This article examines whether trusts or foundations come out ahead in the Shariah wealth structuring and planning sector in Asia.

There
is an increased awareness of Shariah-compliant estate planning among the
emerging wealth in countries such as Malaysia
and Indonesia,
with large Muslim populations and strong economic growth.

Labuan,
a sunny island, off the north-west coast of Borneo is looking to tap on this
development with the passing of the Labuan Foundations Act in 2010 and is
actively talking up its role as strategic financial centre for high net worth
individuals in Asia.

““We
want to be a part of the wealth management value chain by offering a mid-shore
jurisdiction for setting up a foundation or trust,” said Saiful Bahari Bahrom,
chief executive officer of Labuan International Business and Finance Centre.
LIBFC is the business development arm of Labuan Financial Services Authority.

In
a recent interview with WealthBriefingAsia
at its Kuala Lumpur office, Saiful shared that
there are now 83 foundations set up in Labuan
(as at 31 June 2013) with half of these set up by Malaysians. There is also
interest coming from countries such as US, Canada
and Liechtenstein.

An
area that they are keen to develop is Shariah-compliant foundations. Although
the traditional focus of Shariah wealth management solutions have been on high
net worth individuals from the Middle East,
Saiful sees greater potential closer home. 

“The
wealthy in the Middle East have historically
had European or American private wealth managers,” he said.

“We
are focusing on the growing wealth in ASEAN and the Indian subcontinent. It is
useful for someone with assets across jurisdictions – for example, a showroom
in Shenzen, a factory in Hong Kong and an apartment in London
– to pool their assets into a Labuan
foundation. I believe the timing is good. A lot of the wealth in the region is
first-generation and they are starting to reach their 50s and 60s. At this age they
are thinking about how to keep their wealth and family together,” Saiful said.

Foundations

Shariah-compliant
estate planning is an area that has as many interpretations as there are
practitioners. The prescribed method of estate distribution, ‘faraid’, tends to
favour male heirs and this can a tricky proposition when distributing a large
estate if a family has only daughters. A will is only applicable for up to
one-third of assets and even then wills are only allowed for heirs not covered
under ‘faraid’. So far, wealth managers and estate planning practitioners tend
to set up offshore trust to ensure that the wishes of the Muslim client will be
honoured upon death. 

Saiful
sees a growing interest in Sharia-compliant estate planning. He said: “Islamic
wealth is not state-sanctioned at all. In Islam, material wealth belongs to God
and you are just the trustee. There is thus a lot of interest in planning for
future generations while keeping to Shariah principles.”

Datin
Isharidah Ishak, an estate planning practitioner specializing in international
wealth structuring and partner at First Fiduciary (Labuan)
believes that foundations are better placed than trusts to protect the
interests of client when dealing with Sharia compliance.

“As
the Syariah court does not operate on a system of binding precedent, you
can’t predict what the result will be. Therefore, the Muslim inheritance can be
potentially locked up or frozen due to the inability to agree between family
members,” she said.

“As
a high net worth individual, you want certainty. A foundation gives control as
the governance can be controlled by the high net worth individual. Everything can be spelt out
in constituent documents underlying the foundation,” she continued.  

“In
case of divorce, the courts may also look at trust documents.
This is what the client might want to protect against,” she said.

“Trust
structures are established protect your wealth but the trust, unlike
the foundation, is not a legal entity. It is a relationship, at best. A
number of clients I speak to are not comfortable giving the trustee enormous
power over their assets,” Isharidah said.

Ownership
in a trust structure is split between the trustee and beneficiaries, and this
can lead to conflict among the trustee, beneficiaries and the settlor, or the
one who establishes the trust. A foundation, being a separate legal entity,
does not have such a split in ownership and will own the assets in its own name,
she said.

The Labuan private beneficiary foundation’s charter and
articles dictate how the foundation is run, governance can be by the
council and the founder can be both a council member and beneficiary. 

Track record

Isharidah
said trusts have been a more common vehicle for wealth Muslims because of
familiarity while foundations tend to be assigned for charitable purposes.

“Trusts
have been around a long time as. It’s
a common-law creation. A foundation is a creation of civil
law and is relatively new - the first foundation
was formed established in 1926. While most people are familiar
with charitable foundations, a private family foundation as part of estate
planning is something new so you can say that we are ahead of the curve by
passing the Labuan Foundations Act in 2010,” she said.

Isharidah
recommends a private foundation for clients with minimum investible assets of
$1 million onshore. To ensure Shariah compliance, endowments can be made by “hibah”
and Shariah advisers can be chosen and appointed by the client.

Although
LIBFC has been running workshops and seminars in Malaysia and acround the region,
Isharidah feels that there is still a low level of familiarity among Shariah
scholars and private bankers with different estate planning structures.

“The passing
of the Labuan Foundations Act 2010 for both conventional and
Islamic foundations addresses this issue but there is still an on-going
education process. I may be able to advise on structuring but the service
providers need to understand how it works and its applicability to
the client,” she said.

Saiful
is confident that Labuan will be able to ride on Malaysia’s current success in
pushing Islamic finance to the fore. He said: “While Singapore
and Hong Kong offer talent for conventional private banking, we have the skills
in Malaysia
to compete and create products in Islamic finance. Malaysia has been successful in
creating the sukuk market out of nothing and we are now the world’s
largest sukuk market.”