According to the Bank Julius Baer, Switzerland, Asia Wealth Report 2011, it was estimated that in 2010 there were 32,000 high net worth (HNW) individuals and this figure shall double by 2015 with assets totalling from USD130 billion to 330 billion. This exponential increase will flood the financial services sector with wealth management demands. With the help of the Labuan Interna- tional Business and Financial Centre (IBFC) to spearhead the marketing and development of wealth manage- ment in the offshore sector, many more HNW families shall have better avenues to place their wealth in Labuan.
As an offshore financial centre, there are many services of the Labuan IBFC such as acting as the Labuan companies registration, banks, insurance, fund management, wealth management, protected cell compa- nies, leasing, shipping, partnership, money broking and corporate service providers. The services provided are wide and comprehensive. Under wealth management, offshore trusts and foundations are the provisions in Labuan.
The fundamental objectives of a trust are wealth preservation and protection. As HNWs wealth increases, the appetite for “assets consumption” increases too. Without a proper structure to hold these assets, most of the time ownership to these investments are placed under company structures and nominees which makes it venerable to high taxes, creditors and even family feuds. In order to preserve and protect the family wealth from deteriorating, it is very crucial HWNs set up a financial structure that can hold their wealth and is successful in transferring to the next generation.
A simple illustration of this would be having a gated security system in homes where there will be a central guard that monitors the ins and outs of investments (settlor), CCTV to record events (trustee), parameter fencing to keep outsiders out and having home owners who are the actual beneficiaries of the system set up. In between, there will also be guards patrolling (Enforcer, professional advisors) to safe guard the area. Some of the homes (assets) may also have additional security features such as alarms, motion detectors etc.
As you can imagine by now, by comparing a security gated system to a trust, the main similarity is layering. The more advanced layering a trust has the better it is in terms of protection. In offshore trusts, ring fencing the assets is the key success to preservation.
LABUAN SPECIAL TRUST
Unlike traditional trust structures, an offshore trust allows the settlor (owner) to have certain management controls over assets under the Labuan Trust Law 1996, under the section Powers of Retention by Settlor. This feature in the trust makes the set up very attractive and workable since most HNWs in Asia are still very young and would still like to be in control of the invest- ments. The trustee in most offshore trusts only perform their duties as an administrator unlike the full duties of trustees that have fiduciary care on assets under its account. Here the trustee is not responsible to the daily management of the assets. In the Labuan Special Trust for example, trustees are the appointed body that hold the shares of the holding company but do not get involved in the daily running of the business. The board members which consist of the founder, 2nd generation and 3rd generation family members are the ones who call the shots when it comes to business or investment decisions.
So how will the trust be governed? Upon setting up of the trust, the settlor will include an Officer Director Rules or ODR very similar to the company Memorandum of Articles to specify the operating procedures of the family business. Items such as dividend policies, appointment of directors, voting rights, termination clauses etc. are defined in the ODR. Apart from this, a trust deed is also drawn to establish the roles and responsibilities of the trustee.
The will also be the appointment of an Enforcer, an individual or party that looks after the interests of both parties (the settlor and beneficiaries), by using the ODR as a guide to enforce certain rules even when the owner is no longer around. The owner can also state his/her inten- tions by having a letter of wishes for the next generation to follow. The settlor can also involve the next generation on the day to day decisions business matters by appointing key families members in the committee board. By having such avenue to mentor next generation into the business, it would be a gradual transistion for owners to second generation without having to part the wealth to next generation. By this it will help to preserved and protect the family wealth.
PRIVATE TRUST COMPANY, PTC
Under this trust structure, the settlor can set up a private trust with the trustees acting as an agent rather than a trustee. All related businesses or investment decisions are vested on the Board of Directors which shall consist of the owner, family members and professional advisors/managers. The Agent must ensure the Labuan private trust company restricts its business to providing trust company activities only to members that fulfil the connected party rule set under the Labuan Financial Services and Securities Act 2010 (LFSSA) Section 74(2)(a). With this set up, business owners have full control of the business/investment and yet total preservation including protection from creditors. The cost of the PTC trustee fees compared to an external trustee are much lower and charges are based on total asset values. The trustees have limited roles and are not responsible if the assets go bad in the dealings because of their limited roles. With this set up, clients are able to have multiple structures of trust that hold the business, investments and also charities.
A Foundation is a corporate body with a separate legal entity, which is governed by the Labuan Foundation Act 2010. The main purpose of the foundation is for owners (founders) to establish a structure for private family wealth management and charitable functions. The founders have total control of the assets and the businesses while the trustees function under secretarial roles. It has good asset protection against creditors with only a 2 year window for revoking the foundation upon establishment. The foundation is governed by Council Members which consist of the founder, family members with voting rights and the Officer. Charters and Articles are incorporated into the foundation as a guide to Council Members in determining the boundaries for the foundation to exist. Another feature of the Foundation is it can exist perpetually, which makes the idea of family dynasty appropriate.
The uniqueness in having a founda- tion is having a Family Office to attend to the needs of family mem- bers or beneficiaries. The Family Office will consist of a team of dedicated professional officers that are experts in their own fields such as accountants, lawyers, financial
planners, administrator etc. They play supporting roles in helping the founder and members of council to function more effectively and professionally. In a bigger and more complicated family structure, there may be multiple family offices to serve the larger extended families. Any form of assets can be placed under a foundation however for Malaysia real properties to be registered under the foundation, prior approval from the Labuan Financial Services are required.
In conclusion, HNWs must have a platform to place their wealth, as they grow the wealth it becomes important for HWN not to place them under their own personal assets but ring-fence it with an offshore trust. Labuan trusts and foundations allow them the flexibility of control while having the needs of preservation against taxation, confidentially and family feuds. Protection against creditors, international law suits and divorce give offshore trusts more reasons to be used. There are a lot more benefits not mentioned in this article about offshore trust, so do consult a licenced financial planner for more information. Best of planning!