Multi-Generational Wealth Transfer: The Labuan Foundation as a Succession Planning Tool - Featured Articles

The use of trusts in wealth management is not uncommon. However, foundations are fast gaining ground as a viable alternative in our pursuit to preserve wealth. In this article, Datin Isharidah Ishak shares the benefits of establishing a foundation in Labuan IBFC, which strives to position itself as the premier midshore jurisdiction for succession planning vehicles.

Introduction

Many are familiar with the use of a trust as an asset holding structure. Not as many people, however, are aware of the use of another similar private wealth planning vehicle - the Private Foundation.

The Labuan Foundations Act 2010 provides for the establishment of a Labuan Foundation, either in the form of a Labuan Private Beneficiary Foundation or a Labuan Charitable Foundation.

Common Characteristics of Trusts and Foundations

Both the Trust and the Foundation are excellent wealth planning vehicles in that they perform the function of taking asset ownership out of a Settlor’s (the person who settles property to the Trust) or a Founder’s (the person who establishes a Foundation and endows assets to it) names. For succession planning purposes, this is crucial to ensure the properties that are settled to the Trust or endowed to the Foundation do not form part of the Settlor’s or Founder’s estate. This is to avoid the long duration and publicity involved in the process of probate and also for asset protection purposes.

Trusts Distinguished from Foundations

However, a Foundation may be argued to be superior to a Trust. It is seen to combine the best features of both a company and a trust, namely by marrying the separate legal personality of a Company with the confidentiality aspect of a Trust. Like a Company, a Foundation is a separate legal entity in that it can hold assets in its own name. It can also sue and be sued in its own name.

A Trust, on the other hand, is not a separate legal entity. At most a Trust has been described as a “relationship”. Trust assets are held in the Trustee’s (the person who holds the Trust property on trust) name on behalf of the Beneficiary (the person for whose benefit the Trust property is held). Ownership of the Trust assets is thus split between the Trustee and the Beneficiary, with the Trustee having the legal ownership and the Beneficiary holding the equitable ownership. This split ownership presents uncertainty and vulnerability to a Trust structure in the event of any possible future attack on the Trust by a possible disenfranchised Beneficiary, for example.

Furthermore, although the Trustee is to administer the Trust in accordance to the Trust Deed, the Trustee is subjected to strict fiduciary duties in the performance of his trusteeship. Many Settlors are uncomfortable with this split ownership and the fact that their assets are held in a third party’s name whose strict fiduciary duties may lead to uncertainty or conflict of interests between the Settlor and the Beneficiary in the event of a dispute in the form of an attack on the sanctity of the Trust structure. In this way the Settlor may feel that he is not in control of the Trust.

The Foundation, on the other hand, provides for a clearer legal structure as it has its own legal personality. In addition, it does not have any shareholders or owners; therefore, its existence can continue uninterrupted or possibly in perpetuity as it is not affected by any changes to the ownership or shareholders of a Company, for example.

A Foundation Council manages a Foundation - much like a Company’s Board of Directors - in accordance with the terms of the Foundation’s constituent documents, the Charter and Articles, and possibly, a Letter of Wishes by the Founder.

The Founder in this way retains control over the Foundation by stipulating in the constituent documents the management of the Foundation’s assets and the manner in which the Foundation is to be run. The Founder can also provide by way of these constituent documents his successor/successors and the method of running the Foundation after his demise. In fact, the legal provisions in the constituent documents allow the Founder to reserve wide powers to himself.

It is clearly provided in Section 11 of the Labuan Foundations Act 2010 that a Foundation is the owner, with full legal and beneficial title, of any property endowed to it. It is also provided that such property endowed shall cease to belong to the Founder. Neither does the Beneficiary become the owner of the property unless and until it is distributed according to the provisions of the constituent documents and the Act. This clarity in the concept of ownership of the Foundation assets is crucial, particularly for asset protection purposes.

This concept also sits better with the Founder as it is clear that he can retain control of the Foundation by way of crafting the constituent documents in accordance to his wishes. Certainty from a legal perspective as to the ownership of, and title to, the Foundation’s assets, and the Founder’s control over the Foundation are two of the most persuasive arguments in favour of the Foundation being a superior structure for succession planning and asset protection purposes.

What is a Labuan Private Foundation?

The Labuan Foundations Act 2010, which came into force on 12th February 2010, is the enabling legislation for Foundations in Labuan International Business and Financial Centre (Labuan IBFC). The type of foundations provided for by this Act is sometimes confused with the onshore foundations which have been set up in Malaysia, which are charitable in nature and mainly incorporated as companies limited by guarantee under the Companies Act 1965. Amongst other things, these onshore foundations require a seed capital of RM1m. These are not the sort of foundations that this article is referring to.

