Malaysia: Building Legacy On A Foundation

Last Updated: 2 October 2017
Article by Millie Chan

PART I

In the estate planning arena, there has been a flurry of activities in various common law jurisdictions in legislating and promoting the concept of private foundation as an alternative to trust. These legislative efforts are reminiscent of the development in which common law trust or trust-like arrangements found their way into some civil law countries.

A key driver of these initiatives to adopt a concept which is indigenous to civil law traditions is likely to be the evolving profile of high-net-worth families. As these families become more international and the size of their wealth grows exponentially, they demand a multitude of legal solutions to accommodate the diversity and complexity of their needs. For jurisdictions who wish to maintain a competitive edge in attracting clients to come onboard, the ability to offer a tool box showcasing a wide range of structures is crucial.

Labuan International Business and Financial Centre, Malaysia (Labuan IBFC) was the first common law jurisdiction in Asia to adopt the civil law concept of private foundation. The Malaysian legislature passed the Labuan Foundations Act, 2010 (LFA 2010), which was a brilliant legislative innovation aimed at providing multiple legal tools for families seeking to structure their estate planning.

The geographical location of Labuan IBFC is also likely to beckon families in Asia who may, for a variety of reasons, such as the situs of their main assets or operating businesses, find situating their estate planning structure outside of Asia not entirely desirable or practical.

While foundations and trusts in the estate planning space are now often mentioned in the same breath as almost serving the same purpose, there are nevertheless fundamental differences which must be born in mind. In addition, for common law practitioners and service providers advising their clients on the use of foundations, it is important to resist the natural tendency of viewing this entity through the "common law" lens.

This article "Building Legacy on a Foundation" is contributed with the hope of promoting a more meaningful interaction with the foundations. It comes in 2 parts:

  • Part I seeks to understand the statutory creature of private foundation by examining its legislative characteristics in general; and
  • Part II adopts a comparative approach to consider how the foundation functions similarly or dissimilarly in comparison with the common law concept of trust. It further ventures to weigh various practical considerations in determining whether foundation is the structure of choice.

This article however does not enter into a polemic as to which structure, foundation or trust, is a better option for estate planning purposes.

Key Features of Private Foundations

The concept of foundation traces its origin to the civil law traditions. The scholarship on foundations points to Germany as the location where the use of foundations for setting aside assets for the benefit of the members of a specified family first started to sprout.

In 1926, the first codification of the concept of family foundation (as opposed to foundation for religious or charitable purposes) took place in the Principality of Liechtenstein.

Liechtenstein's adoption of private purpose foundation was followed by several other civil law countries such as Austria (1993), Panama (1995), and the Netherlands Antilles (1998). Many other civil law countries, however, remain resistant to the concept of private foundations and the use of foundations continues to be confined mainly to charitable, religious, or similar purposes.

Just as the concept of trust has evolved with variations in each country in response to local requirements and demands, one may also observe a similar trend in the development of private foundations in countries offering this vehicle. Nevertheless they do share some fundamental characteristics.

In Part I of this article, the distinct characteristics of private foundations are being discussed against the backdrop of the LFA 2010, and for emphasis, these characteristics may be contrasted with those of other structures, such as corporations and trusts.

(i) Distinct Legal Personality

A foundation, whether established for charitable or private purposes, is recognized as a distinct legal person. It can sue and be sued in its own right, contracts and trades in its own name, is liable for breach of contract etc. In other words, it has the same rights as a natural person to the extent provided or curtailed by the statute of its creation. In that sense, it is similar to a corporation as known in the common law tradition.

(ii) No Shareholders

The ultimate authority of a foundation rests with itself. There are no shareholders who may liquidate the foundation to release the underlying value of its assets. This is where the foundation differs from a corporation.

(iii) Absolute Ownership of Assets

In traditional civil law, the ownership of assets is absolute and indivisible. This is translated to mean that all rights and obligations associated with the assets are vested in one person. The tenet of split ownership as found in trust laws (where the right of management and disposition in property may rest in one person while the right to its enjoyment rests in another) is alien and offensive to the civil law system.

Following from the above premise, the foundation owns its assets absolutely and indivisibly. Hence, when a founder transfers specific assets to a foundation, he no longer has ownership to these assets and they are protected from the founder's creditors. If the foundation has beneficiaries, they similarly do not have any interest in its assets. This is contrary to the concept of trust which imputes a beneficial interest in the trust property to the beneficiaries.

A foundation however has to deal with its assets as determined by its stated purposes. This is unlike a natural person who can deal with assets in whatever manner he/she wishes.

(iv) Limited Liability

A foundation's liability is limited to its assets. No founder, beneficiary, governing body or any subsequent contributor of assets is accountable for the foundation's liability.

(v) Founder's Reservation of Rights and Control

The founder establishes the foundation and can continue to exert great influence over it by reserving a range of powers in the constituent documents and may assign or transfer such rights. Power may be reserved to amend the constituent documents or to give instructions to the governing body. This reservation of powers to a founder is generally allowed pursuant to private foundation legislations and may be achieved without affecting the validity of the foundation.

The founder can be a member of the governing body of the foundation and sets his own policies. He can be the sole beneficiary. The governing statute may place confines on the degree of identification between the foundation and the founder but conceptually there is no difficulty for the founder to structure the foundation as his alter-ego.

The degree of flexibility accorded to a founder must however be considered carefully against the possibility of triggering undesirable tax consequences and estate planning implications. Further, the greater the retention of control in the founder, the less effective the foundation may be as a solution to planning needs that necessitate a break between the founder and his control of assets.

(vi) Management and Control

A foundation is managed by a governing body (the nomenclature of the governing body differs in different jurisdictions) in accordance to the purposes expressed in the constituent documents. The governing body is an agent of the foundation.

A founder may also reserve power to give instructions to the governing body or establish an entity within the foundation to play a supervisory role over the governing body.

(vii) Beneficiary

A beneficiary of a foundation does not have any beneficial interest in the assets of the foundation, even if the beneficiary is always intended by the founder as a recipient. And generally, a beneficiary has no right of action against the foundation itself and consequently no right against its management.

This position is in sharp contrast to the more entrenched status enjoyed by a beneficiary of a trust. It may not be too far-fetched to observe that a foundation beneficiary is of peripheral importance, and that the central players in the foundation landscape are the founder, the foundation itself and its governing body.

(viii) Indefinite duration

As a juridical person, a foundation can have indefinite duration but this can be limited by the constituent documents.

Observation

The foundation has been "nicknamed" the "incorporated trust". Indeed the incorporated status of a foundation facilitates an easier grasp of its functionality than the concept of trust. However by coining the foundation in light of trust may give a false sense that they are similar and, in turn, mask their underlying differences. Often, the suitability of a legal solution becomes most apparent when its distinctive features are differentiated from other options.

Part II of this article Building Legacy on a Foundation will explore the manner in which foundations and trusts function similarly and dissimilarly.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Labuan IBFC Inc
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Labuan IBFC Inc
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions