Wealth Structuring Options Increase for Families in the Middle East
30 July 2018
Two significant new pieces of legislation introduced by GCC countries in the last 12 months have increased the options available for families dealing with the effective management and transition of substantial wealth.
Bahrain’s new trust law, which comes into effect in November 2018, provides a comprehensive framework for the creation and administration of trusts in the kingdom. For the first time, trusts governed by the laws of other jurisdictions will be formally recognised.
Bahrain’s new trust law – key features
Modern regime: The predecessor law in relation to financial trusts was extremely limited in scope. The new trust law provides a framework for family succession structures under a more flexible regime.
Waiver of foreign ownership restrictions: Trustees of Bahraini trusts are not subject to foreign ownership restrictions that might otherwise apply. Currently, Bahrain is the only GCC country to include the waiver of foreign ownership restrictions for trusts.
Purpose trusts: An example of the flexibility of the new trusts is the inclusion of rules for non-charitable purpose trusts, which will allow families more flexibility in structuring.
Meanwhile, the Abu Dhabi Global Market (ADGM) free zone has enacted the UAE’s first foundations regulations, offering an alternative wealth planning tool for individuals and families. The regulations are designed to assist individuals and investors with wealth management, succession planning and asset protection within the region and internationally.
Trusts are already available in both the Dubai International Financial Centre (DIFC) and ADGM. Both Finance Centres have essentially adopted English trust law as the underlying legal framework. The uptake of trusts however in both the DIFC and ADGM has been relatively limited. There is a perception in the market that foundations will hold greater appeal for regional clients as they are similar in form to a company and are perceived to bestow a greater degree of control in the hands of the Founder or other family members/trusted family advisors.
The introduction of foundations is unique in the region, and this development certainly presents an interesting alternative to a trust for any family reviewing their succession planning options.
The foundation enjoys a separate legal personality to the founder, who establishes the foundation. It can therefore enter into contracts and hold assets in its own name. Importantly, the foundation’s liability is limited, unlike that of trustees. Unlike a company, there are no shareholders. Instead, the foundation must have a founder or guardian to enforce its terms.
A Foundation unlike a Trust is also able to include the founder and other family members on the foundation council, which is similar to the board of Directors in a company. In this way the family can retain control of their assets without the need to transfer them to unknown third-party trustees in another jurisdiction, which will appeal to some GCC families.
ADGM Foundations – key features
Structure: The ADGM foundation is a hybrid of a trust and a company. It can be used for similar purposes as a trust – including wealth management, planning and preservation – but it is a separate legal entity with limited liability. The similarity to a company (but without shareholders) provides more control over the foundation when compared to a trust.
Governance: The council carries out the executive functions of the foundation, acting like a board of a company. Oversight of the council rests with the founder or the guardian, who effectively supervises the council.
Client confidentiality: The regulations aim to achieve a balance between client confidentiality and the transparency of ownership. The foundation’s charter contains limited publicly available information, which is held by the ADGM Registrar, while the by-laws remain confidential.
International: Foreign foundations can be migrated to the ADGM from other jurisdictions and vice versa and can, subject to the relevant law outside ADGM, hold overseas assets.
Similar jurisdictions: The most comparable jurisdiction to the ADGM’s foundations regime is Jersey.
ADGM’s latest innovation is a sign of increasing competition between Gulf jurisdictions to cater to the needs of the region’s high net worth individuals. In 2015, the DIFC set the ball rolling with a new wills and probate registry that made it the first jurisdiction in the region where a non-Muslim could register a will under common law principles of freedom of testamentary disposition.
Abu Dhabi subsequently announced in May 2017 that it would introduce its own registry of wills and probate, giving non-Muslim expatriates greater freedom to pass their local assets to their chosen beneficiaries when they die, rather than the default rules based on Shariah fixed share principles. The ADGM Foundations Regulations are the latest innovation in the Emirates wealth planning arena and it is likely that the DIFC will shortly follow suit having released a consultation on a foundations law of its own on 10 October 2017.
For now, the majority of high net worth families in the Middle East tend to look outside the region for wealth structuring solutions, frequently choosing well-established jurisdictions such as Switzerland, the Caribbean and the Channel Islands, but these changes present viable alternatives closer to home.
Of course many regional families still see the need to structure outside of the region and prefer to opt for well-established international finance centres that have strong reputations as safe harbours for private wealth. Jersey has a regulated Foundations regime that is tried and tested and is seen by many as the leading standard.
Those looking to keep money in the region and make use of the new legislation will need to give careful thought to issues that might arise around restrictions on the ownership of local assets, for example, where different approaches have been adopted by Bahrain and ADGM.
When setting up structures, clients need to think carefully about what their medium to long term objectives. Whether these are about effectively distributing wealth to the next generation, passive protection of assets or educating the next generation. Is the focus purely economic – i.e. looking at maximising income and yield, or is it about bringing in some independent oversight of the assets, with third parties / professionals being involved?
Developing a proper wealth management strategy is all about balancing these key medium and long-term drivers before deciding what represents the best fit from the different regimes and structures that are available around the world.
The arrival of new legislation in the GCC will only enhance the options available to high net worth individuals living and working in the region.