Federal Decree Law No. 19 of 2020 Concerning Trusts (the “Trust Law”) was recently promulgated by the UAE government and aims to regulate the establishment, operation and dissolution of onshore trusts in the UAE.
The Trust Law further seeks to define the rights and obligations of the settlor, beneficiary, trust protector and trustee.
A Trust is defined in the Trust Law as a legal vehicle whereby the trust deed, or trust instrument, sets aside specific trust property which is to be administered for the ultimate benefit of the appointed beneficiaries of the trust or for any other purpose. Such as a charitable endeavor or other private pursuits like investments etc.
There are a number of important definitions set out in the Trust Law which help with its interpretation, namely:
- A settlor is the person who establishes the trust and specifies the assets to be held in the trust.
- A trustee is the person appointed to administer or operate the trust for the benefit of the beneficiaries.
- A beneficiary is usually appointed by the settlor and holds an interest in the trust.
- A protector is the person who is appointed to safeguard the rights of the beneficiaries and to ensure that the trust is administered effectively and in accordance with the purpose of its establishment.
One of the most important characteristics of an onshore trust is that it holds separate legal personality therefore, the trust property vests in the trust itself and not in the trustee or beneficiaries.
This is distinctly different to a Common Law Trust, which does not hold any separate legal personality and therefore, all trust property vests in the trustee and not in the trust itself.
Ensuring Business Continuity and the Preservation of Family Assets and Funds
Previously, if the head of a family business passed away, the only manner which was available to ensure business continuity and the preservation and control of family assets and funds was a Limited Liability Company (“LLC”). However, since this was not the ultimate purpose of an LLC, it did not provide effective relief to ensure the continued control over family assets.
This has now been addressed in the Trust Law by the provision of the onshore trust which offers a robust mechanism for preserving and effectively maintaining control over such family assets and funds. This is evidenced by the fact that the Trust Law now provides the settlor with the ability to establish a trust and transfer all family assets into this trust.
The settlor will prepare a trust deed setting out the manner in which the trust is to be governed and will appoint beneficiaries of the trust. The trust deed will be recorded electronically and the beneficiaries will not be permitted to alter the terms of the trust deed or dissolve the trust, unless a court order permits them to do so.
This is more effective than relying on the LLC structure because, as shown above, the beneficiaries of a trust do not generally have any rights in respect of the operation of the trust, whereas the shareholders of a company have certain rights in respect of the day-to-day operations of the company. Furthermore, the beneficiaries of a trust cannot easily have the trustee removed whereas the shareholders may have a say in the removal or replacement of the management of an LLC.
Furthermore, it is important to mention that the creditors of a beneficiary cannot attach that beneficiary’s interest in a trust asset, however, they will be able to attach any proceeds which may flow from such interest. This is naturally different to an LLC situation where the creditors of a shareholder may indeed attach his/her shares in execution of a debt.
In addition to the aforesaid, the Trust Law also now serves to provide additional legal tools to companies and individuals wishing to invest in the UAE. This is evident from the fact that the Trust Law permits the creation of private trusts established for the purposes of trading in securities. Private trusts may also be utilized for the purposes of establishing pension funds, whereby the beneficiaries of such funds are guaranteed the availability of their benefits in return for the payment of regular contributions to the trust.
It is noteworthy to mention that the Financial Free Zones, namely, the Dubai International Financial Centre (“DIFC”) and the Abu Dhabi Global Market (“ADGM”), are excluded from the scope of the Trust Law as these free zones already have their own legislation governing trusts which is common law based.
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