Succession Planning in the UAE for Family Businesses

Succession Planning in the UAE for Family Businesses

Succession Planning in the UAE

Succession Planning in the UAE – Family Businesses (“FBS”) are significant contributors to United Arab Emirates’s Gross Domestic Product (GDP), wealth creation and economic stability. However, research demonstrates that the survival rate of FBS over the generations is low. Several factors contribute to the low survival rate, from increased competition to lack of capital, with one of the key reasons being lack of succession planning.

It is typical for high net worth individuals to delay succession planning indefinitely as they believe there is no threat to their health and safety. In context of the impact of COVID-19, FBS in UAE are now concerned as health of family patriarchs is at risk. FBS increasingly recognise the importance of succession planning to safeguard family interests and to ensure preservation of wealth.

Succession planning is a mechanism through which the family patriarch sets out terms under which the business will be transferred to the future owners. It also includes a corporate governance framework setting out the roles and responsibilities of each family member and the rights and obligations of the management and board of directors. This briefing deals with the succession planning strategies which FBS may adopt within the legal and regulatory framework in UAE.

Trusts

As trust is a common law concept, UAE does not recognize the concept of trusts except in Dubai International Financial Centre (“DIFC”) and Abu Dhabi Global Market (“ADGM”). A trust is governed by a trust deed and is created by a settlor who transfers property to a trustee who then holds legal ownership of the assets for the benefit of beneficiaries. While the beneficiaries do not have legal ownership of assets, they receive income from trust property or can receive the property itself.

Trusts are a solid asset holding structure where the assets remain within the family. For example, a settlor under a trust deed assigns an asset to his wife for life and on her death to their children. The wife cannot then sell the trust property to a non-family member, which is a possibility if the transfer is a gift.

The legal framework of trusts in DIFC is governed by DIFC Trust Law No.4 of 2018 (“DIFC Trust Law”) and is governed by Trusts (Special Provisions) Regulations 2016 in ADGM. DIFC Trust Law sets out that a valid DIFC trust is not voidable in the event that it conflicts with foreign law. There is a notion that “foreign law” in this context also refers to Sharia law. However, it cannot be stated with certainty that distribution of assets under a DIFC trust made for succession planning will not be voidable if it contradicts Sharia principles until this concept is further tested by the courts.

Family Offices

Family office is a privately held company for management of wealth, asset and legal affairs of families. There are two types of family offices: single-family offices (SFO) and multi-family offices (MFO).  SFO is relevant when the assets of one single family are in question whereas MFO is used to pool the assets of multiple families.

DIFC, ADGM and Dubai Multi Commodities Centre (“DMCC”) have provisions for SFO. The applicable regulations are DIFC Single Family Office Regulations 2011, DMCC Company regulations 2003 and ADGM Companies Regulations of 2015 regarding restricted scope of companies.

A key requirement of SFO is that it must be wholly owned by the same family. Generally, a family is considered as a single family when all of its members are bloodline descendants of a common ancestor or their spouses, widows and widowers. Minors, step children and adopted children are also recognised in the single family under most regulations.

The jurisdictions differ with respect to the minimum share capital and investible funds requirement. ADGM does not have a minimum share capital or investible funds requirement.  DIFC requires a minimum of USD 50,000 as share capital and minimum of USD 10 million as investable assets. DMCC requires a minimum of AED 50,000 as share capital or AED 10,000 per shareholder and a minimum of USD 1 million as investible or liquid asset.

Foundations

FBS are typically run by one or two family members who run the business and some who play a passive role resulting in members having varied assumptions about their role in the business. The rights and obligations of members of the FBS therefore often remain undefined leading to disputes relating to succession, management and ownership. In order for the FBS to grow, it is recommended that the management powers are moved from family members to professional leadership.

Under a foundation, a founder will pass on its assets to a foundation which will hold those the assets in its name separate from the founder’s personal wealth. Foundations are managed by a foundation council and may be supervised by a guardian. Foundations have its own legal personality and can hold assets in its own right, unlike trusts.  The founder may retain control under the by-laws by nominating himself as one of the council members or a beneficiary which is an advantage of a foundation in comparison to trusts.

