Holistic succession planning is a relatively new concept in Asia, says Borden Ladner Gervais senior consultant and lawyer Millie Chan. In an interview with Personal Wealth, she talks about how trusts and foundations are used as global estate planning tools. 

 
THE two estate planning structures commonly available are trusts and foundations. Both have garnered attention in Asia as interest in estate planning grows. Prior to 2010, the common law concept of trust was an estate planning tool available to Malaysians.

A trust is an arrangement made by the settlor, which allows the assets of beneficiaries to be managed by a third party, or trustee. Trustees are legally obliged to manage the assets for the benefit of the beneficiaries.

While trustees hold legal ownership of the assets, generally the beneficiaries have the right to receive the benefits of the assets. Depending on the type, a trust can be administered while the settlor is still alive. Trusts bypass probate, so in the event of the settlor’s death, it allows beneficiaries to have quicker access to the monies.

While trusts and foundations address such complexities and are similar in their objectives, each is distinct in its purpose and in the way it is formulated. The validity of a trust is assessed based on, among others, the basic elements of intention, subject matter, purpose and designation (beneficiaries).

A trust is governed by common law and the relevant domestic legislation. In this country, it is the Trustee Act 1949 and in Labuan, it is the Labuan Trusts Act 1996. The validity of a trust is determined by the court in accordance with the governing trust law. 

Chan says when a trust is created, there is no requirement to register the trust. “A trustee has to manage the property entrusted to him for the benefit of the beneficiaries. The trustee’s fiduciary duty calls for the highest standards. 

“The trustee is entrusted with an asset for the benefit of another party. There is in concept a split in ownership — legal ownership lies with the trustee, while the beneficiary may claim a beneficial entitlement to the property [assets].”

There are different types of trusts. An inter-vivos trust, also known as a living trust, is created during the lifetime of the trustee. A living trust can entail the distribution of assets to the beneficiary during or after the settlor’s lifetime. The opposite of an inter-vivos trust is a testamentary trust, which goes into effect upon the death of the testator (as the settlor is known in a testamentary trust).

Trusts are versatile and can be structured according to the objectives of the settlor, Chan says. “A fixed interest trust is where beneficiaries have some sort of fixed interest or set entitlement in the trust property. For example, the trust property is held in fixed trusts for beneficiaries until they reach a specified age. 

“In a discretionary trust, the trustee has the power to pay income and/or capital to any one of the named beneficiaries at his discretion.” 

For example, in the case of a beneficiary who is an addict or a spendthrift, a discretionary trust would empower the trustee to decide whether and when to make distribution to the beneficiary, she adds. 

Foundations are a hybrid of trust and company. They were introduced after the promulgation of the Labuan Foundations Act 2010, which incorporated the civil law concept of foundation. 

Foundations can be used for asset protection and succession planning. A foundation can sue and be sued in its own name and is the legal and beneficial owner of its assets. However, a foundation has no shareholders. Its affairs and properties are managed by a council for the benefit of the beneficiaries.

“With foundation law being available in Labuan, there are more alternatives to structure estate planning, and this has made it a lot more flexible,” observes Chan.

The establishment of a foundation could mitigate issues that exist in trusts. For instance, patriarchs and matriarchs who are concerned about giving up their ownership of assets to a trustee may try to reserve a lot of powers over the trustee. These reserved powers in a trust may ultimately affect the validity of the trust. 

Chan illustrates how the establishment of a foundation could mitigate this problem. “With the establishment of a foundation, although the ownership of property is transferred to the foundation, the founder may opt to sit on the board or be in control of the board. 

“This is expressly allowed without affecting the validity of the foundation. In this way, they may retain a degree of control over the assets and how they are managed. So, there is that security, and it makes the concept of foundation rather appealing.”

Chan says several countries have amended their trust legislations to give the settlor reserved powers without affecting the validity of the trust. But she cautions that reservation of powers, whether over the trustee or the foundation, should be considered with great care. 

“While the reservation of powers may not affect the validity of the trust or foundation, the power may be used against the party who wields it. Take the example of a founder who reserves power to terminate a foundation and takes back the assets. 

“In certain circumstances, a court may order the founder to exercise that power and bring the assets out of the foundation and be made available to his creditors. Thus, the reserved powers may place the founder in a vulnerable position. The greater the control is reserved over the assets, the less effective the structure becomes as a solution to planning needs which require a severance between owner and control.”

While the foundation may have its advantages, it might not be a recommended option for those with large extended families. Representation on the family council could become a point of contention.

“There may be contention as to who should sit on the board. The members of the family will not be able to sit on the board of the professional trustees. So, a foundation in such a case might not be a viable alternative. 

“The establishment of a trust managed by an independent corporate trustee may be a more amenable solution in this case. Of course, the board of a foundation can also be independently managed by corporate members.”

Chan believes that at the end of the day, the structure of the vehicle is more important than the type of vehicle chosen. “There is no one-size-fits-all. If the trust or foundation is set up carefully, it will minimise disputes.”

These alternatives, however, do not negate the need for a will, says Chan. “Estate planning tools such as trusts and foundations do not negate the need for a will, which expresses the ‘last words’ of the testator concerning his remaining assets.”

Preservation of values

Canada-based Borden Ladner Gervais senior consultant and lawyer Millie Chan says her law firm advocates a holistic approach to global estate planning. 

“In the terminology of holistic planning, the wealth of a family includes the intangible assets of the family such as the family values, traditions and practices, which are very important to Malaysian families.”

Chan also says keeping to family values is an integral part of estate planning, especially today as families are increasingly scattered across the globe. “Values are more important, especially to our Asian families. In those days, we took for granted that our values would be passed on. One elderly client once said he would turn off the ‘tap’ if his children did not return home from their overseas education [to be] present at every cultural and religious celebration.

“Families were accustomed to regular gatherings for cultural and religious occasions. Such communal lifestyle provided opportunities for family values and traditions to pass on. But the oral way of passing on traditions is no longer a given with family members scattered across different geographical locations.”

To retain family values, Chan recommends putting together a family governance structure, which creates processes for families to get together. “The main objective of a family governance structure is to have an organised approach to capturing the family’s intangible but valuable assets and also to use the family’s wealth to find ways to bring the family together.

“The family governance structure is built upon the foundation of a family charter. The charter expresses the values and traditions of the family and acknowledges what makes up the family identity.” 

Chan says processes are provided for the dissemination of information, the way to make collective decisions and the organising of family activities, such as an annual family retreat. “These activities may be funded by the family trust or foundation. This is likely to induce good attendance.”

In some charters, she says, special committees are established for the management of special funds such as a philanthropic committee or an entrepreneurial fund committee. “The entrepreneurial fund is intended to grant or lend to members of the family who may have sound business proposals but are not able to obtain commercial lending.”

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 6 - 12, 2015.

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