Estate planning: Wills

Dying intestate, without a will, is a source of tremendous difficulties (tax, succession, dismantlement of a family business, distribution of estate type of issues…). Establishing a will is the minimum structuring which could be made. It could also mitigate the application of local succession laws (e.g. Sharia law…). The will could be registered abroad or in UAE.

DIFC WILL

A Will encompassing Dubai assets (bank accounts, jewelry, works of art, cars, investment policies, shares of companies, real estates…) only, located or registered in Dubai, could be registered in the Dubai International Financial Center, a Common Law Jurisdiction based on the UK Estates Act and Probate Rules excluding the Sharia law , Wills and Probate Registry (“WPR”) by Non-Muslim individuals over the age of 21 years UAE resident or not under full testamentary freedom (except some restrictions depending on the testator’s citizenship and/or residency) and covering guardianship matters related to minor children habitually resident in Dubai with the testator.

The execution of the will takes place at the time of registration in the presence of a registry officer and one testator’s witness. The Will shall be electronically stored of the Will as a preventative measure against any possible allegations of forgery and to avoid the risk of tampering, loss and theft.

DIFC Courts adjudicate any contentious probate matters and issue Grants of Probate (legal instrument allowing the executor- family member, lawyer, friend…- to handle the disposal of the deceased’s assets and debts), court and guardianship orders.

Trust: Estate planning, Asset protection and Governance planning

The most efficient and widely used asset protection vehicle is the Trust which could hold immovable (real estate property, factory, plants, lands…) and movable assets (bank accounts, shares, investment portfolios, bonds, securities, insurance policies, art collections, gold, intellectual property…) while Foundation (separate legal entity without shareholders which is established to reflect in its by laws the wishes of the individual or corporate founder to be followed by the foundation’s council of which the founder could be part of in case he wants to reserve a high level of control ) is mostly used for wealth preservation and management.

Trust could be used for estate planning, business governance planning, confidentiality planning, investment fund planning, asset protection planning by segregating the family’s private assets from the business ones to limit the reach of the business creditors, securitization purposes, off balance sheets purposes.

Succession, asset protection and Governance planning could be designed through the use of STAR and Vista Trusts.

A Trust is an entity allowing a Third party, the Trustee which could be a private trust company controlled by the settlor (the donor, the client who is vesting his interests into the Trust for the beneficiaries’ benefits; beneficiaries amongst which he could be), to hold assets for the benefit of beneficiaries appointed as per a Trust Deed being the legal framework: The Trust deed instrument specifying the terms governing the Trust, can be drafted in several ways to specify the conditions under which assets should pass to the beneficiaries.

Trust & Foundation Concepts

The Settlor will transfer his property into the Trust by vesting his legal ownership into the Trustee. The Trustee will hold and manage it for the benefit of the beneficiaries by holding the legal ownership over the property called the Trust Fund. The beneficiaries will be holding an economic or beneficial “ownership” depending on the nature of the Trust (revocable, irrevocable, discretionary, fixed interest….). The Beneficiaries will receive distributions from the Trust and enjoy all the profits and benefits of the Trust. A protector (settlor himself, a family member, a trusted advisor…) could be appointed to protect and watch over the Trustees.

A Trust usually avoids probate applicable in case of a will, allowing the beneficiaries to still enjoy the benefit of the Trust despite the death of the settlor (who created and settled property into the Trust) without being subject to obtain a probate from a court on the demise of the settlor.

Other benefits of Trusts include:

  • Protection of your estate
  • Protection of privacy and confidentiality
  • Save estate duty
  • Avoiding probate
  • Avoiding forced heirship rights
  • Mitigating Sharia Law reach
  • Protecting Family wealth
  • Control of your wealth
  • Business succession planning
  • Protection from creditors
  • Tax Mitigation
  • Charitable purposes
  • The Trust deed instrument specifying the terms governing the Trust, can be drafted in several ways to specify the conditions under which assets should pass to the beneficiaries.