In the UAE, FBS have options of setting up foundations in ADGM under ADGM Foundation Regulations 2017, in DIFC under Foundations Law No.3 of 2018 and in Ras Al Khaimah under RAK ICC Foundations Regulations 2019.

Family Business Law

Despite the fact that UAE business market is widely dominated by FBS, there had, until recently, been no legal framework governing FBS. His Highness Sheikh Mohammed Bin Rashid Al Maktoum issued Law No. 9 of 2020 regulating family-owned businesses in Dubai (“Family Business Law”) to bridge this lacuna.

The provisions of the Family Business Law applies at the request of the family members, who are joined by a common property and applies to movable or immovable property, shares in commercial companies, civil companies and assets of sole proprietorship except public joint stock companies.

The Family Business Law regulates the articles of the family ownership contract with respect to disposition of shares, formation of board of directors, appointment of a manager to manage the family property and functions and obligations thereof. The family ownership contract specifies the share of each partner in the family property and is initially valid for a period of 15 years which can be further renewed for a similar term subject to the agreement of all the concerned members. A well drafted family ownership contract should ideally address both business and family interests.

Succession planning is a continuous process, and it is recommended to start early with an agile approach as there is no one-size-fits-all model which caters to all families. FBS are increasingly using specialist advisors such as legal and financial advisors to facilitate succession planning. Decisions should be taken in context of the wishes of the family patriarch, nature of assets and the business requirements to ensure long term sustainability of the FBS.

https://www.galadarilaw.com/

succession planning in the UAE

Abdullah Z. Galadari

Galadari Law
succession planning in the UAE

Manish Narayan

Galadari Law
Checklist for Protecting your Family and Wealth

Checklist for Protecting your Family and Wealth

Protecting your family and wealth

Safety of families and their wealth is of paramount importance. To best protect that you can and should take care. To know that all is well we have made checklist to help with the protection of your family and wealth. When you are forced to stay at home for Covid or whatever reason we suggest to use the time to ensure that you provide your family with an opportunity to enjoy the accumulated wealth for many years to come.

Have a plan how to transfer your wealth to your family in an emergency scenario

Do you have a safe place to keep your ownership documents? Do your loved ones know how to find them? Make sure that you create a system of checks and balances, which will allow your heirs to find what documents you have, so they can step into ownership of assets without many years of searching.

Arrange for a medical proxy

What happens if you are incommunicado or unconscious at the hospital? Who is going to make vital business and medical decisions when you are unavailable? Medical proxy or a power of attorney given to a trusted friend, family member or a professional can be a solution.

Get another citizenship

Different countries provide different levels of protection to their citizens, including the opportunity to travel freely. Being able to act quickly should help to mitigate consequences of natural and man-made disasters alike.

Write a will

Without a will, in many countries such as Russia the fruits of your labour probably will be equally divided between a spouse, children and dependent parents. A will can change that. If you have a will, but you spend time in other countries, or have real estate abroad, or have a citizenship of another country, your old will might not cover all your assets and may not be valid in part or in whole.

Set up a family foundation or trust

A family foundation or trust will help you and your family to protect your assets from hostile parties, whilst allowing your family to enjoy the wealth. When you set up such foundation or trust, make sure a system of checks and balances is in place which allows the family to be in control, without directly controlling the trustees or board members. The choice of them is one of the most important decisions you will make about the new structure.

Check your existing structures

If your ownership documents or structures were done some time ago, please check if they are still legally sound and continue to serve your goals well.

Help others

There is so much more one can do with one’s wealth than just passing it on to the children. Dynasty trusts and dynastic foundations can ensure that wealth is preserved and enjoyed through generations. Charitable foundations can help to continue giving to the causes you care for. http://boltenkolaw.com/

Can I Create Trusts Under Swiss Law?

Can I Create Trusts Under Swiss Law?

Switzerland does not have a law relating to trusts (yet). However, it ratified the Hague Convention regarding trusts and agreed therefore to recognize trusts that are created in accordance to the convention.

Switzerland, as a civil law country, does not have a law relating to trusts. The creation of a trust under Swiss law is, therefore, not possible. It is noteworthy, however, that in 2018 the Swiss parliament mandated the Federal Council to create the legal basis for a Swiss trust and since then an expert group has been drawing up corresponding proposals for regulations.

