In the second episode, Senior Associate Celia Titouni and Managing Partner Yann Mrazek discuss the similarities and differences between Wills and Foundations.
What is legacy planning?
Legacy planning is the financial and governance strategy that prepares you to bequeath your wealth and life achievements to the generations to come. Beyond the basic elements of estate planning, legacy planning aims at providing and implementing a roadmap in line with the patriarch’s vision according to which a legacy is established, assets will be managed and protected, as well as passed on to future generations.
Legacy planning is, therefore, key for individuals with businesses or other assets that require professional management and/or preservation.
Subject to personal priorities, the main objectives of legacy planning are:
- Asset protection
- Asset consolidation;
- Wealth management;
- Family unity
- Business continuity
- Governance; and
- Tax efficiency
Why is it important to implement a legacy planning strategy?
Planning to leave your legacy to your heirs can be complex and difficult to face. There is no easy way to say it – anticipating one’s death is an uncomfortable topic. In order to leave a financial legacy for the next generation(s), it is important to first ensure financial security to amass such legacy. Maintaining such financial security on a long-term basis can be a real challenge – especially for globalized families as the risks are numerous and sometimes hard to predict.
With a proper legacy planning strategy, the following risks may be addressed:
- Political risk
- Geographical risk
- Exchange control
- Tax (domestic/foreign investment)
- Death/Incapacity of principal
- Creditor attacks
- Lack of eligibility for next generation
- Matrimonial attacks
- Family disputes; and
- Freezing of assets
What are the tools?
There are numerous legacy planning tools available (locally), chief among which are wills, foundations, and trusts. The tools need to be chosen and implemented carefully in order to achieve the objectives.
What factors to consider?
- Place of residence
- Marital status and family structure [children]; and
It is paramount to evaluate the priorities, consider the types and location of assets/business as well as the circumstances of the principal and the beneficiaries. As many life events and market or regulatory factors may change the requirements over the course of time, the flexibility of such tools is key.
Wills executed before the UAE Notary can partly structure one’s estate to the extent permitted by Sharia and address guardianship matters.
For Muslims, it is governed by Sharia law and, therefore, as a general rule enforceable within the limit of one-third of the testator’s estate upon the approval of all other major heirs. The remaining two-thirds of the balance of the estate shall be distributed amongst all the heirs, and this distribution will be in accordance with fixed shares as prescribed by Sharia.
From the non-Muslim perspective, the UAE legislation protects the freedom of non-Muslims to elect their own laws governing inheritance, and that measure can be taken only through the execution of a will. Hence, wills executed by non-Muslims may, in principle, be governed by the law of the country of which he/she is a citizen at the time of his death. If the individual has dual nationality, the will must clearly state which law shall govern the testator’s inheritance and will. This does not extend to immovable assets located in the UAE to which UAE laws will be applied regardless.
From a practical standpoint, the will must be drafted in English and Arabic and be executed in front of a notary public. Probate procedures and disputes will be referred to the local Courts.
DIFC WSC Will
The DIFC Will Service Centre (WSC) allows non-Muslims – resident or not – over the age of 21 – to register wills.
Initially restricted to assets located in Dubai and Ras Al Khaimah, it has broadened its scope and can now cover assets located across the UAE and worldwide. This being said, there is little uncertainty as to how the DIFC Courts and, more importantly, foreign judges, will deal with the asset distribution [especially for assets located abroad].
It is based on the UK Estates Act and Probate rules, so unlike a notarial will, it gives complete testamentary freedom to the testator and can cover up to 100% of one’s assets. Objections may still be lodged with the competent authority, the DIFC Courts. E.g. (presumably, disgruntled) heirs may challenge the asset distribution per the terms of the DIFC Will as falling foul from forced heirship rules pursuant to the law of the state of the overall estate.
DIFC WSC Will allow parents to designate guardians for their minor children should both parents pass away in the jurisdiction. An interim guardian can be appointed to immediately take care of the children while the permanent guardian, if abroad, makes the arrangements for the trip.
What are the limits of wills?
Wills fail to address key concerns, e.g.:
- assets (real estate, shares) remain held in an individual capacity, thus subject to probate procedurein case of demise;
- assets are exposed to 3rd parties’ attacks; and
- Muslims are not allowed to register a DIFC Will.
This is where a Foundation adds value!
A foundation is an independent legal entity that holds assets separately from the founder’s personal wealth.
Compatible with all UAE and most international asset classes (real estate, shares, portfolios), Foundation enables entrepreneurs and their families to consolidate and keep control over income-generating assets and investments while protecting them from potential threats. They are equally effective for Muslims and non-Muslims. Foundation can be used in combination with corporate structures or as a direct owner of assets, thereby guaranteeing business continuity and smooth intergenerational planning.
Foundations are being used for a variety of reasons, chief among which are:
- Wealth structuring, succession, and estate planning
- Asset protection (forced heirship rules, creditors and hostile takeovers)
- Long term holding structure for businesses
- Charity and/or philanthropic purposes
Generally speaking, foundation regimes provide more flexibility on several fronts. One major advantage is that they ensure continuity by avoiding probate procedures.
For non-Muslims, a DIFC WSC will should be registered if there are minor children in the country; but a foundation should be considered for high-value assets.
For Muslims, a notarial will should only be used for guardianship purposes. Foundations should be considered for asset protection and legacy planning to cover up to 100% of the estate.