Trusts in the Abu Dhabi Global Market

Introduction

Trusts have been an essential tool for individuals and businesses looking to protect and manage their assets and wealth. They provide a means to safeguard resources for future generations, plan for estate transitions, and achieve various financial objectives. A jurisdiction that has recognized the significance of trust structures in the United Arab Emirates is the Abu Dhabi Global Market (ADGM), which has implemented a Trust Law to facilitate such arrangements.

The Trusts (Special Provisions) Regulations 2016 (“ADGM Trust Law”) is an addition to the ADGM’s host of estate planning vehicles and structures for family wealth, which are regulated by common law principles and enjoy a 0% tax environment. This article discusses the features of a trust, the ADGM Trust Law, and a brief comparison to foundations.

 

Trusts: definition

Trusts are contractual arrangements that have evolved from common law principles. The owner of the assets (known as the settlor or grantor) transfers the legal title of assets, property, or funds to another party, referred to as the trustee. The trustee holds and manages these assets for the benefit of one or more individuals or entities, known as the beneficiaries. The terms and conditions of the trust, including how the assets are to be managed and distributed, are typically outlined in a trust document/deed or even included as a provision in a will.

The trust deed signed by the settlor would state the powers and duties of the trustee, or any specific wishes that they would like to be carried out in relation to the trust. There should be clarity on the intention (of the settlor to create an expressly declared trust), the subject matter (the assets that form the trust must be easily recognizable), and the objects of the trust (the beneficiaries under the trust must be readily identifiable).

A trust denotes the separation of legal and beneficial ownership of assets. The trustee would have legal ownership and control over the assets and must safeguard the subject matter of the trust in accordance with the trust instrument. However, beneficiaries of a trust do not have legal interests in assets but are entitled to benefit from it.

A trustee/beneficiary relationship is a working example of a fiduciary relationship. Fiduciary relationships are ‘special’ as there is an element of trust involved (such as trustees looking after assets for the benefit of another). Key elements of a fiduciary relationship involve the duty to avoid conflicts, and the duty to not profit from their position as a trustee. This is codified in Article 4(7) of the ADGM Trust Law, ensuring that trustees and any related third parties do not profit from the trust due to their position of power. This preserves the principles of good faith and ensures that a fiduciary puts the beneficiary’s best interests ahead of their own.

Trust Regulations in ADGM

Article 4 of the ADGM Trust Law recognizes non-charitable purpose trusts that are consistent with ADGM regulations and are in line with public policy. This affords individuals the freedom to create trusts that could include a range of purposes, including investments of shares in a company.

The regulations, under Articles 4 and 5 make reference to a Protector and an Enforcer of the trust. This gives settlors the power to appoint a Protector who has the power to appoint/remove trustees, add/remove beneficiaries, release trustee’s powers, or give/withhold consent to acts of the trustees. An Enforcer is an individual appointed in addition to the trustee to enforce the trust in relation to its specific non-charitable purposes. Due to this position, an Enforcer or Protector cannot also be a trustee or have any conflicts of interests.

The ADGM Trust Law recognizes foreign trusts and trusts established in other financial-free zones in and outside the UAE, as stipulated by Article 3, as long as this is not

In addition to the ADGM Trust Law, there is a range of investment trusts recognized by ADGM that serve as funds that operate for collective investment purposes, which are regulated by the ADGM Financial Services Regulatory Authority, such as Real Estate Investment Trusts.

Trusts vs. Foundations

• Constitutional documents: trusts are governed by the trust deed/instrument signed by the settlor; whereas foundations are governed by the by-laws and foundation charter.
• Legal form: trusts are a contractual relationship; foundations are legal entities with a separate personality from their founders (which can own assets, and enter contractual arrangements).
• Control: trustees have duties and powers under trust regulations (such as the ADGM Trust Law) and the trust deed; foundations have appointed councils whose members have the power to make decisions in a foundation.
• Assets: trustees have the legal title to assets; whereas foundations own their own assets.
• Purpose: trustees may hold assets for personal and commercial purposes; foundations are restricted to charitable/philanthropic or family planning structures.
• Lifetime: trusts, once the specific purpose has been carried out, ends in existence; foundations may exist in perpetuity and have no limit on their lifetime.

Summary

The ADGM Trust Law and the distinctions between trusts and foundations provide individuals and businesses with diverse options for achieving their financial and philanthropic goals. This law introduces key positions like the Protector and Enforcer, granting settlors control over trustee decisions and compliance with the unique purposes of trusts, such as investment. Furthermore, foreign trusts and those established in other financial free zones are acknowledged under the ADGM Trust Law, subject to specified conditions.

In comparison to trusts, foundations represent a distinct legal entity governed by by-laws and foundation charters, with council-appointed members overseeing decisions. Foundations are limited to charitable, philanthropic, or family planning purposes and may exist in perpetuity. Therefore, individuals and companies navigating wealth management and asset protection options in the UAE, the ADGM trust regime and the unique contrast of a trust in comparison to a foundation offer a spectrum of options to those facilitating the realization of financial and philanthropic goals.