Practical Matters: trust funds can be useful tax-saving tools for UAE expats thinking of moving home.
Top tips for expats on how to set up the right trust fund
Trusts and foundations have long been considered as tax-saving tools for only the wealthy, with the "trust-fund kid" held up as a symbol of elitism. However, many UAE expats perceive these as practical, sensible mechanisms for financial planning for their children or dependents, says Paul Hymers, the finance director at Atlas Corporate Services.
1. Understand the key differences
A trust is formed when someone (the settlor) places their assets in the legal custody of someone else (the trustee) for the benefit of a third party (the beneficiary). The assets no longer belong to the settlor and are the responsibility of the trustee, who controls these assets on behalf of the beneficiary. Once a foundation is registered and the assets have passed from the settlor to the foundation, it is the foundation itself that owns and has legal responsibility for those assets.
2. Identify what your trust or foundation is for
Is it an education fund to pay for university fees or is it more geared at ensuring your wealth is passed on to your children rather than other family members? Or it could be to control and protect family assets when someone is too young or are incapacitated to handle their affairs. There are many types of trusts available to suit each purpose.
3. Decide which jurisdiction is best to serve your needs
Trusts are governed and utilised in common law jurisdictions and, historically, the most popular jurisdictions are those where there is the most case law history, such as Jersey, Guernsey or Mauritius. Foundations are primarily civil law tools, used where trusts may not be recognised or deemed appropriate. They have a special legal status that mixes the legal components of a trust and a company. They originated in Liechtenstein and are now offered in Panama, the Bahamas, Dutch Antilles, Isle of Man and, most recently, Jersey.
4. Understand all of the costs in advance
Although a simple trust can be set up at no cost, getting professional help and advice is highly recommended to ensure that the trust is properly protected. Fees for both trusts and foundations vary according to the jurisdiction and the services required, but an average initial cost could be between Dh6,000 and Dh9,000, with a similar figure as an annual renewable charge.
5. Carefully consider who you'd like to control the assets
Trustees are the legal owners of the assets held in a trust. They must deal with the assets in line with the trust deed, manage the trust on a day-to-day basis and pay any tax due on the income or chargeable gains of the trust. The trustees can change while the trust is in operation. It's recommended that the trustees include a professional person with trust experience and a family member. In a discretionary trust, the trustees have the power to exercise how and when assets are distrusted to the beneficiary. A foundation is governed by a foundation council who are directed by a Letter of Wishes, supplied by the founder, which specifies how assets are handled and/or distributed.
6. Understanding the benefits of a protector
A protector role is usually added into a foundation structure to oversee the implementation of the Letter of Wishes. Crucially in a foundation, this protector can be the settlor. A protector role can be established in a trust structure, but to ensure the trust's discretionary nature, this role can't be assumed by the settlor. If the settlor wants to maintain a greater level of control over the assets, then a foundation is a better option.
7. Who is the beneficiary and might this change?
A beneficiary is anyone who benefits from the assets held in either the trust or foundation. There can be one or more beneficiary who may benefit in different ways. In most trusts (but not all, such as irrevocable trusts), if the settlor would like the trustees to change the initial beneficiary they can make their wishes known in a letter sent to the trustees or by completing an Expression of Wishes form. The beneficiaries of a foundation can be changed by the foundation council with the approval of the protector.
8. Consider the threats against your assets
In a world where lawsuits are, unfortunately, common, assets are more than ever under threat from people attempting to make claims on them. These threats include divorce settlements, estate settlements, creditor claims or other legal claims. Tax issues arise in some countries where the assets in a trust may be deemed as remaining as the assets of the settlor, or where the assets belong to the beneficiary.
9. Consider the tax consequences of transferring the assets into the trust or foundation
For expats living in the UAE, the time to consider transferring assets into one of these estate-planning vehicles might be now, especially if they are considering moving back to their home country soon. In certain countries, the tax authorities will consider a transfer of an asset such as cash, investments, land or buildings, or even paintings and jewellery as a disposal at fair value, which triggers capital gains taxes. Also, disposals late in life can be subject to inheritance taxes.