• The interpretation and application of inheritance laws in the UAE can cause much uncertainty for expatriates, particularly with respect to which law takes precedence and the correct entity to use for different circumstances.
• Wills and foundations are two common structures that share certain elements but also key differences in their use and application.
• A will is a legal declaration of a person’s wishes regarding the distribution of his/her property or estate after death. It is facilitated by a lawyer or other professional and may include assets, movable funds and property located in and outside the country.
• In contrast, a foundation is an independent legal entity that allows wealthy families and HNWIs to segregate their personal and commercial wealth. It is a long-term holding structure used for asset structuring, succession and estate planning and philanthropic purposes.
• Its assets belong to the foundation in its own name, and it’s managed by council members and may be guided by the wishes of its founder and governed by its charter and by-laws.
• It is similar in structure to a corporation in the respect that it has its own legal identity. However, unlike a corporation, a foundation is considered an ‘orphan’ structure since it does not issue any shares. This enables the foundation to own and hold assets in its own name or on behalf of the beneficiaries which adds a layer of separation between the founder, the assets and their estate.
What similarities and differences do wills and foundations have?
• Both foundations and wills retain key characteristics that are important to consider before choosing the right one for your wealth.
Structure• A will can be created for both Muslim and non-Muslim individuals and is enforced after death. A UAE Will only covers 1/3 of a testator’s assets if they are Muslim and 100% if they are non-Muslim. A DIFC Will is for non-Muslim expatriates and covers all worldwide assets. A UAE Will follows the UAE Personal Status law, while a DIFC Will follows DIFC Common Law but can never contravene Personal Status Law.
• A foundation can be structured for both Muslim and non-Muslim individuals, it allows the inclusion of all kinds of UAE and worldwide assets and is enforceable once the assets are moved to the foundation. Foundations follow DIFC and ADGM Common Laws.
Setup Requirements• The setup requirements of a will are fewer in scope compared to a foundation. A will usually involves drafting a document that outlines how you want your assets to be distributed upon death. You will be required to have an executor of the will and a guardian, both of whom need to be over 21 years of age. Finally, you will need to register your DIFC Will at the DIFC Wills Service Registry or your Notarial Will in the Dubai Courts.
• To create a foundation in the UAE, you will need to register and incorporate the foundation according to Foundations Law. The foundation will need to have a drafted charter that outlines the founders, objectives, investments, timeframe, and bylaws. Unlike a will, a foundation requires individuals to be named to key roles, such as a governing council member, a registered agent, or a guardian.
• In the UAE, there are currently three jurisdictions that have foundations regimes. These are The Dubai international Financial Centre (DIFC), The Abu Dhabi Global Market (ADGM) and The Ras Al Khaimah International Corporate Centre (RAKICC). Each of these are very similar in structure but are governed individually by each respective centre’s laws and regulations.
Practical Applications• A will is the best option if you are looking for a straightforward and cost-effective solution to passing your assets down after death. It provides full protection of all family members and allows for the guardianship of minors (something which cannot be stipulated under a foundation).
• Many HNWIs and wealthy families are now moving towards setting up a foundation because of the added legal protection, expanded privacy features, and reduced taxation. A foundation also allows for better continuity since even upon the founder’s death, there is no probate requirement, and the assets will not be frozen until probate order is granted.
• Moreover, there is no dilution risk as your assets remain consolidated under the foundation. Foundations also retain a 0% personal income tax rate and give you access to different ‘Double Taxation’ treaties. Additionally, a foundation structure leads to the ability to transfer assets into the foundation name, including real estate and other investments.
Pros and Cons• Both wills and foundations have pros and cons that may make one more appealing than the other. Firstly, wills don’t have any asset protection from third parties. This means that your assets could go to probate court after you pass if there are any outside claims for your property. On the contrary, foundations do protect your assets from third-party claims, eliminating the risk of going to probate court. However foundations do not provide guardianship provisions as they are better at catering for commercial wealth as opposed to personal.
• One of the major disadvantages of a foundation is the ongoing maintenance costs required. Wills generally have a one-time setup fee, making it a cost-effective solution in the short term.
• The trend that we are seeing is that more and more expats are registering DIFC Wills and establishing DIFC Foundations too. This offers a double layer of protection.
Soma Gardi is the founding partner of SG Legal Consultants FZC. Please contact
soma@sglegalconsultants.com for any further information.
