Trusts and foundations are not a new feature in law or finance, and neither are they in the UAE laws. What began as a way for English noblemen to leave their lands in the hands of capable caretakers has evolved into a legal instrument through which individuals can attain wealth growth and wealth preservation in a tax-efficient environment.
This article analyzes trusts and foundations and how they apply to the UAE and the two free-market zones, which are the Dubai International Finance Centre and the Abu Dhabi Global Market.
What Exactly is a Trust?
Trusts are a common feature of legal systems worldwide, even though the most common definition is rooted in Anglo-American Law. For example, the Romans had a fully developed concept of fideicommissum, while Shariah also had the Waqf system.
A trust fund is best defined as a legal relationship where the holder of a property or the right hands it over to a second party. The latter's responsibility is to maintain and grow it on behalf of a third party. In Civil Law, the first party is known as the settlor, the second as the trustee, and the third one the beneficiary.
Therefore, a settlor contributes assets to the trust. The trustee may hold the legal rights over the property, but this is only on behalf of the beneficiary, who is the ultimate owner.
Where Does a Foundation Come In?
Trusts are an excellent vehicle to pass down wealth to beneficiaries, especially if they are minors. The trusts, however, can get complicated, especially in cases of multiple trustees or beneficiaries. In such cases, foundations offer excellent utility.
Both the DIFC and ADGM have separate legal systems accompanied by necessary legislation for the foundation. Foundations also offer families an ideal path for family wealth preservation. They show characteristics similar to trusts and corporations.
A foundation director is also saddled with the same fiduciary duty placed on a trustee. A foundation is a separate legal entity similar to a corporation for tax purposes, which safeguards assets from bankruptcy, divorce claims, or other legal proceedings.
How Are Trusts Taxed?
While recognized in law, a trust is not a taxable entity as it is a relationship. This is because trusts are neither individuals nor corporations. Therefore, although other jurisdictions may treat trustees as persons in tax matters, the UAE exempts them from income tax.
Taxing trusts in the UAE means looking at the three parties it comprises. If the settlor and contributors to a Trust reside in a taxable jurisdiction, then they will become liable to taxes such as a gift tax.
The trust's residence is determined by where the trustee is located and may be subject to tax due to residency jurisdiction and not the law governing the trust formation.
How Long Does a Trust Last?
It's common in many jurisdictions to eschew the idea of perpetual trusts. In fact, the famous 21-year rule is widely loathed by law practitioners and estate planners. As a result, even though this rule has been a common law tenet since the 16th Century, it has been excluded by the DIFC and ADGM.
When setting up a trust in those two jurisdictions, you are guaranteed perpetual trusts, as per Al Tamimi and Co. So, if you would like wealth preservation and your entire heritage to enjoy your hard work, know that it is possible. The only way to close down such a trust is for the administrators themselves to wind it up.
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