Trusts vs Foundations - Perpetual Tug of War?

ARTICLE

25 Jan 2021

Trusts and foundations are often thought of or addressed together, most likely because they are both used by practitioners for asset protection purposes, and also possibly because of their similarities when it comes to their administration.

However, trusts and foundations couldn’t be more different, especially to the trained professional, and this article will explain why.

What is a trust?

Under Maltese law, trusts are regulated by the Trusts and Trustees Act ("TTA”), Chapter 331 of the Laws of Malta. Article 3 of the TTA defines a trust as the holding of property by a person, known as the trustee, for the benefit of persons, known as beneficiaries.

In other words, the trustee must hold property (in trust) for the benefit of beneficiaries, otherwise, there is (quite literally) no trust.

What property can be held in trust, and why would you settle property in trust?

Any property may be held in trust. Trust property can consist of monies, investment portfolios, shares in companies, paintings, immovable property and even yachts or ships.

Trust property under Maltese law is a separate estate owned by the trustee, distinct and separate from the personal property of the trustee and also distinct from the other property held by the trustee under any other trust.

When a trust is created, the legal title and therefore the ownership of the property which is settled in the trust passes from the settlor to the trustee, who from then on has a duty to administer, employ or dispose of the trust property in accordance with the terms of the trust for the beneficiaries, (and not for the trustee itself).

The immediately obvious legal effects and benefits of settling property in trust with a trustee under Maltese law are:

  • The ownership of the trust property is transferred from the settlor, the person who settles the property on trust, to the trustee;
  • The trust property will not form part of the trustee’s personal estate upon its insolvency or bankruptcy;
  • Personal creditors of the trustee shall have no recourse against the trust property;
  • The trust property shall not form part of the matrimonial property of the trustee or the Settlor, nor of their spouses (where Settlor and trustee are natural persons), nor part of the trustee’s estate upon his death (or liquidation if a company);
  • The settlor’s creditors shall have no recourse against the trust property as it would not form part of the settlor’s estate following the settlement on trust.

What is a foundation?

Under Maltese law, foundations are regulated by the Second Schedule of the Civil Code, Chapter 16 of the Laws of Malta. Article 26 of the Second Schedule of the Civil Code defines a foundation as an organisation consisting of a universality of things constituted in writing, including by means of a will, by a founder or founders whereby assets are destined either for the fulfilment of a specific purpose or for the benefit of a named person or class of persons.

A foundation is an organisation that enjoys a separate legal personality. In certain ways it is similar to a company whilst retaining certain characteristics of a trust. Whilst a trustee administers a trust, an administrator of a foundation administers a foundation, and both do so for the benefit of their respective beneficiaries.

How do trusts and foundations differ?

The main difference to bear in mind when discussing trusts and foundations is that while in both trusts and foundations there is an owner of property who divests himself of the ownership of the property, in the case of trusts, the property is settled on trust with the trustee, whereas in the case of foundations, the property is not endowed to the administrator of the foundation, but it passes to the foundation itself, since a foundation enjoys separate legal personality (akin to a company).

A trust does not enjoy separate legal personality. It is the trustee that is the legal person who can own and administer the property.

As for the many other differences between the two, we have compiled a quick reference chart below.

Trust
Foundation

Mode of Creation

Private writing

Public Deed

Registration requirement

n/a

Yes

Is creation by means of a will possible?

Yes

Yes

Segregation of assets

Yes

Yes

May be created for the benefit of beneficiaries

Yes

Yes

May be created for the fulfilment of a specific purpose

Yes

Yes

Initial endowment of money or property

No – anything can be set up on trust upon creation

Yes – law outlines specific values

Deed of Foundation/Trust

Yes

Yes. Law is very specific about requirements on pain of nullity

Creation of Cells

No

Yes

Term

125 years

125 years

Ownership over property

Ownership is transferred to the trustee

Ownership is transferred to the foundation

Fiduciary Obligations

Yes

Yes

Legal personality

No. It is the trustee that enjoys legal personality

Yes

Settlor/Founder

Settlor does not have any control over the ownership and the administration of the property

Founder is usually allowed a greater degree of control than a settlor in a trust scenario