The Labuan Foundation can be established for any purpose, both charitable and non-charitable (private), as long as those purposes are not illegal, immoral or contrary to public policy. The focus of this article is on the use of the Labuan Private Beneficiary Foundation as an ideal vehicle for succession planning, wealth transference and asset protection. In fact, the main purpose of a Labuan Foundation, as stated in the Act, is the management of its property.

How to Establish a Labuan Foundation

Setting up a Labuan Foundation is relatively simple and can be done fairly quickly. A person who wishes to set up a Labuan Foundation (the Founder) has to appoint a licensed Labuan Trust Company to submit the Foundation Charter to the Labuan Financial Services Authority (Labuan FSA). This Labuan Trust Company becomes the Secretary of the Foundation. The name and address of the Secretary has to be stated in the Charter and shall become the address of the registered office of the Labuan Foundation.

The Officer

The Founder should also appoint at least one Officer of the Foundation prior to the registration of the Foundation. A Founder or Beneficiary who is not a Council Member may be appointed as the Foundation Officer. The Officer may also be a company. The Officer is responsible for administering the Foundation in order to achieve its aims and purposes. This normally involves the carrying out of the resolutions made by the Council Members in accordance with the constituent documents.

The Foundation Charter and Articles

The Foundation Charter is in effect the main constituent or governing document of the Labuan Foundation. The Foundation Charter has to state the main purpose or object of the Labuan Foundation. Amongst other things, the Charter has to contain the identity of the Beneficiary or the identification of a body by which the Beneficiary is to be ascertained, or a statement that the Labuan foundation is to benefit the public at large. The Charter has to also state the duration for which the Foundation is to exist or if it is to exist in perpetuity.

The Charter may provide that Articles shall or may be made, which in turn may provide for matters such as the distribution of property to the Beneficiaries. Where there are Foundation Articles, both the documents are regarded as the governing documents of the Foundation. As with the case of the Charter, where there is an absence of Articles on any matter, the provisions of the Act shall apply in respect of that matter.

In practice, where there is provision for the amendment of the Charter, in order to expedite the application for the registration of a Labuan Foundation, the Secretary can prepare a basic Charter containing the mandatory particulars to be submitted to Labuan FSA. The Charter can then later be amended to incorporate the other details which may take longer to finalise. The Articles may also be prepared and submitted after the registration of the Foundation if need be.

The Founder

The Founder is the person who subscribes his name to the Charter to establish the Labuan Foundation. He may be acting either for himself or as a nominee on behalf of another and who endows the Foundation with its initial assets. The Founder may be a resident or non-resident. It is also possible to have Joint Founders or Corporate Founders.

The Founder may also reserve wide powers to himself such as the power to add or remove Beneficiaries or Council Members for whatever reason he chooses. The Founder may also assign any or all of his rights under the constituent documents and the Act to a third party. This may cover the situation where the Founder wishes to sell the Foundation.

Assets Endowed

There is no minimum requirement for the initial assets endowed. Assets endowed can include Malaysian property for which the prior approval of Labuan FSA is required.

The Council Member

Any Founder or Beneficiary who is not an Officer of the Foundation may be appointed as a Council Member where the Foundation Charter so provides.

The Council Member is responsible for the general supervision of the management of the Labuan Foundation by its Officer.

The Council Member acts as a check and balance to the Officer.

Supervisory Person

Where the Foundation Charter so provides, a Supervisory Person may also be appointed to supervise the Labuan Foundation.

Certificate of Registration of a Foundation

Upon registration of a Labuan Foundation, a Certificate of Registration will be issued, which will serve as conclusive evidence that the Labuan foundation is registered in the name specified to Labuan FSA.

Other Features of a Labuan Foundation

As is common with most structures available in international financial centres, the Labuan Foundation is embedded with statutory asset protection provisions, making it harder for a creditor to claim against a Foundation’s assets. The statutory immunity that it provides also makes it an ideal structure for the protection of assets against foreign claims with respect to divorce and forced heirship.

Transferring or redomiciling a Foundation from a different jurisdiction to Labuan IBFC and vice versa is permitted if the laws of both jurisdictions are compatible and allow for this.

The Labuan Islamic Foundation

Labuan IBFC became the first international financial centre to enable the establishment of the Islamic Foundation both for charitable and non-charitable purposes. The Labuan Islamic Financial Services and Securities Act 2010, in accordance with the Labuan Foundations Act 2010, provided for the establishment of a Labuan Islamic Foundation where the aims and operations of the Foundation are in compliance with Shariah principles. The Foundation Council can appoint a Shariah advisor to ensure the Foundation’s compliance to these principles.

To that end Labuan IBFC has established its own Shariah Supervisory Council to make rulings and advise on Shariah matters. This clearly gives Labuan IBFC an edge over other jurisdictions as it strives to become the premier midshore jurisdiction for succession planning structures.