LABUAN TRUSTS

Labuan Trusts Info Sheet

A. Introduction

 

A trust is a highly effective vehicle for asset preservation, protection and income distribution, making it one of the primary vehicles used to pass wealth from one generation to the next. It provides unparalleled financial control with exceptional fiscal advantages. Assets in a trust are held in the trustee’s name and are dealt in accordance with the trust deed. The trustee has a fiduciary duty to ensure the trust assets are managed in the best interest of the beneficiaries. Wealthy individuals, families as well as corporations and nonprofit organisations will find trusts a versatile solution for their varied objectives. Traditionally used in common law countries, a trust is ideal for individuals who wish to assume control over their assets and businesses while being accorded premium legal protection.

 

 

B. About Trust

 

In common law legal systems, a trust is an arrangement whereby property (including real, tangible and intangible) is managed by one person (or persons, or organizations) for the benefit of another. A trust is created by a Settlor, who entrusts some or all of his or her property to people of his choice (the trustees). The trustees hold legal title to the trust property (or trust corpus), but they are obliged to hold the property for the benefit of one or more individuals or organizations (the beneficiary, a.k.a. cestui que use or cestui que trust), usually specified by the Settlor, who hold equitable title. The trustees owe a fiduciary duty to the beneficiaries, who are the "beneficial" owners of the trust property. The trust is governed by the terms of the trust document, which is usually written and in deed form. It is also governed by local law. The trust law developed in England at the time of the Crusades, during the 12th and 13th centuries. The crusading nobleman trusted one of his friends to manage his estates for the benefit of the crusaders family. Thus the crusader was the first trust settler, his friend was the first trustee and the family were the first beneficiaries. Though it has many variations of form and exists in many jurisdictions, trust law is universally considered to be well-settled stable and predictable. 

 

 

C. Creation of Trust

 

In general forming the trust the main parties involved are:

 

Settlor

 

  • In law a Settlor is a person who settles properties or assets on express trust for the benefit of beneficiaries. The property or assets can be in form of funds, shares, cars, boats, real estate, (movable or immovable property) and even non entities such as patents or rights.

 

Trustee

 

  • Trustee is a legal term that refers to a holder of property on behalf of a beneficiary. In all cases, the trustee may be a person or company, whether or not they are a prospective beneficiary. The trustee must be independent from the Settlor and has all rights and full control over the actual running of the trust. The trustees administer the entire affairs attendant to the trust. This includes investing the assets of the trust, insuring trust property is preserved and productive for the beneficiaries, accounting for and reporting periodically to the beneficiaries concerning all transactions associated with trust property, filing any required tax returns on behalf of the trust, and many other administrative duties. However it is possible to draft a separate agreement between the Settlor and Trustee ensuring the Settlor retains full control and can benefit from the Trust itself.

 

Beneficiary

 

  • The beneficiaries are beneficial (or equitable) owners of the trust property. A beneficiary will normally be a natural person, but it is possible to have a company as the beneficiary of a trust, and this often happens in commercial structures, generally speaking, there are no strictures as to who may be a beneficiary of a trust. 

 

 

D. Practical Uses of Trusts

 

The following are the key practical uses of conventional or Islamic Trusts:

 

  • Wealth Management

  • Estate Planning

  • Assets Protection

  • Succession Planning  

  • Tax planning

  • Avoidance of forced heirship rules

  • Maintenance of corporate control

  • Separation of voting and economic benefits

  • Employee share option schemes

  • Art collections

  • Charitable purposes

  • For employee benefit plans, retirement insurance plans and special financing arrangements

  • As a vehicle for investing in time deposit accounts, stocks, bonds or other securities

  • Vehicle for owning patents and intellectual property and for receiving royalties and other forms of associated income

  • To avoid political or economic instability within the jurisdiction

 

 

Trusts also can be establish for the following charitable purposes;

 

  • The prevention and relief of poverty;

  • The advancement of religion, profession or education;

  • The advancement of health including the prevention and relief of sickness, disease or of human suffering;

  • Social and community advancement including the care, support and protection of the aged, people with a disability, children and young people;

  • The advancement of culture, arts and heritage;

  • The advancement of amateur sports, which promote health by involving physical or mental exertion;

  • The promotion of human rights, conflict resolution and reconciliation;

  • The advancement of environmental protection and improvement;

  • The advancement of animal welfare; or

  • The advancement of facilities for recreation or other leisure-time occupation in the interest of social welfare.

 

 

E. Labuan Trusts

 

The governing law for a Labuan Trusts is the Labuan Trusts Act, 1996. The creation of a Labuan trust is generally for an individual or a settlor to give specific property to a third party to be held for the benefit of others, including charities. The Labuan Trust Act 1996 (LTA) allows the creation of the following types of trust:

 

  • Purpose trusts

  • Charitable trusts

  • Spendthrift or protective trusts

  • Labuan special trusts

  • Discretionary Trust

  • Reserved Power Trust

  • Accumulation and maintenance trust

 

A Labuan Islamic trust can be established under Section 105 of the Labuan Islamic Financial Services and Securities Act 2010 (LIFSSA) and all the provisions of the Labuan Trusts Act 1996 (LTA) shall apply to a Labuan Islamic trust unless specifically provided. The object, purpose and activity of the Labuan Islamic trust must be in compliance with Shariah principles. The creation of a Shariah-compliant trust is to provide an alternative for a settlor to exercise his rights in creating a trust in accordance with Shariah principles. The trustee of a Labuan Islamic trust is required to appoint or consult a Shariah adviser to advise on matters relating to the operations of the Labuan Islamic trust to ensure its compliance with Shariah principles. The vesting of property into a Labuan Islamic trust may be facilitated through hibah or hadiah as guided by the Shariah Resolution of the Shariah Supervisory Council of Labuan FSA on Labuan Islamic Trust issued by Labuan FSA.

