Trusts: A Tool in Family Business Governance Planning in UAE (Part 2)

TRUSTS: A TOOL IN FAMILY BUSINESS GOVERNANCE PLANNING IN UAE

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 is 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 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.

Trust could be used for estate planning, business governance planning, confidentiality planning, investment fund planning, asset protection planning.

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, the 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 ongoing 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. The practicality of STAR TRUSTS:

  • To create dynasty-style trusts for multiple generations to hold investments, preserving and retaining shares in the 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).

 

PRIVATE TRUST COMPANY

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 control over the Trust structure either as a shareholder of the PTC, as members of a family committee or as an enforcer of a Purpose Trust to act as a shareholder of the PTC. A foundation could also be used instead of the PTC to act as Trustee of the Family Trust (s).

Private Trust Company - STAR Trust

 

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.

A. The practicality 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

Private Trust Company - Non-Charitable Purpose Trust

Private Trust Company - Purpose Trust - Family Trust

 

LET’S GET IN TOUCH

If you wish to discuss the concept and how trust works, or any other legal entity, feel free to contact us.

For Support and assistance on this matter Get in Touch with our Corporate Team Today 

Wincore specializes in TaxEstateCorporate and Fiduciary matters. We provide pragmatic, flexible and efficient solutions to individual entrepreneurs, startup businesses, foreign and local SMEs, multinationals, wealthy international families, HNWIs and UHNWIs.

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Mohammed Rahali

Managing Partner | E: m.rahali@wincoreadvisory.com | M: +971 (0) 55 138 9591

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