Carolyn Oh, the principal of Carolyn Oh and Co, discusses the importance of control in wealth preservation and how it can be achieved via Labuan Trust and Foundation.
"It's ok to have your eggs in one basket as long as you control what happens to that basket" – Elon Musk
The word to note is 'control'. If one has exercised control for most parts of one's life when it comes to succession planning that need to control would still be very much prevalent in the system. However, as much as 'control' is an innate characteristic in any successful person, a penchant to 'preserve' is another usual trait which in this context mirrors thriftiness and an instinctive need to plan ahead, be it for:
- Business Succession: to relinquish to test and hone successor(s) for thebusinesses
- Legacy Planning: to relinquish to one's chosen beneficiaries or to consider what kindof legacy to leave behind
- Wealth Preservation: to relinquish assets but in a controlled fashion
The point I am intent on making is that for whatever reasons, to preserve would inevitably involve giving up i.e. relinquishing. In the inverse, imagine if one dropped the basket!
The reasons to preserve differ from people to people and differ at different times of our lives.
- at the start, to save for oneself (rainy day monies)
- to save for our family
- to save for business capital
- to retire
- because of unforeseen circumstances
- because there is too much for one's own lifetime
- for the sake of one's legacy
To move on to preserve and to structure requires one to start thinking of candidate(s) whom one can rely on.
Whom 'TO' rely upon
The process of structuring for preservation automatically leads one to think of one's own mortality and when we are not around or unable for whatever reasons―who can we rely on to help us preserve.
Needless to say choosing who can be entrusted should be a deliberated choice as the candidate(s) could either take the family or the business or the family business to a greater height but in the inverse wrong candidate(s) could also be the downfall of it all.
If the focus is on family-owned businesses then the children of the patriarch or matriarch concerned are the usual suspects as candidates-to-succeed.
On this note, the relationship complexities of 'Grandfather to Father to Son', i.e. the 3 Generation Gap Issue which is a topic that can be elaborated to no end and possibly to no certain solution. For now, we are dealing with that complex word 'relationship'. However, a good place to start would be acknowledging from the onset that the 3 Generation will have different point(s) of views.
The next step would be to encourage inter-generational sharing, tolerance, open-mindedness and willingness to try and accept hence the shelving of one's critical and cynical nature. The younger set should also not view the 'older' as being old-fashioned but rather classic and vintage hence parties to learn from. On the other hand, the older ones should see the 'younger' as current and possibly having a modern way forward for the family businesses. In a nutshell, to overcome the 3 Generation Gap Issue will take great efforts on all three camps.
The alternative and this is when relationships amongst the generation breaksdown or maybe not worked on enough to be successful – the Patriarch or Matriarch concerned has no choice but to look for third parties to entrust through a business relationship. With third parties we have yet another issue which is commonly termed the 'arranged marriage' between the third party such as a professional trustee company and the beneficiaries which is not necessarily an 'arrangement' that will not work but again a new form of relationship needs to be carved out to make that fiduciary set up not merely workable but also amicable.
RELINQUISHING – truly & consciously
True relinquishment is when one can, whilst living – consciously relinquish! The factual statistics reflect that people are now living longer and what relinquishment should mean is learning to let go and see the fruit of your labour in action.
Onshore practitioners would be familiar with some legal document(s) which purport to be ways or forms of relinquishing, for example:
1 PROXIES AND POWER OF ATTORNEY(S)
These are revocable powers which require the grantor or donor to be alive to ratify. The grantor or donor does not have a fall-back person if the grantor or donor dies or is incapacitated. Not reliable forms of relinquishing to say the least.
A common self-pat-on-the-back belief is that to 'Will' might be the highest form of relinquishing since to compose a Will requires a testator to think long and hard as to whom he/she might want to bestow or bequeath. The Will notwithstanding its legal bindingness if crafted properly is actually not 'conscious' relinquishing after all since the effect of a Will only happens very much after one is unconscious or rather dead!
Historically, the Will was a device intended solely for men who died without an heir. Moreover in a Will scenario, the Executor's duty is to distribute and not per se to hold and 'preserve'.
3 WILL coupled with TRUST
In this form, we see the testator cum settlor's mind embracing the need to 'preserve' and choosing person(s) 'to' whom things can be entrusted but again a trust under a Will only comes into effect post the demise of the testator cum settlor, again unconsciously.
Moreover a Will can be contested and requires at the minimum to be probated before it can be effected.
The trust vehicle is used time immemorial because it sets out the base elements of 'relinquishing' namely:
- the Settlor decides and accepts that he/she is ready to 'preserve' – has the Certainty of Intention– creates a trust
- the Settlor elects parties 'to' whom can be entrusted – Trustee(s)
- the Settlor relinquishes' (transfers) to the chosen trustee(s) to completely constitute the trust.
Below is a comparison chart of trust structured onshore or offshore.
|Brief comparison of trust elements|
Based on English common law
Based on English common law but also drawn from other developed jurisdictions
Trustee Act 1949
Trust Companies Act 1949
Trustees (Incorporation) Act 1952
Income Tax 1967
Real Property Gains Tax Act 1976
Labuan Trusts Act 1996
Labuan Companies Act 1990
Labuan Financial Services and Securities Act 2010
Labuan Business Activity Tax Act 1990
|Provision of Protector||No statutory definition||
|Rules Against Perpetuity||
Unless 'limited', trust can and will continue to exist for an unlimited period
To be expressly stated however common onshore take that once settled, is settled
Statutorily provided; Revocation rights can be reserved by the Settlor or empowered to another e.g. Trustee. Moreover, there can be retention of certain rights by the Settlor
Saunders v Vautier (1841) 4 Beav. 115.
