Effective family business management: The role of Wills, Trusts, and Foundations

Business succession planning is the process that streamlines the transition of ownership and control of the business. It has an array of benefits apart from wealth preservation of family-owned businesses in UAE. This is particularly crucial in the dynamic business landscape of the UAE. A well-structured succession plan has many benefits. Firstly, it helps in the continuity of business by ensuring minimal disturbance during the transition period. Secondly, it saves the value of the business because it identifies and nurtures potential successors. Thirdly, it reduces risks relating to unforeseen events like sudden illness or death of key people. Besides this, succession planning would maximize tax implications by doing it in a tax-efficient transfer of ownership and assets. Furthermore, it Will continue maintaining family harmony by having clearly defined and expected rules governing the transfer of ownership and control. This Will benefit the future of businesses in the UAE, safeguard family interests, and give sustainability in the long run. It is a proactive step that would make all the difference in making a business successful, particularly in such a competitive market as the UAE.

Continuity And Stability

A good succession plan clearly outlines a path of transferring ownership and management rights. This reduces disruptions and uncertainties, and the business Will run relatively smoothly both during and after the transition process. Businesses also maintain their brand identity, customer relationships, and market reputation by determining and grooming suitable successors that are essential for long-term success and customer loyalty. Business Succession planning also helps in identifying potential risks, such as unexpected illnesses, accidents, or the untimely death of key personnel. It thereby helps businesses maintain continuity of operations and financial stability. Thus, a solid succession plan is the most important tool for business continuity in the UAE. This Will provide a clear and transparent roadmap for the handover of ownership and management responsibilities so that there are no interruptions and uncertainties. In addition, succession planning reduces risks from sudden illnesses, accidents, or early death of critical employees. It Will continue to ensure the operation’s running and financial stability as a protection of business interest. For the UAE with its mixed business landscape and regulatory environment, succession planning Will play a critical role in facing potential challenges while keeping the market in the strong position.

Preserving Value

An efficient succession plan Will provide an added value to the business. Successor hunting and grooming, helps attract interested buyers or investors, so therefore is valued highly. Additionally it also helps safeguard the business’s assets and financial resources. It minimizes the risk of disputes, legal battles, and unnecessary expenses that can eat up the value of the business. An effective succession plan would also go a long way in achieving the optimal tax

implications and would help businesses in the context of UAE’s legal and regulatory environment. Understanding all relevant tax laws and regulations Will help businesses in transfer of assets and Will thereby streamline the process in a tax-efficient way. And thereby saving significantly for the business and maximizing value transferred to the next generation.

Minimising Tax Liability

Succession planning allows businesses to structure the transfer of ownership and assets in a tax-efficient manner. This can involve utilizing Trusts or Foundations, to minimize tax implications. By aligning succession planning with estate planning, businesses can optimize the overall tax burden on the transfer of wealth and assets. This ensures that the maximum value is transferred to the next generation.

Securing Family Interest

A well-structured succession plan can help prevent family disputes and conflicts over ownership and control of the business. It establishes clear guidelines and expectations, fostering harmony among family members. By implementing appropriate legal and financial structures, businesses can safeguard family wealth and ensure its long-term preservation. This involves considering factors such as asset protection, wealth management, and charitable giving. Succession planning facilitates the smooth transfer of the business to the next generation, ensuring the continuation of family legacy and values. It helps maintain family control and influence over the business

A Will is a crucial legal document that outlines how an individual’s assets Will be distributed after their death. It ensures that the estate is managed according to your wishes. In Abu Dhabi, the registration of Wills is governed by local laws and regulations, making it essential to seek professional legal assistance to navigate through the process effectively.

Legal Framework for Wills in Abu Dhabi

Abu Dhabi follows a dual legal system, accommodating Sharia law for Muslim residents and expatriate laws for non-Muslim residents. This distinction is vital as it influences the preparation and registration of Wills.

Muslim Wills

Muslim laws of inheritance are governed by Sharia law. According to this law, you can only allocate up to one-third of your property through a Will. This part is called the bequeathable third.

