05 Apr UAE trusts: Protecting family wealth
Wealth protection has become increasingly fraught with uncertainty and difficulty in recent years. The prevalence of economic downturns, fluctuations in currency value, political unrest and geopolitical tensions have made the complexities of wealth management more difficult than ever to navigate. Increased international regulations and compliance requirements are also adding to the challenge of preserving wealth and implementing a secure succession plan.
In this current climate, Dubai is one destination that stands out. Its attractive tax environment, investment friendly policies and stable legal framework make it an ideal choice for the preservation and management of family assets, business and wealth.
In DIFC and ADGM, it has two world class jurisdictions that offer an ideal environment for family businesses and ultra-high net worth individuals (UHNWIs) to access wealth and asset management support. Both operate under a recognisable common law framework and provide access to world class expertise and structuring options such as wills, trusts, foundations and offshore entities, and both offer a high degree of confidentiality and security.
When selecting the appropriate structuring option for wealth management and/or succession planning, it is important to give consideration to what your main objectives and priorities are.
While foundations, sharing many similarities with corporations, may offer greater scope to enter into contracts and explore a wider range of investment opportunities, trusts benefit from a greater level of legal protection and confidentiality.
What are trusts used for?
Trusts are legal arrangements in which a person (the “settlor”) transfers assets to a trustee to manage and hold for the benefit of one or more beneficiaries. The trustee has a legal obligation to manage the assets in the trust in accordance with the trust deed and for the benefit of the beneficiaries. They have applications for wealth management, estate planning, asset protection and even philanthropic purposes.
How is a trust administered?
Under common law, as is used in DIFC and ADGM, a trust is typically administered by a trustee who holds legal title to the trust property for the benefit of one or more beneficiaries. The trustee is responsible for managing the trust assets, making distributions to the beneficiaries according to the terms of the trust instrument, and fulfilling any other duties specified by law or the trust document.
The trustee has a fiduciary duty to act in the best interests of the beneficiaries and to manage the trust assets prudently. This includes investing the assets wisely and diversifying the trust portfolio to minimise risk. The trustee must also keep accurate records of all trust transactions and provide regular accountings to the beneficiaries.
If there is a dispute among the beneficiaries or between the beneficiaries and the trustee, the matter may be brought before a court of law for resolution. In such cases, the court will review the trust instrument and applicable law to determine the appropriate course of action.
A better choice for family wealth?
Trusts are an excellent tool for asset protection. By transferring assets to a trust, they are owned by the trust, and are therefore insulated from personal creditors of the settlor or beneficiaries. They are also a more effective way to distribute family wealth in a structured and tax-efficient manner, often with greater flexibility than a will. Trusts can be designed to accommodate the unique needs of individual family members, while ensuring that the family wealth is distributed according to the settlor’s wishes, dictating exactly how and when the assets are passed on to the beneficiaries and avoiding probate, inheritance tax liabilities and potentially estate reducing taxes.
Privacy is also a significant advantage that trusts hold over other structures. Unlike a will, which becomes a public document upon death, a trust can be kept confidential, and the terms of the trust can remain private.
Overall, trusts can be designed to accommodate a wide range of family situations and can be tailored to meet the specific needs of the settlor and beneficiaries. This makes them a very customisable tool for multi-generational wealth transfer, ensuring that family assets remain in the family for years to come.
They allow the trustee to dictate how and when assets are passed on to the beneficiaries. They operate outside of probate which means that they can help save time, costly court fees and potentially estate reducing taxes.
How is a UAE trust taxed?
The taxation of a trust can be complex and varies depending on several factors, including the type of trust, the source of its income, and international tax laws.
Since a trust is considered a relationship, it is not taxed in the same way a corporation or other taxable entity would be.
Taxation of trusts in the UAE requires assessing the three parties involved. The settlor, as the initial contributor of funds to the trust, may be liable for gift tax on the contribution, whether cash, property or other assets, if they reside outside the UAE in a taxable jurisdiction. Thereafter the main party with primary importance from a tax perspective, is the trustee(s). This is because, the tax liability of the trust depends on the residency of the trustee, not the jurisdiction where the trust is registered. As such, any assets held by the trust may be subject to taxation if the trustee’s primary residence is not the UAE, but another jurisdiction which imposes personal income tax. Further, depending on the domestic law applicable to the beneficiaries, tax may be payable where the beneficiaries are located and receive distributions.
In trust set up in DIFC or ADGM, the most favourable scenario is to have one or more trustees who are UAE residents and or entities formed in UAE, provided they remain a UAE resident. This arrangement provides the advantage of safeguarding the trust from being taxed on its income and capital gains, even if its beneficiaries are not residents of UAE.Ultimately, the laws governing trusts can be complex, so it’s essential to work with a qualified legal and financial advisor to ensure that the trust is structured correctly to minimise tax liability, that all relevant regulations are followed, and the interests of the beneficiaries are protected.
How can Huriya Private help?
Huriya Private has over 20 years of experience in the domain of corporate structuring. We have unparalleled knowledge of business practices and legal requirements in the UAE as well as an international network of contacts and a deep understanding of the needs of modern-day high net worth clients and international businesses.
We can help you set up a trust in the UAE and ensure that it is fully compliant with all local laws and regulations and structured to manage your wealth in the most tax efficient way. If you need help with this or any other immigration, financial or corporate structuring issue, please don’t hesitate to contact us on email@example.com and we will be happy to help.