This article first appeared in Personal Wealth, The Edge Malaysia Weekly on July 31, 2017 - August 6, 2017

Recent political and economic events have not only had an impact on the global economy but also on individuals’ wealth management, particularly those with cross-border assets. The need for offshore wealth management vehicles has become more important today than ever before, say industry experts.

Vijayan Ramanjulu, associate director of legal, compliance and Labuan services at Tricor Trustco (Labuan) Ltd, says as things become more globalised and people are connected more easily, events such as Donald Trump’s presidency, Brexit and Japan’s fiscal policy can have a huge impact on one’s assets as well as estate planning.

“Affluent Malaysians more often than not have businesses or investments in the US and/or UK. As the current administrations of both countries are increasingly more inward looking or creating policies that are more favourable to domestic consumption, their laws may be changed or amended to suit domestic affairs,” he says.

 Wong Chow Yang, partner at Ernst & Young Tax Consultants Sdn Bhd, says while wealth planning is less likely to be influenced by cyclical shifts in economic conditions or global uncertainties due to geopolitical factors, it is possible that the uncertainties in global markets arising from events such as Brexit or those related to the policies of the new US administration, or a protracted weakness in the Chinese economy and its currency, may be influencing factors that lead to behavioural shifts in the investment patterns of some high-net-worth individuals (HNWIs).

“In the face of global uncertainties, it is quite conceivable that these HNWIs would act to further diversify their investment holdings across multi-currency wealth products and instruments in an effort to manage and protect their wealth. In doing so, they will invariably explore new investment holding structures using offshore jurisdictions that provide flexible choices of legal structures and sound privacy protection that operate within well-established legal frameworks and that offer legitimate tax efficiencies,” says Wong.

Trusts or foundations offer protection against those risks. If investors park their wealth in a trust or foundation structure, they do not have to worry about what happens to their business, says Vijayan.

“The structure that owns the assets is either the trust through the trustee or the foundation. That is why it is a huge benefit for people with significant assets. By setting them up, they do not own the assets, but they can control them. At the same time, they can control the effects and benefit from them.

“In the past, before the new legislation came about, Malaysians could not set up trusts or foundations. There was no foundation in the first place before 2010. And even if you set up a typical trust structure using Malaysian laws, you could not benefit from them.”

Mari-Len Ngu, director and head of Labuan business at Tricor Trustco, says most investors would have used conventional structures or vehicles in jurisdictions like the US and UK. These structures/vehicles will now be exposed to legal or tax repercussions that may affect the liquidation or repatriation of assets or income.

She says it is in the best interests of Malaysian investors to shore up their assets using structures that would not require any changes when changes occur elsewhere. One example would be through Labuan.

“Using a Labuan structure could prevent these [unexpected complications] as it would have been insulated from the political/economic policy changes in these jurisdictions,” she says.

With the growing number of HNWIs in Asia-Pacific, they are increasingly looking for solutions to help manage their wealth efficiently and preserve their fortunes for future generations, says Danial Mah Abdullah, CEO of Labuan International Business and Financial Centre (IBFC) Inc.

“Labuan IBFC offers a plethora of wealth creation and preservation structures in conventional and Islamic forms. These comprehensive private wealth management vehicles range from common law trusts to civil law foundations. In fact, it is the only jurisdiction in Asia that offers private foundations as a wealth management solution, and with a shariah-compliant option as well,” he says.

According to its data, there were a total of 188 foundations last year — a significant increase from 65 in 2012.

Types of wealth management vehicles

Labuan IBFC offers a variety of wealth management products and solutions for individuals. They include charitable trusts, private trust companies, purpose trusts, spendthrift/protective trusts, Labuan special trusts and foundations.

“Labuan IBFC is one of the few jurisdictions in Asia offering private foundations and trusts, through which HNWIs are able to structure their business and family succession plans. In addition, Islamic foundations, such as the Labuan International Waqf Foundation, are unique to the financial centre,” says Wong. The tax advisory provides in-depth services for investments, structures and transactions involving Labuan IBFC.