The two-thirds of your property that remain must be distributed to your heirs according to Mohammedan laws of succession, unless your heirs agree to the bequest of more than one-third to someone else.

For Sunni Muslims, it is only permissible to bequeath one-third to a stranger, not to an heir, unless the other heirs agree to the bequest, even within the one-third limit. Shia Muslims, on the other hand, can make bequests to strangers and/or heirs without the consent of the other heirs, as long as it does not exceed one-third of the estate. Beyond one-third, the consent of the other heirs is necessary.

As a Muslim resident, it’s crucial to ensure that your Will complies with these regulations in order to be considered valid.

Non Muslim Wills

The UAE has made provisions for non-Muslim residents to register their Wills according to the laws of their home country. This offers flexibility and aligns with the individual’s personal wishes and cultural practices.(kindly cross check)

In addition to ownership succession, businesses should also focus on succession planning for key employees. This ensures the continuity of critical skills and knowledge within the organization. They should be regularly reviewed and updated to reflect changes in the business environment, family dynamics, and legal regulations. This ensures that the plan remains relevant and effective. Seeking guidance from legal and financial experts is crucial to developing a comprehensive and effective succession plan. As it can provide valuable insights and help navigate complex legal and tax issues.

Trusts

Trust is a three-party relationship involving a settlor, a Trustee, and a beneficiary. In this arrangement, the Trustee manages the assets of the settlor, and the legal framework ensures that the ultimate ownership belongs to the beneficiaries. Trusts are usually private agreements that are not required to be publicly disclosed, and they are regulated by a Trust agreement that defines the terms of the Trust as well as the rights and responsibilities of the Trustee and beneficiaries.

Trusts in DIFC

The DIFC Trust Law governs Trusts in the DIFC and provides the legal framework for establishing and operating Trusts. This law allows for a wide range of Trusts, including charitable, private, and purpose Trusts. A DIFC Trust is created if its purpose is practical, legal, and aligns with the public policy of the DIFC. The terms and conditions of the DIFC Trust are determined based on the benefits to its beneficiaries. The Trust is terminated if it no longer serves its purpose. Trusts provide legal protection for the assets of Trustees, reduce paperwork, and minimize state taxes and formalities. A DIFC Trust is established when property is transferred during the settlor’s lifetime or upon their death, leading to the creation, variation, or transformation of assets from one source to another. A valid Trust must have a settlor and be intended for a lawful and legitimate purpose. Conversely, a Trust is considered invalid if it is intended for immoral or illegal activities that violate DIFC Law. This includes scams, fraud,

false statements, coercion, or misinformation, and must comply with public policy and regulations. There are two types of Trusts: charitable Trusts and non-charitable Trusts. Charitable Trusts are created to support public organizations and causes such as education, religion, health, art, and the environment. Non-charitable Trusts, also known as purpose Trusts, have specific purposes but no individual beneficiaries. The Trustee oversees the Trust based on specific terms and conditions. If there is no enforcer appointed to a non-charitable Trust, the Trustee has the right to take necessary steps. If the Trustee finds the enforcer unWilling or unfit, they can ask the Court to appoint a replacement. The Court can give the enforcer 30 days to act properly and may impose a fine of 10 percent of the Trust’s value if they do not.

Trusts in ADGM

The ADGM Trust brings together financial institutions, corporations, and organizations to promote their engagement, development, and prosperity under a global legal framework based on the common law of the United Arab Emirates. Through ADGM, there is a platform to effectively manage family wealth in the UAE, providing ample space for business and related solutions to maintain and manage family assets, business, and wealth with the necessary flexibility. A non-charitable purpose E is permitted only if it is lawful and complies with the public policy of ADGM. It Will be invalid if it is immoral or contrary to the public policy in the Abu Dhabi Global Market. A non-charitable purpose Trust can be established through the Trust instrument, which may include the purpose of holding or investing in shares in a company or person, or any other assets constituting the Trust property, as long as it aligns with lawful and moral purposes according to the law and policy of ADGM.

