However, a Foundation may be argued to be superior to a Trust. It is seen to combine the best features of both a company and a trust, namely by marrying the separate legal personality of a Company with the confidentiality aspect of a Trust. Like a Company, a Foundation is a separate legal entity in that it can hold assets in its own name. It can also sue and be sued in its own name.
A Trust, on the other hand, is not a separate legal entity. At most a Trust has been described as a “relationship”. Trust assets are held in the Trustee’s (the person who holds the Trust property on trust) name on behalf of the Beneficiary (the person for whose benefit the Trust property is held). Ownership of the Trust assets is thus split between the Trustee and the Beneficiary, with the Trustee having the legal ownership and the Beneficiary holding the equitable ownership. This split ownership presents uncertainty and vulnerability to a Trust structure in the event of any possible future attack on the Trust by a possible disenfranchised Beneficiary, for example.
Furthermore, although the Trustee is to administer the Trust in accordance to the Trust Deed, the Trustee is subjected to strict fiduciary duties in the performance of his trusteeship. Many Settlors are uncomfortable with this split ownership and the fact that their assets are held in a third party’s name whose strict fiduciary duties may lead to uncertainty or conflict of interests between the Settlor and the Beneficiary in the event of a dispute in the form of an attack on the sanctity of the Trust structure. In this way the Settlor may feel that he is not in control of the Trust.
The Foundation, on the other hand, provides for a clearer legal structure as it has its own legal personality. In addition, it does not have any shareholders or owners; therefore, its existence can continue uninterrupted or possibly in perpetuity as it is not affected by any changes to the ownership or shareholders of a Company, for example.
A Foundation Council manages a Foundation - much like a Company’s Board of Directors - in accordance with the terms of the Foundation’s constituent documents, the Charter and Articles, and possibly, a Letter of Wishes by the Founder.
The Founder in this way retains control over the Foundation by stipulating in the constituent documents the management of the Foundation’s assets and the manner in which the Foundation is to be run. The Founder can also provide by way of these constituent documents his successor/successors and the method of running the Foundation after his demise. In fact, the legal provisions in the constituent documents allow the Founder to reserve wide powers to himself.
It is clearly provided in Section 11 of the Labuan Foundations Act 2010 that a Foundation is the owner, with full legal and beneficial title, of any property endowed to it. It is also provided that such property endowed shall cease to belong to the Founder. Neither does the Beneficiary become the owner of the property unless and until it is distributed according to the provisions of the constituent documents and the Act. This clarity in the concept of ownership of the Foundation assets is crucial, particularly for asset protection purposes.
This concept also sits better with the Founder as it is clear that he can retain control of the Foundation by way of crafting the constituent documents in accordance to his wishes. Certainty from a legal perspective as to the ownership of, and title to, the Foundation’s assets, and the Founder’s control over the Foundation are two of the most persuasive arguments in favour of the Foundation being a superior structure for succession planning and asset protection purposes.