 

 

F. Parties To The Labuan Trusts

 

  • Settlor 

     

      The person who establishes the trust and provides trust property into the trust.

 

  • Trustee

 

      The person or entity responsible to hold the title to the property and administer the running of         the trust. A Labuan trust shall have at least one trustee and one of which shall be a Labuan trust       company.

 

  • Beneficiary

 

      The person entitled to benefit under the trust or designated to exercise discretion to distribute         property held in trust. It can include any person or class of people that the settlor chooses.

 

  • Protector

 

      May be appointed to oversee the operation of the trust, as well as removes and appoints the             trustee. Commonly, the settlor appoints the settlor’s attorney or a family member. However, the       settlor or the beneficiary may also be a protector.

 

 

G. Advantages of Labuan Trusts

 

 

1.  ASSET PROTECTION

 

  • From an asset protection standpoint, it is always sound financial planning to separate oneself from ones assets. Trusts have been used for years to protect one's assets from future and potential future claims on ones assets. One common trust structure used for asset protection is the discretionary trust. The creation of a discretionary trust, of which the Settlor may be the protector and a beneficiary of the trust, but not the trustee and not the sole beneficiary. In such an arrangement the Settlor may be in a position to benefit from the trust assets, without owning them, and therefore without them being available to his creditors. Such a trust will usually preserve anonymity with a completely unconnected name (e.g. "Cow Trust"). The above is a considerable simplification of the scope of asset protection. In general practice the documents governing the trust is confidential and not available for public viewing

     

2.  WEALTH PLANNING AND PRESERVATION

 

  • Labuan Trusts can be utilised as an effective vehicle for asset protection and family wealth planning throughout the entire generation. A Labuan Trusts protects the wealth of the family from the possibilities of extravagant generation of the Settlor family who may dissipate the wealth. It also protects the family’s assets from the mismanagement of the Founder himself, for instance, where he is medically incapacitated or has a tendency to succumb from serious disease.

 

3.  ESTATE PLANNING 

 

  • Trusts are frequently used for estate planning and often appear in wills. One particular way that trusts are used for estate planning is in the case of forced heirship, which is when the law of the country dictates who gets what, regardless of the wishes of the deceased. While there are a number of solutions to this problem, one of the most popular, and the one that is the use of a foreign trust structure in jurisdiction to hold the assets indefinitely without ever triggering heirship rules since elements within a trust structure can be created so that they never die.

 

4. PROTECTION FROM CREDITOR AND FRIVOLOUS LAW SUITS

 

  • The Labuan Trusts Act, 1996 provides a robust statutory protection by safeguarding the Labuan Trusts assets from creditors’ claims or frivolous lawsuits. The firewalls provided in Section 11 of the Act makes it difficult for a creditor to assail the Labuan Trusts. The claiming creditor bears the burden of proof to show that the Founder had a principal intent to defraud when he established, registered or disposed the property to the Labuan Trust. 

 

5. SECRECY AND CONFIDENTIALITY  

 

  • Labuan Trusts Act offers great protection of confidentiality. It is a criminal offence with a possible custodial penalty for any wrongful disclosure of information concerning the Trust. Furthermore, Labuan is a ‘white listed’ jurisdiction that endorses the OECD ‘level playing field’ principle to the bilateral exchange of tax information with foreign tax authorities. Notwithstanding this, Labuan has safeguards in place and limitations on the sharing of information which ensures that no ‘fishing expeditions’ will be entertained

 

6. UNENFORCEABILITY OF FOREIGN CLAIMS OR JUDGMENTS

 

  • A judgment or claim against a validly established Labuan Trust cannot be enforced with regard to the personal and proprietary consequences of marriage or succession rights or the claims of creditors in an insolvency. In this way, claims in respect of foreign forced inheritance are also protected.

 

7. TAX AND TAX EXEMPTIONS 

 

  • Labuan Trusts domiciled here enjoy the same generous tax benefits as other Labuan business entities which are taxed under the Labuan Business Activity Tax Act 1990 (“LBATA”) but income derived from the holding of Malaysian property will be subject to the Income Tax Act 1967. The Exchange Control Act 1953 does not apply to Labuan Trusts and there are also no withholding taxes on the income distribution to beneficiaries. The legal basis of the Trusts allows dividend distributions to be guaranteed unconditionally within the scope of Trusts law.

 

 

 

Our dedicated teams are more than happy to assist you in establishing, structuring and planning your Labuan Trusts. Contact us today at info@zrctrust.com for free initial consultation without any obligation.

 

 

Why you should choose ZRC International Trust Inc. ?

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Lazenda Commercial Centre 

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87000 F.T Labuan, Malaysia

 

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FAX : +6087-581020

 

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