Examples

Cook Islands and New Zealand Asset Protection Trusts

To protect life savings from being wiped out by suspicious litigation. An offshore asset protection trust (APT) provides the highest level of security for personal assets against professional creditors.
There are four main features providing effective barriers to creditors attacking an International Trust:

  • Practical Barriers – including instructing local counsel, appearing in local Courts, absence of contingency fee lawyers.
  • Enforcement of Foreign Judgments – the courts will not recognize or give effect to certain judgments of foreign courts in relation to International Trusts. Only the local law will apply to International Trust.
  • Barriers to claims for fraudulent transfer being brought in a court –strict time limits, requirement of proof of fraud beyond a reasonable doubt (criminal standard), and no bankruptcy law.
  • Procedural law – prevents ‘fishing expeditions’ by creditors, restricting the use of interrogatories (discovery…).

Cayman STAR TRUST

A. Main features of STAR trusts:
  • The beneficiaries and/or objects of the Trust may be persons, purposes (whether charitable or non-purposes) or both.
  • STAR trusts must have an “Enforcer”, the only person (natural person or corporate entity) vested with the exclusive authority to enforce the terms of the STAR trust (such enforcement powers having been removed from the beneficiaries, unless, an Enforcer is also a beneficiary of the trust. Even in this situation, the beneficiary would act as an enforcer and not a beneficiary). No rights to the beneficiaries to enforce the trust, to seek disclosure of information regarding the trust and its on-going administration.
  • Trustee of a STAR trust could be a Cayman trust company or a Cayman private trust.
  • The rule against perpetuities does not apply to STAR trusts which may be created for an unlimited duration, eliminating the tax risk of a resulting trust in favor of the settlor at the end of the perpetuity trust period.
B. Practically of STAR TRUSTS:
  • To create dynasty-style trusts for multiple generations to hold investments, preserving and retaining shares in family’s company by having these goals being a purpose of the trust, thus avoiding the “prudent man” duty of the trustees to diversify the trust fund.
  • To create trusts for philanthropic purposes.
  • To restrict the rights of beneficiaries who may challenge the trust, seek information about the trust, or use the Saunders Vautier principle (Allowing all the Beneficiaries together to terminate the Trust).
  • To create trusts which benefit persons and achieve in parallel a goal such as the preservation of family business.
  • To form “Special Purpose Vehicles” for commercial transactions in a safe, flexible, and bankruptcy remote manner by which assets settled into a STAR trust will not be owned by the settlor and will be deemed to be “off-balance sheet”. These structures are useful for the repackaging of securities and other self-financing transactions.
  • To act as a vehicle to hold shares in a private trust company allowing a person to retain a degree of control over the administration of the underlying trusts (which could be holding shares in family businesses).

British Virgin Island Vista Trust

This type of Trust will allow the corporate owner of a family business to settle his shares in a Trust to retain them in a trust indefinitely and to remove the trustee’s monitoring and intervention duties under the general trust law by allowing his disengaged from all management responsibility in the underlying company which to be exclusively instead carried out by the directors of the company without interference in the company management by the trustee.

Practically of Vista TRUSTS:

The trustee has a statutory duty to retain the shares (known as “designated shares”) with a limited power to dispose of them in the circumstances defined in the trust deed.

  • The trustee cannot intervene in the management of the company except in prescribed circumstances which are to be outlined in the trust deed.
  • “Office of director” rules in the trust deed specify how the trustee or an appointor (by an appointor designated by the settlor at the settlement time of the Trust) must exercise their voting powers in respect of the appointment, removal and remuneration of the underlying companies’ directors. However these rules are subject to and must comply with the company’s memorandum and articles of association.
  • An “intervention call” may be made by any “interested person” (e.g. a beneficiary, a protector, etc.) which ask the trustee to intervene in the management of the company, but only in prescribed circumstances (known as the “permitted grounds for complaint”).The trustee has no fiduciary duty in relation to the assets or management of the company unless there is an intervention call.

Example of Trust Governance Planning Structure:

A Private Trust Company (PTC), which is a standard company with the sole objects to act as Trustee of Family Trust (s), could be used as a family governance tool to allow the creator or his family to maintain a control over the Trust structure either as shareholder of the PTC, as members of a family committee or as enforcer of a Purpose Trust to act as shareholder of the PTC. A foundation could also be used instead of the PTC to act as Trustee of the Family Trust (s).

Comparative chart Foundation – Trust

FoundationTrust
Legal BackgroundCivil LawCommon Law
Definition:
  • A foundation is similar to a corporation as it is a legal entity that can enter into contracts, can have bank accounts and can be used for a wide range of investment (and limited commercial activities). The foundation has no shareholders, instead, there is a management body (board).
  • The foundation is similar to a trust as legal ownership of assets is passed onto the foundation.

