Comparison Between Trust and Foundation

05 Jan Comparison Between Trust and Foundation

Comparison Between Trust and Foundation

In the realm of wealth management and asset protection, trusts and foundations have long been utilized as powerful tools by high-net-worth individuals and families. The United Arab Emirates (UAE) has emerged as a leading jurisdiction for the establishment of such structures, offering a favorable legal framework and a business-friendly environment. However, understanding the nuances between UAE trusts and foundations is crucial for making an informed decision that aligns with one’s objectives and circumstances.

This article compares two mechanisms for managing wealth in the UAE: Trusts and Foundations.

UAE Trust

A UAE trust is a legal arrangement where a settlor (the person creating the trust) transfers assets (trust assets) to a trustee, who holds and manages those assets for the benefit of the beneficiaries, as per the terms outlined in the trust deed. UAE trusts can be revocable or irrevocable, charitable trusts, donor advised funds, charitable remainder trusts, and asset protection trusts.

Trusts can be compared to a deposit box for a person’s assets. Trusts can be integral to wealthy families’ asset protection, wealth management, real estate planning, charitable giving and succession planning strategies. They can also provide tax efficiency, particularly regarding inheritance, estate, and gift tax es.

They offer benefits like shielding assets from potential claims, ensuring orderly transfer of wealth to future generations, tax benefits, and potentially mitigating tax liabilities like income tax and real estate tax in certain jurisdictions. However, it’s important to note that UAE trusts are subject to specific legal requirements, including the appointment of a licensed trust service provider and adherence to the Trust Law and Internal Revenue Code.

Trusts emerged centuries ago under English law. As such, trusts are primarily found in countries that inherited English common law; however, in 2021, the UAE enacted the UAE 2020 Trust Law, which introduced an English-style trust arrangement into the UAE’s legal environment. This UAE law provides reassurance for those investing in the country that their assets will be legally protected with these structures.

UAE Foundation

A UAE foundation is a separate legal entity established under the UAE Federal Law No. 11 of 2018. Unlike trusts, foundations have a distinct legal personality and can hold assets in their own name. Foundations perform similar roles to trusts and are deployed to protect assets and manage successions. A foundation is a legal entity more analogous to a company, whereas a trust is a legal relationship between the trustor, trustee, and beneficiary.

UAE foundations can be private foundations, charitable organizations, community foundations, public charities, or nonprofit corporations dedicated to pursuing philanthropic or charitable purposes and causes.

The primary advantages of UAE foundations include perpetual existence, confidentiality, and the ability to operate as a separate legal entity. They are often utilized for purposes such as wealth preservation, estate planning, charitable endeavors, and meeting charitable beneficiary needs. Foundations offer a high degree of flexibility in terms of their structure and governance, allowing for customization to suit individual needs. Private foundations may also benefit from tax exemptions.

Unlike a trust, a foundation can hold the founder’s assets in the foundation’s name, offering asset protection measures. As the assets no longer belong to the founder, ring-fencing protection is placed between the founder and their assets against creditors or other family members. Foundations tend to be found in civil law countries.

Foundations in the UAE are available across various jurisdictions in the United Arab Emirates:

• Abu Dhabi Global Market under the Foundations Regulations 2017
• Dubai International Financial Centre under the Foundations Law DIFC Law No. 3 of 2018
• RAK International Corporate Centre under the RAK ICC Foundations Regulations 2019

Types of Trusts and Foundations

Trusts

Revocable Trust: The settlor retains the ability to modify or terminate the trust during their lifetime.

Irrevocable Trust: Once established, the settlor relinquishes control over the trust assets.

Charitable Trust: Created specifically for charitable purposes and beneficiaries.

Charitable Remainder Trust: Allows the donor to receive income from the trust assets during their lifetime, with the remaining assets going to a charitable organization upon their death.

Charitable Lead Trust: The charitable organization receives income from the trust assets for a specified period, after which the remaining assets are transferred to non-charitable beneficiaries.

Asset Protection Trust: Designed to shield assets from potential creditors or lawsuits.

Foundations:

Private Foundation: Established for non-charitable purposes, such as wealth preservation or estate planning for a specific family or group.

Charitable Foundation: Dedicated to philanthropic or charitable causes and activities.

Community Foundation: A public charity that pools donations into a coordinated investment and grant-making facility for local communities.

Company-Sponsored Foundation: Created by a corporation to support its philanthropic endeavors and enhance its corporate social responsibility initiatives.

Operating Foundation: Directly conducts charitable activities or programs, rather than solely making grants to other organizations.

Trust and Foundation Comparison Chart

Here is a brief chart that compares and contrasts trusts and foundations in the UAE.

Choosing Between a Trust or Foundation

The choice between establishing a UAE trust or foundation largely depends on an individual’s specific objectives, assets involved, residency status, tax situation, and personal preferences. A trust may be more suitable for those seeking asset protection, succession planning, real estate tax planning, charitable remainder annuity trusts, charitable lead trusts, or tax optimization, while a foundation could be a better fit for those prioritizing confidentiality, perpetual existence, and the benefits of operating as a separate legal entity for charitable organizations.

It’s essential to conduct a thorough pros and cons analysis and seek guidance from experienced professionals, such as lawyers, trust service providers, financial advisors, and nonprofit consultants to ensure that the chosen structure aligns with your unique requirements and long-term goals.

UAE trusts and foundations offer distinct advantages and cater to different needs within the realm of wealth management, asset protection, and charitable giving. Ultimately, the decision to establish a UAE trust or foundation should be based on a careful evaluation of individual circumstances, objectives, and professional advice from experts like financial advisors and charity/foundation consultants. By understanding the key differences between these two structures outlined in the foundation charter or trust deed, individuals and organizations can make an informed choice that safeguards their assets, maximizes tax benefits, and ensures their long-term financial security or fulfillment of their charitable goals.

Want to know more about UAE Foundation and Trust?

If you wish to learn whether a foundation or trust is better for your needs, please speak to one of the best business consultants in the UAE for a free consultation.