Nevertheless, at the time of writing it is too early to say whether Switzerland will implement a law relating to trusts in the foreseeable future and how this law might look like. Thus, in the following it is described what Swiss alternative to the trust is available to a descendent under existing law and how he or she might arrange for the establishment of a trust to be governed by the law of another jurisdiction.

The Swiss Usufruct

The so-called usufruct, a limited right in rem that can be created for a maximum term of 100 years, is the closest that Swiss law comes to the concept of dual property rights as recognised in common law jurisdictions. The beneficiary of the usufruct is entitled to possess, enjoy and use the property during his or her lifetime. The right of disposition, however, is restricted in so far as it would affect the rights of the owner of the bare property.

Recognition of Foreign Trusts

Switzerland has ratified and put into force per 1 July 2007 the Hague Convention on the Law Applicable to Trusts and on their Recognition of 1 July 1985. Even though Swiss law still does not provide for trusts to be established under Swiss law, the Hague Convention permits to create a trust choosing a law—other than Swiss law—which recognises the trust. A trust created in this way is – as consequence of the ratification of the Hague Convention – also recognised in Switzerland.

As a second consequence of the ratification of the Hague Convention and in order to codify the concept of property separation between trust and trustee property in Swiss law, Switzerland made the corresponding amendments to the Swiss Debt Collection and Bankruptcy Act. Thus, trust property will be protected from personal creditors of the trustee.

However, Swiss succession law and especially the provisions protecting the compulsory portion of statutory heirs may conflict with the settlement of assets into a trust. The heir whose rights to a compulsory portion are infringed can file an action in court for reduction.

The Foundation of a Trust in a Last Will or Contract of Succession

Even though trusts that are created in accordance with the Hague Convention are recognized in Switzerland, it is controversial whether a testator can provide for the constitution of a trust in a last will or in a contract of succession. The common advice is to establish a trust during lifetime with a nominal trust fund and to bequest additional funding by testamentary dispositions.

Switzerland recognizes Trusts

Switzerland does not have a law relating to trusts but recognizes trusts that are created in accordance to the Hague Convention on the Law Applicable to Trusts and on their Recognition. Nevertheless, due to the controversy around testators providing for the constitution of a trust in a last will or in a contract of succession and the additional possibilities the Swiss usufruct offers, it is advisable to address the subject in good time and seek the advice of a professional. https://www.paltzerprivateclientslaw.ch/en/ 

Dr. Edgar Paltzer works as an attorney-at-law in Switzerland and counts estate planning among his specialist areas of expertise.

succession planning in the UAE

Edgar Paltzer

Paltzer

Acquiring a Vacation Home in the US

Acquiring a Vacation Home in the US

If you are acquiring a vacation home in the USA, you can avoid common pitfalls and take full advantage of opportunities by using appropriate structures to preserve your assets and do so on a tax-effective basis.

Vacation home in USA

My client, David, recently told me that as a so-called “snowbird” going to Florida each winter, he wanted to acquire a vacation property there. I advised him that a Canadian resident who dies owning property with a U.S. situs in law, such as the Florida Property which is real estate located in the United States, may be subject to U.S. estate tax at an escalating scale up to a maximum rate of 40%.

Accordingly, unless proper tax planning is undertaken by a Canadian resident investing in U.S. situs property, there can be an onerous tax burden on death or from making a gift.

Canadian Discretionary Family Trust

Instead, I suggested he consider establishing a Canadian Discretionary Family Trust instead of a US Family Trust to hold the American vacation property.  Thus, on the death of either David or his spouse, there will be no exposure to U.S. estate tax.  In addition, if the Trust sells the property for a capital gain, the Trust is viewed as a flow-through vehicle for U.S. tax purposes, and so the long-term capital gains rate of about 23% would apply to the individual Canadian beneficiaries.  Because the top rate in Ontario for capital gains is about 26.5% and a foreign tax credit will be available to offset Canadian tax, only 3.5% tax would be payable in Canada.

succession planning in the UAE

Lorne Saltman

Gardiner Roberts LLP
+1-41-6625-1832
www.grllp.com
[email protected]

The Trust as a Family Holding Structure 

The Trust as a Family Holding Structure 

A Trust can provide a very good solution for the long term holding and preservation of family wealth. Trusts have been used for generations for the holding and preservation of family wealth.