Danial says these vehicles can be structured for a wide array of needs and are especially suitable for family offices and wealth managers in facilitating dynamic wealth transfer, dynastic planning and inheritance management. “The Labuan Trust can be created for an individual or settlor to give specific property to a third party to be held for the benefit of others, including charities. The Labuan Trust Act 1996 (LTA) allows the creation of various types of trusts, including purpose trusts, charitable trusts, spendthrift or protective trusts, and Labuan special trusts. A Labuan trust may be created or established for a particular purpose — charitable or otherwise,” he adds.

“The Labuan foundation is a corporate body with a separate legal entity, established to manage its own property for any lawful purpose, which may be charitable or non-charitable. In the case of a Labuan Islamic foundation, its aims and operations are in compliance with shariah principles.

“Specifically for a Labuan Islamic foundation, its operations are in accordance with shariah principles and other requirements stipulated in paragraph 10.0 of the Guidelines on the Establishment of Labuan Foundations Including Islamic Foundations. Labuan IBFC is probably the only jurisdiction in the world that offers shariah-compliant wealth management vehicles, making us a key player in the global Islamic wealth management industry.”

Vijayan points out that the Labuan foundation is a legal entity governed by its charter and articles and is self-owned (no shareholders required). It is endowed by the founder to be used for a specific purpose or purposes, such as charitable or non-charitable (wealth preservation and succession planning) purposes, or a combination of both. By comparison, domestic foundations can only be used for charitable purposes.

“The Labuan foundation offers a hybrid solution, in which it has all the benefits of a trust with the certainties of a company. The founder may be directly or indirectly involved in the running of the foundation via the council,” he says.

“A Labuan foundation is the only one in Asia used for private wealth management. In Singapore and Hong Kong, they have foundations, but they are usually for charitable purposes.”

Tricor Trustco is a provider of trust solutions and services. It specialises in advisory and structuring services, among others.

Vijayan cites the example of a foundation he set up for two brothers, who have accumulated wealth over the last 40 years and whose children are involved in the business too. The brothers were concerned that the children were not quite ready to take over and that they were quite spendthrift. At the same time, they wanted to get the children involved in the business. The brothers were also concerned about the welfare of their staff, who had been with them for 34 years.

So, they set up the foundation as a succession planning tool and to protect the wealth that the company has accumulated. “That process took us advisers and lawyers almost eight months because we had to develop a formula where the succession planning for both families is done smoothly. It will come in at a certain point in their lifetime, then the children will start running their company,” says Vijayan.

“They also created a sort of pension fund for the employees so that if one or both brothers die, the employees will be protected,” he adds.

“The employee structure is there to protect the wealth and make sure that when the younger generation take over, they will come in and have limited roles. They cannot sell the shares of the company. They have to manage it in accordance with the objectives of the founders. At no point should they do anything that jeopardises the welfare of the employees. All this is clearly spelt out in the governing document of the foundation. So, this is the perfect example of how an affluent family can use a Labuan structure for its purposes.

“There is also a charitable element to it because it is a Muslim family. So, what they did was create funds for their family members to perform the haj. They are also funding a charity home. So, the foundation can be used for both charitable and non-charitable purposes. The foundation is multi-layered and involves three generations.”

Vijayan says with a foundation, the founder may remain anonymous through a nominee founder. “Almost 90% of the foundations that I have been involved in setting up, the founders had no issues. But there could be a founder who may say, ‘I want to set it up so my children will be involved. But I don’t want to be seen to be involved’. Some are hesitant for private reasons, for example, if they have multiple families and do not want one of them to find out they are setting up a foundation for another family.”

He says Labuan foundations could provide protection against mismanagement by the next generation. “In the case of the two brothers, they felt right from the outset that the children were quite spendthrift and were going to come in, take the money and spend it. The brothers thought that unless they developed some form of discipline, the children would have free rein over the assets. For that reason, they created a filtering mechanism — through the foundation, they have to prove themselves.

“If a family does not have a foundation or trust, the only way they can hand over the business is to transfer their shares in the company to their children. There is no other way. This share option attracts all the complications that a company structure has.”

