Monthly Insight: UAE Onshore Trust Law: Broadening the scope of wealth preservation solutions in the region

Monthly Insight: UAE Onshore Trust Law: Broadening the scope of wealth preservation solutions in the region

By Joelle Niven

In late 2020, the Federal Decree-Law No. 19 of 2020 on Τrusts was enacted in the United Arab Emirates by President Sheikh Khalifa bin Zayed. The law regulates trust formation, purpose and operation in the UAE and defines the rights and obligations of the settlor, beneficiaries and trustees.

In our March 2020 monthly insight Wealth Preservation in an ever changing environment, we touched on some of the available tools for ensuring that your wealth is passed on according to your wishes. Amongst these tools is the Trust, a structure used frequently in common law jurisdictions, but not usually recognised in civil law jurisdictions, such as the UAE.

Although trust laws exist in the UAE’s two financial free zones, the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM), this is the first time the trust structure has been recognised within the UAE’s onshore legislative system. It is also the first time the common law concept of the Trust has been included within the civil law regime of the Arab world.

Free zone trust arrangements are unable to enforce ownership rights over onshore assets, and so the new law ensures that the UAE now offers a more encompassing framework of tools for preserving and managing private wealth in the region.

The Decree-Law is an innovative and future-oriented framework which puts in place new mechanisms for managing wealth in the UAE. Two of the main areas of benefit are the following:

Protection and continuity of family assets

Until the Decree-Law was put in place, the only onshore vehicle available in the UAE to control family assets was a limited liability company (LLC). The LLC was not designed for this purpose, as the shareholders have ultimate control over the company, and no matter the terms initially included in the articles of association, the founder cannot prevent the succeeding shareholders from making changes or choosing to dissolve the entity.

The trust law addresses this obstacle. Now the patriarch of the family can become the settlor of a Trust and transfer the family assets to the Trust. The family members become beneficiaries and the trust’s assets are governed by the trustees. The trust instrument, or trust deed, which is created by the settlor, defines the terms of the Trust.  The trust deed cannot be varied by the beneficiaries, nor can they choose to dissolve the Trust (except under exceptional circumstances through court approval).

Investment infrastructure

Another advantage of the new law is that it allows the creation of Private Trusts, Trusts that can be set up for performing securities trading. To set up a traditional investment fund in the UAE is often time consuming and requires considerable financial and technical resources.

The Decree-Law allows the creation of an investment fund by simply registering a trust instrument and transferring assets to the trust. The investment fund can then receive contributions by the investors.

The Private Trust can also be used to establish pension funds or guaranteeing availability of benefits to the beneficiaries in return for contributions paid to the Trust.

Conclusion

It is vital to have a sound wealth preservation plan in place. More importantly so, for high net-worth individuals and wealthy families. The Decree-Law emphasizes the forward-looking initiative of the UAE cabinet to expand the legal framework, so that an extensive range of structuring options are available in the UAE, thereby making it an increasingly attractive jurisdiction for them to base their wealth protection and management structures.

The country has increasingly demonstrated its willingness to integrate sophisticated international business and financial practices, and this new trust law is another step towards the UAE’s goal of becoming a financial hub of the highest standard, not only in the Middle East, but globally.

At Loggerhead Partners, we believe in a holistic approach. Firstly, we aim to understand your unique business and family requirements, and then creating a bespoke solution which positions you to withstand global uncertainty, to secure your wealth, and to pass it on to generations to come.

 

If you are interested in knowing more about how to effectively use wealth protection structures in the UAE, reach out to us to arrange a free consultation.

If you liked this article, check out our LinkedIn page and give us a ‘like’ or ‘follow’, or click here to subscribe to our monthly newsletter.