A trust can arise in several ways, but the most usual in the context of family wealth is either by virtue of the lifetime act of an individual, or by virtue of provisions left by an individual under his will, and so coming into effect upon his death. 

General introduction of the Trust as Family Holding Structure

It can sometimes be difficult to explain what a trust is, but at risk of oversimplification, a trust can be described as being the situation which arises where an owner of property causes that property, either by lifetime transfer, or by virtue of provisions under his will, to be transferred to persons, known as trustees, to hold for the benefit of other persons, known as beneficiaries.

The trustees generally hold the legal title to the trust property, but the beneficial entitlement, or the beneficial interest, lies with the beneficiaries.  The beneficiaries are entitled to require the trustees to perform their trusteeship according to the governing instrument, usually either an inter vivos trust deed or a will.

They need not themselves have been a party to the establishment of the trust. Trustee, on the other hand, hold a position of considerable responsibility. Two of the traditional tenets of trusteeship are that a trustee may not profit from his trusteeship unless authorised to do so, because all profits belong to the beneficiaries, and a trustee may not delegate his responsibilities as trustee to someone else, again unless specifically authorised to do so.

Thankfully, modern trust instruments are invariably drafted to include the capacity for trustees to be paid for acting as trustees, and for appropriate levels of delegation to be done to enable trustees to function efficiently in the modern world.

The identity of the beneficiaries of the trust, and their respective interests, can be fixed at the outset, or alternatively they can be determined as an identifiable group such as the descendants of a person, with the question of allocation of assets or benefits amongst those beneficiaries being left to the trustees, although generally with some background guidance provided by the settlor or testator in a letter of wishes.

Such latter type of trusts are generally described as discretionary trusts, as opposed to the former type of trusts which are described as fixed interest trusts.  Where a settlor or testator is concerned with long term holding and preservation of family wealth, it is inevitably a discretionary trust which is used because it provides the opportunity to cater for future events and circumstances as they arise and develop and avoids the requirement of having to decide in advance on how family wealth should proceed down the generations.

Planning for family wealth preservation down the generations, and particularly where it is inevitably going to be a multi jurisdictional matter, is always going to throw up particular problems which have to be dealt with in their particular circumstances.  Trusts can provide solutions under several different headings.

Choice of trustees

It is self evident that the choice of a trustee to handle substantial family wealth, and particularly so where this involves an operational business, is an important aspect.  It is invariably going to involve a professional trustee, often a financial institution. Reputation and competence are paramount.

An individual considering the selection of a trustee will generally wish to become familiar with the candidate under consideration. This can be an extremely valuable process in terms of ensuring that the trustee has a good background knowledge of the family and of the assets to be placed in trust.  It also enables the introduction of the existing family advisers to the trustee to allow for a smooth transition to the trusteeship once it has been established.

Settlor control

Successful individuals with wealth created by themselves often find it difficult to consider transferring that wealth to trustees and ceding control over it, all the more so where the wealth continues to be represented by a successful group of operating companies. At its most extreme, this can lead to the realisation that it may not be appropriate for such an individual to consider making a lifetime trust, but rather should be covered in terms of a will to become operative on death following which the individual’s capacity to control is inevitably curtailed.

Alternatively, a measure of control can be retained by the individual through retaining a direct shareholding in one or more group companies giving either positive control, or maybe some specific negative sanction. This can also be achieved through the mechanism of the terms of the trust itself by requiring the trustees in certain circumstances to seek the consent of the settlor for certain specified transactions.

However, it is important that any settlor control retained in respect of trustees’ actions or decisions should be limited to particular aspects only, because too much retained control can result in claims that there is no real trust at all. Such claims may arise in the areas of taxation, or creditors or succession, and possibly frustrate the overall intention behind the making of the trust in the first place. https://www.linkedin.com/in/john-hickson-1b855b79/?originalSubdomain=ie