A trust is a legal obligation or relationship between the settlor (the person who creates the trust) and the trustee (the person in charge of the trust) and the beneficiary (the person who receives benefits from the trust).

Types :There are three main forms of foundations:

  • Charitable Foundations are set up for the sole benefit of approved charitable causes or charitable organizations.
  • Private Foundations, also called Private Interest Foundations are used for succession planning in place of a will. Used also for personal asset protection to protect assets from potential threats such as spouses and creditors.
  • Corporate Foundations are used by corporations to manage employee based schemes (pension plans, retirement plans)
There are four main types of international trusts:

  • Charitable Trusts are set up to benefit charitable causes or organizations. These trusts may have access to beneficial tax treatment depending on the local laws under which the trust operates.
  • Non-Charitable or Purpose Trusts are set up to provide asset protection (the assets are transferred to the trust and not attached to owner).Trusts are used for estate or succession planning in the absence of a will. A trust can dispense its assets entirely according to your wishes.
  • Spendthrift Trusts are trusts set up to protect the beneficiaries from themselves. When, for whatever reason, (illness, addiction, and bad habits) the beneficiary is incapable of managing his own financial affairs.
Purposes and UsesThe purposes of a foundation may be drawn up as broadly as the Founder wishes, but generally used for:

  • Asset protection: to protect your assets from excessive taxation (death taxes, inheritance taxes), from settlements against you arising from divorce or lawsuits, from political instability.
  • Estate planning: To avoid forced heirship (which is where the law (not you) decides who inherits): the assets are out of reach, and not subject to heirship ruling. Moreover, a foundation can be used in place of a will. You have control over how your estate is divided and avoid hefty probate costs and save time.
  • Estate planning privacy: The terms of a will are public; the terms of a foundation are not. You may use a foundation to divide your assets without the public ever having access to your instructions.
  • Investment purposes — the foundation can be used as a vehicle for commercial and investment activity.
  • Charitable purposes: Foundations are often used for philanthropic, humanitarian, educational or other similar purposes, or used to manage assets for such purposes.
The purposes of a trust may be drawn up as broadly as the settlor wishes, but generally used for:

  • Asset protection: to protect your assets from excessive taxation (death tax, inheritance tax) and from settlements against you, arising from divorce or lawsuits. NB: In this case, the settlor of the trust cannot be the trustee, as the assets belong to the trustee and become open to claims.
  • Estate planning: To avoid forced heirship (which is where the law (not you) decides who inherits): the assets are out of reach and not subject to heirship ruling. In addition, a trust can be used in place of a will. You have control over how your estate is divided and avoid hefty probate costs and save time.
  • Estate planning privacy: The terms of a will are public; the terms of a trust are not. You may use a trust to divide your assets without the public ever having access to your instructions.
  • Spendthrift protection: To protect beneficiaries from themselves.
  • Investment purposes : Although the trust is prohibited from commercial activity, the trustee can invest on behalf of the trust
  • Charitable purposes: Trusts are sometimes used for philanthropic, humanitarian, educational or other similar purposes, or used to manage assets for such purposes.
Establishment:When a founder (the person who gives the assets) registers the particulars of the Foundation charter or the Declaration of the Memorandum of establishment at the Public Registry. Unlike the trust, there is no immediate requirement to transfer the assets to the foundation for it to be valid.

Founder, management body, beneficiary, foundation charter, assets/property, secretary, registered agent and office, By-laws, guardian, supervisory board

The trust is established when the settlor (the person creating the trust) prepares a Trust Deed also known as Deed of Trust or Declaration of Trust and transfers assets (of any kind) to the trustee for the benefit of the beneficiary. In order for the trust to be valid, the assets must be transferred to the trust.

