Trust vs. Private Foundation

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Effective Tools to Manage Your Wealth and Protect Your Assets

Deciding upon a wealth management, asset protection and succession planning structure and location is a key decision for every individual, family, and wealth manager to make. Although there are quite a few high-quality options available, many prospects and clients struggle to find the best legal structure and suitable jurisdiction in which to set it up. It often happens that a legal structure is established in one jurisdiction while assets are held in other jurisdictions. In this article we focus on trusts and private foundations and differences between those two legal instruments. 

Trusts and private family foundations are both legal structures that individuals and families can use for various purposes, including managing, distributing, and protecting assets. They are both great instruments for preservation of a family legacy. While they share some similarities, they also have key differences, particularly in terms of their purposes, structures, setups, disclosure requirements and tax implications. It’s important to note that legal and tax regulations may vary by jurisdiction, so it’s advisable to consult with a professional advisor to understand the specific implications in your area and particular situation. In this piece of writing, we focus on Malta trusts and foundations. 

We are a licensed trustee, foundation administration and fiduciary company in Malta. Malta trusts and foundations can be used for wealth management, estate and succession planning, asset protection, and charitable purposes. However, there are some key differences between the two. In our practice, a question that comes up regularly is what is the most suitable legal structure for me: a trust or private foundation?

Trust or Foundation: What Suits You Best?

The choice between establishing a trust and private family foundation depends on your specific goals, preferences, tax residencies of the counterparts and the nature of your assets. Both structures offer unique advantages, and the decision should be based on your individual circumstances and objectives. Here are some key considerations for each option:

Legal personality: Private foundations in Malta are distinct legal entities with their own legal personality, while a trust is not a separate legal entity. A trust is merely a contractual relationship between Trustees, settlor, and the beneficiaries. 

Administration and Management: A foundation is managed and controlled by Administrators, while a trust is managed and controlled by a Trustee. Both Trustees and foundation Administrators have a fiduciary duty to act in the best interests of the beneficiaries. 

Duration:Maximum duration of foundations is up to 100 years. Trusts have a limited duration up to 125 years. 

Taxation: Foundations are by default taxed as companies in Malta. However, it may elect to be taxed like a trust and opt for tax transparency. Trusts are tax transparent flow through instruments by default. Like foundations, Malta trusts may elect their tax status. Trusts may elect to be taxed as Malta companies. This option of election in Malta legislation is a huge advantage creating flexibility. Thus, foundations and trusts can both be taxed like trusts (tax transparent) or as Malta companies (opaque). Clients have a choice, which creates a lot of planning opportunities. 

Setup and Registration. Foundations are registered with Malta Business Register (MBR). Trusts are not registered in Malta, which makes them more private. 

Endowments. All donations to foundations must be registered with MBR. Contributions to trusts must not be registered, which adds certain degree of privacy. 

Public Records. Names of founders and beneficiaries of foundations or trusts do not appear in any public records.

Counterparties to Foundations and Trusts: 

Founder/Settlor   

Foundation: The founder is the individual or entity that establishes the foundation and endows it with initial assets. 

Trust: The settlor is the person who establishes the trust by transferring assets into it. The settlor decides the terms and conditions of the trust.

Administrator / Trustee

• Foundation: A foundation is managed by the Administrators who oversee its activities and ensure compliance with its Statue.  
• Trust: Trustees are responsible for managing and administering the trust according to the settlor’s instructions and wishes. Trustees hold legal title to the trust assets. 

Beneficiaries: 

• Foundation: Foundations may have beneficiaries who benefit from the foundation’s activities or distributions as specified in its Statue. 
• Trust: Beneficiaries are individuals or entities who stand to benefit from the trust. They may receive income generated by the trust assets or may have a future interest in the trust property.  

Protector (Optional): 

• Foundation: A foundation may also have an enforcer / supervisory council who oversees its activities and serves as a guard dog.
• Trust: In trusts, a protector may be appointed to oversee the trustee’s activities and ensure that the trust’s objectives are being met. 

Both foundations and trusts may engage legal, financial, and tax advisors to provide expertise in managing the structure and assets, complying with regulations, and optimizing its operations.

Ultimately, the choice between a trust and a private family foundation depends on the specific goals and priorities of the individual or family, as well as legal and tax considerations. Professional advice from legal and financial experts is crucial when deciding which structure is most appropriate for a given situation.

Key facts summarized for you:

Our expert team are well-versed in understanding the specifics of local and international laws, and regulations. Malta has excellent legislation for both: private foundations and trusts. We know how to make it work best for you, ensuring you an efficient structure that benefits you and your family.

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