PART I
In the estate planning arena, there has been a flurry of activities in various common law jurisdictions in legislating and promoting the concept of private foundation as an alternative to trust. These legislative efforts are reminiscent of the development in which common law trust or trust-like arrangements found their way into some civil law countries.
A key driver of these initiatives to adopt a concept which is indigenous to civil law traditions is likely to be the evolving profile of high-net-worth families. As these families become more international and the size of their wealth grows exponentially, they demand a multitude of legal solutions to accommodate the diversity and complexity of their needs. For jurisdictions who wish to maintain a competitive edge in attracting clients to come onboard, the ability to offer a tool box showcasing a wide range of structures is crucial.
Labuan International Business and Financial Centre, Malaysia (Labuan IBFC) was the first common law jurisdiction in Asia to adopt the civil law concept of private foundation. The Malaysian legislature passed the Labuan Foundations Act, 2010 (LFA 2010), which was a brilliant legislative innovation aimed at providing multiple legal tools for families seeking to structure their estate planning.
The geographical location of Labuan IBFC is also likely to beckon families in Asia who may, for a variety of reasons, such as the situs of their main assets or operating businesses, find situating their estate planning structure outside of Asia not entirely desirable or practical.
While foundations and trusts in the estate planning space are now often mentioned in the same breath as almost serving the same purpose, there are nevertheless fundamental differences which must be born in mind. In addition, for common law practitioners and service providers advising their clients on the use of foundations, it is important to resist the natural tendency of viewing this entity through the “common law” lens.
This article “Building Legacy on a Foundation” is contributed with the hope of promoting a more meaningful interaction with the foundations. It comes in 2 parts:
• Part I seeks to understand the statutory creature of private foundation by examining its legislative characteristics in general; and
• Part II adopts a comparative approach to consider how the foundation functions similarly or dissimilarly in comparison with the common law concept of trust. It further ventures to weigh various practical considerations in determining whether foundation is the structure of choice.
This article however does not enter into a polemic as to which structure, foundation or trust, is a better option for estate planning purposes.
The foundation has been “nicknamed” the “incorporated trust”. Indeed the incorporated status of a foundation facilitates an easier grasp of its functionality than the concept of trust. However by coining the foundation in light of trust may give a false sense that they are similar and, in turn, mask their underlying differences. Often, the suitability of a legal solution becomes most apparent when its distinctive features are differentiated from other options.
Part II of this article Building Legacy on a Foundation will explore the manner in which foundations and trusts function similarly and dissimilarly.