Settlor, trustee, protector, beneficiary, trust deed, assets/property, registered agent and office Letter of Wishes/Memoranda of Wishes

Parties:The Founder:

  • The person or a corporation that forms the foundation and then transfers assets to the foundation.
  • The founder may also be a beneficiary or a council/board member
  • The name of the founder is on public record
  • Nominee founders are permitted. A protector will be appointed to exercise full powers over the foundation, freeing the nominee founder (who is provided by the agent) of any responsibility or liability.
  • Foundations can have more than one founder

The Foundation Council / Foundation Board:

    • The body managing/administering the foundation. This board/council has a moral and legal obligation to the foundation to carry out the objectives and purposes of the foundation and directs the administration of assets in the foundation
    • Members can be individuals or a corporate body

The Beneficiary:

  • The person(s) or group of people who benefit from the foundation.
  • The founder can identify the beneficiary by name, by class or by relationship.
  • Beneficiaries can be living, or not yet born. For example the beneficiary can be a relationship “my grandchildren” regardless of whether they are born or unborn at the time of creating the foundation.
  • Is not an owner, and has no claim over the endowment until he/she is given their entitlement/settlement.

The Foundation Charter / Memorandum of Establishment with Consent Schedule

This is the official document forming and governing the foundation. This document may contain:

    • The name of the foundation
    • The name and addresses of the founder
    • Type of foundation
    • Name and address of registered agent
    • The initial capital or value of assets to be transferred into the foundation
    • The name(s) and address(es) of the foundation council member(s)
    • The purpose, the objectives and goals of the foundation (must be possible, reasonable, moral, and legal)
    • Names of other officers where applicable (protector or guardian or secretary)
    • The life of the foundation (foundations normally have indefinite life, but may be limited in duration)
    • The responsibilities of council/board
    • May also include provisions for
    • Preparation of by-laws
    • Appointment of guardian
    • Designation of beneficiaries
    • Other lawful provisions
    • Whether foundation is revocable or not
    • Arbitration clauses

The charter may be amended during the life of the foundation. The documents kept by the registrar are private and cannot be inspected, copied or viewed by anyone, unless that person is authorized by the council or board member.

The Certificate of Establishment:

The document issued by the registrar showing proof of existence. Contains only the date of registration, name of foundation, agent name and address and registration number.
Assets:

      • Normally called the endowment and are the assets/property endowed (put into/donated/gifted) to a foundation.
      • The endowment does not have to be cash, and can include real and intangible assets such as real estate, copyright, patents, jewelry, art, insurance policies, or shares in a company.
      • It is possible to increase the endowment at anytime, and by persons other than the founder.

There is a minimum value of endowment.
Secretary:

Foundations MUST have a secretary (may be non-resident).
Registered Agent / Registered Office
By-laws: This is an optional and private document that specifies how the foundation is to be managed. This is not filed for public scrutiny. The By-Laws of a foundation may include instructions for the management board that pertain to the management, distribution or application of assets. Guardian or Protector or Supervisory Board: Guardians are optional safeguards’ or positions in the foundation. They serve as watch dogs’ of foundations and may be granted more powers than the management board. It is a position that can be held by the founder (so that the founder retains ultimate control).

The Settlor:
• The person(s) or a corporation that creates the trust and transfers assets to the trust.
• The settlor may also be a trustee, a beneficiary or a protector.
• The settlor may be referred to as trustor, donor, creator, grantor or founder
The Trustee :
• The person(s) or company managing the trust. Generally, the trustee has a fiduciary (a legal, financial and ethical) responsibility to the beneficiaries, and a trustee has a broad range of powers. The trustee can buy, sell and invest on behalf of the trust, although his role can be limited by the settlor.
• The trustee may be a settlor, a beneficiary, or the protector of the trust.
NB If the settlor of a trust is a trustee, asset protection coverage diminishes or gets lost since the settlor reverts to becoming the legal owner of the assets.The Beneficiary:
• The person(s) or group of people who benefit from the trust.
• The settlor can identify the beneficiary by name, by class or by relationship.
• Beneficiaries can be living, or not yet born. For example the beneficiary can be a relationship my grandchildren’ regardless of whether they are born or unborn at the time of creating the trust.
• Is not an owner, and has no claim over the endowment until he/she is given their entitlement/settlement.
The Trust Deed /Deed of Trust /Declaration of Trust: The official document that creates the trusts. It may contain:
• The name of the trust
• The nature and purpose of trust;
• Name(s) of trustee(s)
• Name of protector(s) (if any)
• The duties and powers of the trustees
• Powers of trustees on commercial and investment activities

