Protecting the Wealth of Young Adults: A Middle- Eastern perspective Outright Distributions

Protecting the Wealth of
Young Adults: A MiddleEastern perspective
Pierre Sigrist
Director, Business Development
Park PlaceTower
Suite 1403
Sheikh Zayed Rd
PO Box 3614
+ 971 4 332 3230
[email protected]
www.rbcwealthmanagement.com
www.rbcwmfiduciarynews.com
Understandably, most parents give serious
consideration to what would happen to
their dependent children should the worst
happen. At the forefront of this consideration
are the issues of custody and guardianship;
in circumstances where dependent children
acquire significant assets through succession,
the role of the guardian is critical. In such a case,
the guardian is responsible for managing these
assets in a child’s best interests, using them to
pay for education, health and living expenses.
In most jurisdictions guardians are subject
to high standards of care in exercising their
powers. However, as we know, there are cases
where the guardian wastes or mismanages the
children’s property, causing financial loss. Estate
planning for young children is therefore a vital
issue involving much more than simply who
gets what; rather it is essential to establish how
and when each of the heirs will receive their
inheritance.
Wealth planning for minors and the rights of
children to succession are widely discussed
themes in many jurisdictions. However, an
issue often overlooked is estate planning
for young adults. This article will therefore
discuss succession planning for young adults,
with particular focus on the Middle Eastern
jurisdictions.
Trust and fiduciary services
Outright Distributions
In the absence of any specific legal
arrangements, the laws of most jurisdictions,
including Islamic ones, provide for the outright
distribution of an inheritance to a child who is
at or beyond the age of majority. Children who
are under the age of majority normally receive
their inheritance only upon reaching that
milestone.
The age of majority is the threshold of
adulthood as recognized in law, when minors
cease to be considered children and assume
control over their actions and decisions,
thereby terminating the legal control and
responsibilities of their parents or guardian.
Most countries in the world set majority at 18.
In Middle Eastern countries, the age of majority
ranges from 18 in Saudi Arabia and Qatar to 21
in the UAE and Egypt.
The age of majority is typically also the age of
full legal capacity, except in cases where the
offspring is legally incapacitated, such as with
mental illness. This is therefore the age at which
children can receive their inheritance. However,
handing over ownership or control of significant
wealth to an individual of such relatively tender
years can certainly be a high-risk manoeuvre.
So, while reaching the official age of majority
may bequeath full legal capacity, it certainly
does not guarantee or represent immediate
transformation into a mature adult.
Protecting the Wealth of Young Adults: A Middle-Eastern Perspective continued
Forced Heirship
In common law jurisdictions where
testamentary freedom normally applies, it is not
unusual for parents of young adults to leave all
or part of their respective estates to each other
in the expectation that the surviving parent will
financially support their children. This is an
option even if it is not always in the best interest
of the children because the surviving spouse
could, for example, dispose of the inherited
assets, re-marry, or face lawsuits or even
bankruptcy.
There is less flexibility in the wealth planning
process in jurisdictions with forced heirship
rules. Forced heirship laws are most prevalent
among Islamic and civil law jurisdictions and
are provisions of the laws that protect certain
categories of heirs so that they cannot be
excluded from inheriting part of a person’s
estate. Under Islamic forced heirship rules, the
closest surviving relatives – be they spouses,
parents or children – will always inherit a
share. In the absence of such close kin, more
distant relatives such as grandparents and
grandchildren will inherit fixed shares.
Forced heirship provisions restrict the ability
of the testator to freely decide how their assets
should be posthumously distributed, despite
the testamentary freedom under Islamic law
that allows for the distribution of up to one third
of the estate to appointed beneficiaries. Shari’a
compliant trusts provide a typical example of
this, with up to one third of the net trust fund
allocated to non-relatives and the balance
to the so-called Faraid – or family – heirs, in
compliance with Shari’a law.
Offshore Trusts and Staggered
Distributions
As an alternative to the outright distribution,
there is the staggered distribution method
which allows spreading inheritance
distributions over time. For instance, assets may
be held in trust with staggered distributions
based on a reasonable estimate of when
the children will be mature enough to make
good financial decisions. This method gives
the children a certain percentage of their
inheritance at certain ages or at other specific
milestones in life. For example, it could be set
up so that the adult children receive a quarter
of the assets at 25, half at 30 and the balance at
40. A staggered distribution trust is also a useful
tool to provide financial security and stability
for a disabled or vulnerable person throughout
their lifetime. It achieves this by applying a
similar principle, ensuring regular distributions
throughout the lifespan of the trust, thereby
negating the risk of inappropriate decisionmaking by the beneficiary.