Foundations

Foundations on the other hand are bestowed with a legal personality and combine characteristics of a Trust and a company. They are used for efficient wealth management, succession planning, and inheritance arrangements. Foundations are not allowed to engage in commercial profit-generating activities and are overseen by a Council of Members, which is similar to a Board of Directors. They are often set up for a specific purpose or goal. Foundations are governed by a Charter & By-Laws, which are equivalent to the Articles of Association, and these documents outline the Foundation’s purpose, governance, and operations. Additionally, Foundations must comply with regulations similar to those required of a company, including the obligation to keep annual accounts and submit an annual return for the renewal of its operating license.

Foundations in DIFC

The DIFC Foundations Law governs Foundations in the DIFC. The law provides a flexible and modern legal framework for establishing and operating Foundations, allowing for the creation of various types, such as charitable, private, and purpose Foundations. The process for establishing a Foundation is outlined as follows:

1. A Foundation must have a minimum of one founder and a minimum of two council members.

2. A Foundation must have a registered office or presence in the DIFC. This can be satisfied by establishing an office in the DIFC, sharing an office with an affiliated entity already present in the DIFC, or by appointing a registered agent.

3. A standard Foundation charter can be utilized, and the Foundation charter and regulations can be customized based on the client’s needs.

4. The Foundation should appoint a guardian under the following conditions: a. If the Foundation has a charitable or specified non-charitable object, it must have a guardian for that object. b. The Foundation may choose to have a guardian for an object to provide its property to a person or class of persons, whether or not immediately ascertainable or ascertained by reference to a personal relationship.

The objectives of a Foundation in DIFC must be specific, reasonable, and achievable. They must also be lawful and aligned with the public policy in the DIFC. A Foundation can be established for exclusively charitable purposes or for a combination of charitable and non charitable objectives, including benefiting specific individuals or groups. However, the Foundation cannot engage in commercial or charitable activities unless they are essential for, or related to, its objectives.

Foundations in ADGM

The ADGM Foundations Regime offers an alternative to Trusts for financial planning and structuring. ADGM Foundations allow High Net Worth Individuals (HNWIs), families, and the corporate community in the United Arab Emirates to access a sought-after product from an international financial center for the first time locally. These Foundations can be used for various purposes including wealth management and preservation, family succession planning, tax planning, asset protection, corporate structuring, and public interest purposes (excluding charities). Foundations provide a way to consolidate family holdings of different assets into a single top-holding entity. Using a Foundation to hold family assets, such as business interests, property, financial investments, or other assets, allows clear instructions to be legalized for the transfer of assets upon succession. Transferring ownership of all assets held under a single entity is operationally and tax efficient. Additionally, it is cost-effective compared to the complicated process of separately transferring ownership of a wide range of asset holdings.

Updates to the DIFC Trusts and Foundations Laws

Under the amended laws, prior property transfers to a Trust/Foundation Will not be invalidated unless the transfer was made to defraud creditors and rendered the transferor insolvent. Creditors must now prove the transfer was made with fraudulent intent. The amendments also introduce a 3-year time limit for actions related to a Foundation or property transfer to a Foundation. Additionally, foreign judgments that contradict DIFC laws are not enforceable. The new duress provisions require a Foundation or Trust Officer to cease acting if a foreign judgment has been made against them, enhancing the protection of the Foundation/Trust property. Furthermore, the Foundations Law now permits the conversion of a DIFC Foundation into a company, providing clarity regarding the possibility of reversing this action.

Trusts and Foundations in the Abu Dhabi Global Market (ADGM) and the Dubai International Financial Centre (DIFC) showcase a sophisticated legal framework designed to meet the specific needs of international investors and high-net-worth individuals. Both jurisdictions offer strong and adaptable structures that deliver significant benefits in asset protection, estate planning, and charitable initiatives. By blending common law principles with regional legal traditions, the ADGM and DIFC have effectively created an enabling environment for establishing and managing Trusts and Foundations.