  • Date of settlement
  • Specifics of the trust property
  • If this is a revocable trust, the content may be changed, amended or altered during the life of the trust.
  • The final trust certificate if issued by the registrar shows only the name of trust and the date of trust.Assets: The assets/properties that are transferred to a trust can take on any form, real or intangible. There is no minimum amount of assets to be placed in a trust at inception or to remain in the trust during its existence.Secretary: There are no requirements for a secretary Registered Agent / Registered OfficeLetter of Wishes/Memorandum of Wishes: In addition to the trust deed, the settlor can write a private letter of wishes which spells out exactly what the trustees can do. This is a private letter between the trustee and settlor.The Protector: Protector is optional. The protector is an officer with the power to direct the trustee in matters relating to the trust. Protectors can be given powers to appoint or dismiss trustees, or overrule their decisions. The protector can be a settlor, trustee or a beneficiary of the trust. Though this set up is not recommended for asset protection because ownership of assets reverts to the settlor.
Legal entity?A foundation is a legal entity formed by registering a document called the Foundation Charter or Declaration of Establishment. As a legal body, it can be sued or can sue, enter into contracts and agreements with companies or persons, open bank accounts and conduct commercial activities.Under common law, a trust is NOT a legal person in its own right. Therefore, the trust cannot be sued or take legal action as a corporation or a foundation can. The Trustee must be acting on its behalf.
Revocable or irrevocable?Foundation may be revocable or irrevocable.The revocability of the trust is up to the Settlor, but a trust will be deemed irrevocable if it is not expressed as revocable.
Legal owner of assetsThe assets owned by the foundation are independent of the founder. Once they are transferred to the foundation, these assets no longer belong to the founder, but belong to the foundation only. This means that the endowment cannot be seized, or subject to any claims or legal actions on the founder, or the beneficiaries.The trustee is the manager of assets, held for and on behalf of beneficiaries. Once they are transferred to the trust, these assets no longer belong to the settlor. This means that the endowment cannot be seized, or subject to any claims or legal actions of the settlor or the beneficiaries.
AccountabilityThe foundation council members answer to the foundation.The trustees ultimately answer to the beneficiaries or trust protector.
ManagementThe foundation is managed by a board or council made up of one or more persons; corporate bodies are permitted.The trust may have a protector, but the trustee and settlor have overall charge of the assets as defined by the trust deed/letter of wishes or the memorandum of wishes.
Commercial and investment activityFoundations are not really intended to carry out day-to-day- commercial activities, but it can undertake investment and commercial activity as set out in laws of the foundations.
To conduct daily business activity, an offshore company that is owned by the foundation could carry out all of your commercial activities. Of particular good use is the a Multiform Foundation which is a foundation that can change its form (type) at any time to suit objectives. For instance, if initially you need a foundation to protect current assets, but also need to continue to engage in commercial business activity, then a company foundation is suitable. If after a few years you have achieved the commercial objectives, you may then convert that company foundation to a trust foundation to meet your estate planning and asset protection needs.
Investment activity is permitted, but scope can be limited by jurisdictional laws or the letter of wishes.
Limitations/RestrictionsOther than the limitations placed on the council members in the laws and declaration there are no specific restrictions placed on the foundation.Other than the limitations placed on the trustees pertaining to investment activity, there are no specific restrictions placed on the trusts.
Maximum duration of entityA foundation can be established for an indefinite period. But there are cases when the duration of the foundation can be more specific and set to a specific number of years.Trusts are established for a definite period, generally 100 years. Charitable Trusts may have indefinite periods.
Type of assets (that can be put into entity)Any kindAny kind
LiabilitiesFoundations have limited liability hence the personal assets of the beneficiaries and members of council are protected. The Founder no longer has legal claim to assets.The trustee is wholly responsible for the liabilities of the trust, unless there is a protector who accepts that liability.
Information entered on the register/ on public record:Only a limited amount of information is placed on public record- the name of foundation, date of establishment, registration number, name of members and the endowment value.The trust’s name, name of Trustee and the registered office address (identity of settlor is not recorded)
The deed is not filed.
Maintenance requirementsEntities must be renewed each year. A certificate of good standing is available as evidence that the entity is still in existence, has all files up to date, has paid all fees and penalties required under the act.
Advantages of EntitiesFoundations could choose to have disputes settled through arbitration rather than go through courts. Clients can have matters resolved in a confidential and efficient way, and have the option to select the method and place of dispute resolution.Arbitration settlement -Proceedings (legal but non-criminal) relating to trusts could be heard in private and no details are published without court permission.
A creditor who wants to bring a court action against a foundation or its founder or the member or the beneficiary must first purchase a bond (between $25,000 and $50,000) and deposit it with the Minister of Finance/Registry to cover all costs should the action prove unsuccessful.Before any creditor can bring actions against a trust, that creditor must pay a bond of US25, 000 as a security deposit.
Nevis Multiform foundations can take on one of several forms (trust, company, partnership and ordinary private foundation) and can convert from one form to another at any time, without cause or penalty.
  • Quicker distribution of assets
  • Reduce or eliminate estate taxes
  • Difficult to contest
  • Prevents courts control over assets

