Hiu Chee Fatt, Trust Advisor, Labuan IBFC
Hiu Chee Fatt, Labuan IBFC examines how the flexible nature of Labuan Foundations can provide a wealth of options for clients looking an attractive wealth management structure.
Members of the public often associate foundations with either a high profile tycoon or an extremely rich dynastic family that has chosen this wealth management tool to give back to society or expound a needy cause, for example the Bill and Melinda Gates Foundation; one of the bastions of philanthropy worldwide.
There are also foundations which are used as vehicles to manage family wealth, ensuring successive generations are catered for by their forefathers, much like a common law trust, and then there are foundations that hold companies and businesses, and run like a corporate body, with a board and a management committee.
So what is a foundation? How does it work and are foundations a mainstay of the hyper rich only?
Foundations are civil law structures and can be viewed as a hybrid of a trust and a company. These characteristics allow foundations to offer all the asset protection features of a trust and yet are structured to operate much like a company, with an independent entity and its own legal personality.
How would you like to have your own foundation that protects your assets, serves as an estate planning tool and investment holding vehicle?
Vehicles like a foundation allows the founder a lot of flexibility, such as building a legacy for future family members, ensuring the aspiration of the founder is carried through to future generations, preserving a family’s wealth, fulfilling family members’ aspirations and so on. Indeed the terms of a foundation are endless. As the management of the foundation is in independent hands of the Council of the foundation, which operate very much like the board of directors of a company , there is bound to be less conflict of interest as is sometimes seen in typical trusts, especially where trustees are appointed from among the ranks of beneficiaries.
How is a Foundation Set Up?
To a limited extent and in most countries, the setting-up of a foundation does require a huge amount of initial property or asset injection before it can be operational. In addition, sometimes an extensive amount of paperwork is required and regulatory approval must be received even before the foundation is operational. Additionally, in many traditional jurisdictions, the setting-up of foundations are limited to charitable purposes only.
However these arduous and restrictive requirements are not applicable in Labuan International Business and Financial Centre (Labuan IBFC). As such, more people are able to protect and manage their wealth using a Labuan foundation as it is not restricted to charitable purposes only and can be used for all lawfully permissible activities, including but not limited to investments, holding of companies, legacy and succession planning.
The Labuan Foundations Act 2010 was enacted in February 2010 and is the governing law for all foundations set up in Labuan IBFC. A licensed trust company and managed trust company in Labuan IBFC are allowed by the Labuan Financial Services Authority to set up foundations in Labuan.
The basic structure of a Labuan foundation consists of the founder, secretary, council members, officers, supervisory person or protector and beneficiaries. The founder is the person who sets up the foundation and who then subscribes his or her name to the ‘charter’ as establishing the foundation.
The founder may be an individual, a corporation, Malaysian residents or non-residents. In addition, the founder may appoint any trusted individuals or corporations to be the council members, officers and supervisory person. This ensures that the founder is able to bring together legal persons within the council and management of the foundation who understand his wishes and are persons the founder can trust to execute his wishes.
In addition, the founder may also have reserved power expressly stated in the charter, this ‘reserved power’ allows the founder to have power to make decisions concerning the running of the foundation, including but not limited to the disbursement of funds to himself or another beneficiary.
The charter is the main constituent document of the Labuan foundation. It states the objectives and purposes of the establishment of the foundation similar to the article of association of a company. The charter may also allow the creation of ‘articles’, which are similar to the by-laws of an association.
Every Labuan foundation must have a secretary, which is to be a licensed Labuan Trust Company or Labuan Managed Trust Company. Council members are responsible to ensure the compliance of the Labuan Foundation and its officers with the terms of the Foundation charter and articles. In addition, council members are expected to supervise the management of the foundation by its officers.
The role of an officer of the Labuan foundation is to administer the foundation in such a manner that it achieves its objectives and purposes, including the management of the foundation’s investment and other roles that stated in the charter and articles of the foundation.
What are the Advantages of a Foundation over a Trust?
One of the key advantages is that a trust is not deemed a legal entity unlike a foundation. Foundations are set up to be more like a corporate body; specifically a company set up to manage the assets of the founder according to the wishes of the founder as contained in the charter. Therefore, a foundation allows for less ambiguity in its application and provision of the assets to the end beneficiary. In addition, similar to a company, a foundation is required to be registered which gives more certainty to its operation and administration.
The provisions described above allow for foundations to be better understood in civil law countries, as it fits in neatly into most if not all civil codes, which in turn provide the backbone to all civil law systems. Thus, it provides an easily understood structure, which will work in the same manner as trust would under common law jurisdictions.
With a trust, the interests of the beneficiaries are paramount. However, in a trust even though the settlor may provide a ‘Letter of Wishes’, in an attempt to ensure his exact wishes are executed by the trustee, the trustee is not duty bound to comply with his wishes as the trustee does not have a fiduciary duty to do so. Such a situation then leaves the settlor at the mercy of the trustee who has been appointed to manage the trust.
This problem does not arise with foundations as the will and interest of the founder can be explicitly detailed in the charter and the founder himself may serve on the council of the foundation, ensuring that his wishes are known and allowing him a much greater degree of control as compared to a trust.
Another key advantage of a foundation is that is can also be a tool for company succession as the council members can be appointed from members of the founder’s family, which provides a strong platform for council members to discuss and work on common objectives. For example, this allows for the entire council to discuss and determine the successor of the estate with ease and objectively.
Labuan Foundation v Foundations in other IFCs
One of the key advantages of a Labuan foundation is that its set up is not limited to charitable purposes only, hence a foundation can be set up with the explicit and clear aim of advancing the wealth of a family or even a distinct branch of the family.
Another key difference is that there is no minimum value of property/asset required for the initial set up of a Labuan foundation. This allows for a lower barrier of entry and ensures that a foundation is available for all.
In some instances, a founder may also be keen to ensure that he receives benefit from foundation as well. This is normal in instances where the founder has set up a foundation early in his life and has transferred his entire asset base into this foundation. It is only then natural that he himself would like to enjoy the benefits of a foundation for the remaining years of his life. This is possible with a Labuan foundation as the law allows for the founder to also be a beneficiary.
Along the same lines, should a founder want to ensure that his aims and wants are catered in the management of the foundation, he may serve on the Council of the foundation he has set up. This as mentioned earlier, ensures that he still retains control over the management of his assets injected into the foundation while enjoying the protection too.
A Labuan foundation also can be used as a vehicle to avoid the forced heirship rule. Clear and unambiguous provisions of the Act prevent the assets of the foundation being attacked not only on the basis of forced heirship but also in matrimony rulings as served by foreign courts.
It is clear that the flexible structure of Labuan foundations can be tailor made to suit the numerous objectives and varied purposes of individuals, families and corporations. With a bit of creative thinking you will be surprised how much more a Labuan foundation can do besides those that I have shared.
Hiu Chee Fatt, Trust Advisor, Labuan IBFC