liability company- in other words, the creditors of the foundation have no claim on any of the assets of the administrators.

One of the biggest differences between a trust and a foundation is that a trust is not registered on any register or with any authority, instead, it is kept with the trustee. A foundation, on the other hand, must be registered and overseen by a notary or lawyer. Both trusts and foundations are considered to have very high levels of confidentiality.

When it comes to deciding what is the best vehicle for an individual’s purpose, it really depends on what your needs are and what you want to achieve. Malta is rare in that you can choose between either option and both offer infinite possibilities and benefits. To find out more, please contact us at [email protected].