Foundation Regime in ADGM / Abu Dhabi

“ADGM Foundations Regime has been introduced as an alternative to trusts for financial planning and structuring. The regime was developed to strike an appropriate balance between transparency and discretion. ADGM Foundations can be used for a variety of purposes, including but not limited to, wealth management and preservation, family succession planning, tax planning, asset protection, corporate structuring, and for public interest foundations (excluding charities).

Unlike trusts, however, Foundations are incorporated as a legal entity with their own distinct attributes and legal personality. In this respect foundations are similar to companies but without shareholders, making them suitable for wealth management across generations. Though a foundation operates similarly to a common law trust, it has certain features more akin to a company, such as being incorporated with a separate legal personality and holding assets in its own name on behalf of beneficiaries. Unlike a company, though, a foundation cannot carry out commercial activities, other than those necessary, ancillary or incidental to its purposes. A key feature of a foundation (as compared to a common law trust) is the ability of the founder to retain more control over the foundation (Governance controls and safeguarding the founder’s ability to exercise control over a foundation). In contrast, the settlor has a more limited role and, once assets are settled on trust, the duties of trustees are towards the beneficiaries, rather than the settlor.

BENEFITS OF FOUNDATIONS:

  • Offers enhanced asset protection
  • Tax/Access to UAE’s DTTs (subject to the Ministry of Finance Requirements)
  • Provides a robust governance structure
  • Additional assurance through guardian oversight
  • Provides a robust governance structure – Foundation Council acts in an equivalent manner to a board of directors. Council members’ duties are prescribed in the Foundations Regulations. ADGM Foundations Regulations follow international best practice and set a legislative standard for the foundation council. This standard includes statutory duties, such as those similar to common law and equitable duties of directors pursuant to the ADGM Companies Regulations 2015.
Assurance through Guardian oversightDistinct legal personality, unlike a TrustSeparation of liability whilst maintaining control of assetsPerpetual existence after lifetime of FounderAsset protection mechanisms
Guardian supervises the Foundation Council and ensures that it acts in accordance with the Foundation’s Charter and By-Laws. Appointment of the Guardian is compulsory upon Founder’s death and optional during Founder’s lifetime.Having a legal personality provides Foundations with flexibility to enter into contracts and arrangements directly, as a company would be able to.Foundation is a distinct legal entity which allows for separation of liability between Founder and the Foundation.like a company, a Foundation is a perpetual concept, allowing arrangements to continue and therefore providing certainty after the Founder’s death.increased protection from bankruptcy claims, claims in the event of divorce and from the effect of forced heirship rules.

WHY CHOOSE ADGM FOUNDATION’s REGIME?

  • Locally based option
  • Developed in close consultation with global advisors to meet local and international needs
  • Strikes an appropriate balance between transparency and discretion
  • Additional comfort in using a reputable, world-class international financial center
  • Facilitating migrations from other jurisdictions to ADGM and vice versa
  • The most comparable jurisdictions to ADGM’s foundations regime are Jersey and Guernsey.
  • ADGM Courts have jurisdiction over ADGM Foundations, as part their overall jurisdiction under Article 13 of Abu Dhabi Law No. 4 of 2013. The ADGM Foundations Regulations preserve a pro-active role for ADGM Courts.
  • Like other common law jurisdictions, ADGM has incorporated “asset protection mechanisms” into its Foundations Regime. These are known as “firewall provisions”, and are a familiar feature in common law trust jurisdictions, as well as Foundations jurisdictions.
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