Distributions to beneficiaries under such a
structure may be linked to conditions and be
subject to the child reaching certain goals such
as a completing a school or college examination
or a graduate degree. A trust with incentive
provisions is a planning tool designed to
influence certain behaviours and to help foster
a productive lifestyle for the beneficiaries.
Without being overly restrictive, the trust can
be drafted in such a way as to cover the cost of
living and include emergency clauses for certain
situations. Setting up conditions within a trust
arrangement for the protection of the wealth
and ensuring assets are distributed gradually
is a way of protecting the young heirs and of
giving the children time to learn from their
mistakes and to garner more experience in
managing their assets.
The staggered distribution method is widely
used where inheritance assets are particularly
substantial, in order to avoid young adults
getting “too much too young”. It works
especially well with offshore assets which
would typically be held in an offshore trust
until such time as distributions are triggered
by the terms of the trust instrument. Such
an arrangement with staggered distribution
provisions provides increased protection from
the common threats already described. Assets
remaining in trust are afforded appropriate
protection but individual distributions are
unprotected. A pure discretionary trust
providing the trustees with complete control of
the distributions to the beneficiaries provides
a greater level of protection for the young
adults, with assets held in the trust more likely
to remain protected. A discretionary trust may
also provide added flexibility to own assets for
the use and enjoyment of the children and even
grandchildren, also reducing the risk of loss due
to divorces, lawsuits and bankruptcies.
Structuring Options
A staggered distribution of inheritance could
be in contradiction of local Islamic inheritance
laws requiring outright distributions in many
jurisdictions. Staggered distributions could also
be in breach of forced heirship laws prevalent in
Islamic and civil law jurisdictions. It is therefore
important to structure the trust properly and
to seek independent legal and tax advice in the
relevant jurisdictions to make sure the proposed
estate planning arrangement is in keeping with
applicable laws. Holding the assets offshore and
using a deed of gift when the trust is established
should ensure that the structure could not
later be challenged by a beneficiary. Given the
flexibility and relatively liberal system regarding
lifetime gifts in Islamic jurisdictions, it may be
appropriate for the settlor to proceed by way of
gift, the settlor acting as “donor” in favour of the
trustee acting as “donee”.
Under Islamic inheritance laws, a donor who
is not insolvent can make a gift. Additionally,
this donor must be major, able to understand
the nature of the act, be subject to no undue
influence, coercion or duress and must be
the owner of the property to be gifted. For
the gift to be valid, there must be an offer, an
acceptance and transfer of ownership, and
therefore for reasons of proof it is preferable to
have evidence of this in writing. A deed of gift
would mention that the donor confirms that
he has transferred the assets by way of gift to
the donee, with the intent that the donee will
hold such rights in the property upon trust and
subject to the powers and provisions contained
in the trust instrument. Local legal advice is of
course necessary for this instrument of gift in
the jurisdiction of the settlor, as well as in all
the other relevant jurisdictions, such as that
or those of the offshore trustees. A revocable
offshore trust is unlikely to avoid forced heirship
requirements and there may be a risk that
local courts may scrutinize the arrangement
and conclude that the assets are still owned
by the settlor. Using an irrevocable offshore
trust instrument should ensure that the gift is
effective and the transfer of assets recognized.
Protecting the Wealth of Young Adults: A Middle-Eastern Perspective continued
Conclusion
Due to the substantial accumulation of wealth
for many Middle Eastern families, it is essential
for them to deal with the protection and smooth
transfer of their assets to the next generation.
One of the biggest estate planning concerns
for parents is protecting their children. Parents
working out an estate plan must be especially
careful when planning for the future of their
children. Planning for children after they reach
the age of majority is equally important and
parents may wish to delay inheritance until the
children are a little older and displaying suitable
levels of maturity.
When the inheritance is sizeable, a welldesigned trust plan with staggered distributions
and incentive provisions might be considered
a good way for the children to gain experience
in handling money over an extended period of
time. Discretionary trusts can ensure long term
financial provision for children, asset protection
and the necessary flexibility to adjust to life’s
ever-changing circumstances.
Protecting the interest and wealth of young
adults is just one of the many important issues
to consider in the complex field of international
and cross border planning. Attention needs to
be paid not only to wealth succession issues,
but also to potential conflict of laws issues and
to the different rules that may apply to different
assets in different jurisdictions.
Selecting the right trustee can give you peace
of mind that your estate planning objectives
will be realized and the interests of your
heirs protected. For long-term and complex
planning, institutional trustees with extensive
experience in trust administration and
investment management may turn out to be the
wisest choice.
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