Private trust companies are set up to facilitate the management and administration of family wealth for the purpose of dynastic planning and wealth transfer. “A Labuan private trust company (PTC) is formed for the specific purpose of acting as a trustee for a group of connected persons where each beneficiary of the trust established by the PTC is a connected person related to the settlor of the trust. This is akin to your very own wealth and asset management entity,” says Danial.

The PTC structure is suitable for big families who want to take control of the trust and manage it in accordance with their objectives. This eliminates the use of a third-party trustee, says Ngu.

“The Labuan PTC is the only one in Asia that allows both private and non-commercial purposes. Other jurisdictions where you can find foundations for these purposes would be in Panama, Jersey and Lichtenstein,” he adds.

Another type of trust is the Labuan special trust. Ngu says this allows a family business to be placed in a trust. It requires the trustee to retain designated shares of an underlying Labuan company as assets of the trust while leaving the control and management of the underlying business to the settlor and/or his or her advisers.

“The Labuan special trust is ideal for use in estate and succession planning. When the business is a long-term source of wealth for the family, it can help protect against mismanagement by the next generation,” she says.

“The special trust offers a means of deferring decisions related to the appointment of future heads of the business. In this structure, there is a separation of economic benefit to beneficiaries from the voting control of the trustees, which is carried out in accordance with pre-set rules. Arrangements can be made to allow family members to play an active role in management.”

Vijayan says the Labuan special trust is suitable for entrepreneurs who want to retain control of the affairs of their business as well as their personal wealth. “This structure allows them to be in control of the day-to-day running of the business, yet protect the assets from unforeseen challenges that may arise from their business dealings. The special trust allows the creator/settlor to be in control of the assets, which he can use for investment purposes. The proceeds are then placed with a trustee for protection.”

Vijayan says one of the benefits or purposes of the special trust is that it can be structured for those who desire long-term asset protection due to possible high-risk investment exposure. “Let’s say I am accumulating wealth. I am setting up this trust to achieve a certain purpose. So, after accumulating, say, RM1 million, I could trigger the trust structure for the purposes of funding my children’s education or setting up a business.

“The reason for that is I am trying to make sure that when the funds have reached that threshold, they go into this structure rather than remaining under my name. This reduces risk from a business perspective. The moment things are held under my name or are under my control, things like creditor issues, bankruptcy protection, the risk of losing the business and all its proceeds held under my name is always on the horizon.”

Another type of trust is the Labuan purpose trust. It provides flexibility because it can be set up without the need to stipulate a beneficiary for the benefit of a group of individuals for any number of purposes — charitable or non-charitable, or a combination of both, says Vijayan.

“It can be structured for those who wish to have long-term asset protection as a result of the high risks in their personal circumstances. Under this trust structure, the settlor may appoint a personal representative in the form of an enforcer. This person will ensure that the trustee carries out his/her duties accordingly. The Labuan special trust does not have provisions for this,” he adds.

Ngu says there are differences between how foundations and trusts are used. For instance, a foundation is a multi-generational vehicle typically used when a patriarch or matriarch of a business who is coming close to the end of his tenure at the business and is looking to hand over the reins.

“The foundation allows multiple parties to be involved, such as council members and the officer. The council members operate like a board of directors of a company while the officer is like the managing director,” she says.

“So typically, the council members will include the patriarch, matriarch and maybe their sons and daughters. The officers are usually the grandchildren so a foundation structure can be more elaborate or done simply. From our experience, we have seen big families with multiple businesses who have their children and grandchildren involved because the structure allows for that.

“In a trust, you have a trustee with a single director, so it is a more straightforward structure. But the intents and purposes for both are the same, which is to protect your assets and plan your wealth.”

Even though a foundation allows for more layers, it is less costly to set up than a trust. Ngu says the reason for this is that you need a trustee in a trust.

“In a foundation’s structure, there is no trustee. Those who set it up manage it themselves and we [as trustees] play a small administrative role,” she points out.

“Contrary to the name, we are really just a conduit between the foundation and the regulator. We only need to adhere to the annual reporting requirements. So, the cost of maintaining a foundation is way cheaper than that of a trust.”

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