If Beneficiaries absolutely entitled and sui juris they can collectively terminate the trust
|More provisions to curtail Beneficiaries' rights to demand and to terminate the trust|
& Secrecy Created
Fiduciary duty on Trustee
Expressly via an instrument in writing
Statutory protection expressly provided
Expressly via an instrument in writing
Stamping & Filing
Stamping: Nominal(subject to amendments of the Stamp Act, 1949)
Registration: Need not be registered
Stamping: Need not be stamped
To structure onshore or offshore, one would have to study the different provisions of the applicable statutes which are both based on English common law but given that the offshore trust is newer a creature the statutes touch more on current concerns.
A few relevant elements to note are:-
Offshore there is a statutory introduction of yet another player in the common tripartite structure of a trust, comprising a settlor, a trustee and a beneficiary known as a Protector. The Protector provides another layering of protection as the protector oversees the Trustee who/which would oversee the trust itself hence a double layering of fiduciary duty.
Onshore whilst not statutorily provided one can possibly also draft the role of a protector into the trust instrument but often this role is omitted in onshore drafting given the lack of statutory provisions.
(II) Rules against Perpetuity
The Rules against Perpetuity applies to onshore trusts wherein the vesting of properties/assets to beneficiaries cannot occur at too remote a time in the future and the base concern was the tying up of capital or accumulation of income for too long a period to the disbenefit of the beneficiaries wherein the intent of the trust is not served. The usual rule is that the maximum period within which the interest of a beneficiary is required to vest is:
Offshore, the Rule against Perpetuity does not apply. Again, it must be remembered that the offshore world caters if not specifically but largely for continuous succession planning.
Moreover, the quantum of assets in play nowadays are significantly larger; we are no longer looking at limited capital or income meant for the beneficiaries' day-to-day disbursements; we are looking at investable assets and much of the time the beneficiaries are already well provided for sans trust.
The intended beneficiaries are many folds and the intention is to last beyond a generation or two – a strive for a perpetual self-generating structure perpetuating not only monies but the legacy intended.
Whilst it is always possible to draft in an expressed revocation right for the settlor, it is common onshore take that the settlor would have thought long and hard before settling and once settled and completely constituted, the trust in place is not to be revoked.
The offshore statutes expressly provide:
- revocation rights to be reserved by the settlor
- revocation rights to be empowered to another
- (an additional power) the retention of certain rights by the settlor
(IV) Beneficiaries' rights/powers
Onshore there is always a concern that beneficiaries armed with knowledge of their equitable rights and acting in concert can apply to set aside the trust ― Saunders v Vautier  4 Beav 115.
Under the terms of a Labuan trust, it may include pursuant to Section 22(4) of the Labuan Trusts Act 1996 inter alia:
- the exclusion of a beneficiary from a benefit;
- the imposition on a beneficiary of an obligation as a condition for a benefit; or
- the power to declare that any person shall cease to be a beneficiary
all of which are forms of curtailing the beneficiaries' rights/powers.
(V) Confidentiality, disclosure & secrecy
Whilst the call of fiduciary duty and confidentiality bears strong on the trustee and the trust instrument can be safeguarded accordingly, however, should any of the players or the assets be corporate entities then onshore, it is quite easy to ascertain the people behind the same which may lead to ascertaining the existence of the trust itself bringing about the possibility of demands or actions.
Offshore, the confidentiality, disclosure & secrecy provisions, state inter alia that:
- all proceedings relating to a Labuan trust shall be heard in camera and no details of the proceedings shall be published by any person without leave of the court [Section 8A (2) of the Labuan Trusts Act 1996].
- when the Labuan trust is validly created the Court shall not recognise the validity of any claims against the trust property pursuant to the law of another jurisdiction [Section 10 of the Labuan Trusts Act 1996].
- all documents filed with the authority in relation to Labuan trusts shall not be open to the public for inspection [Section 15(3) of the Labuan Trusts Act, 1996].
Lastly, this is a civil law product which offers an alternative solution to the common law trust vehicle.
- has features of both trusts (in that it is intended for beneficiaries) and companies (in that it is its own legal entity) but is neither a trust or a company or some say it is a hybrid or the ever popular word 'fusion'.
- has no separation of legal & beneficial ownership i.e. the Foundation is both the legal & beneficial owner of the Foundation assets and no beneficiary has any equitable interest in the said assets until so given.
- like a company, the Foundation is in its own right a legal entity and can hold and be registered (over the assets) in its own name as well as contract or sue in its own name.
Onshore, we akin Foundations primarily to those of a charitable nature. Offshore, private family foundations have rapidly been coming into popularity as the go-to-vehicle given its basic makeup – the Foundation retains full control of the assets and the Founder can be very much involved in the Foundation on so many levels.
The Labuan Foundations Act which came into force in Year 2010 is 14 years newer than the Labuan Trusts Act of 1996 (although revised to a certain extent in year 2010). So by virtue of being a newer enactment the Foundation is a more sophisticated vehicle for structuring.
- WHY – we would PRESERVE
- WHOM – we can consider TO help us Preserve
- WAYS – we can select to RELINQUISH our responsibilities where we can be assured that a structure exist and can subsist when we are not around or not capable (for whatever reasons) to handle matters
One can fairly surmise that Relinquishing to Preserve rings true and if 'relinquishing' but with a sense of control is what one is looking for then looking offshore is the way to go about it.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.