Asset protection is a component of financial planning intended to protect one's assets from creditor claims. Individuals and business entities use asset protection techniques to limit creditors' access to certain valuable assets while operating within the bounds of debtor-creditor law. The truly wealthy understand that maintaining their fortune for generations is as important as actually earning it.
Benefits of Succession Planning
- Distribute assets to heirs efficiently that minimise cost, delay and court proceedings
- Protect your assets from creditors or other claimants
- Control how a beneficiary receives assets
- Passing down of family wealth and values
- Give to charity
- Cross-border asset distributions to the beneficiaries
- Tax planning and mitigation in some jurisdictions
Risks of Lacking Succession Planning
- High legal costs and prolonged court proceedings
- Inaccessibility of assets due to legal process
- Family dispute and breakdown
- Family business disruption
- Negative publicity
- Tax exposure in certain jurisdictions
Comparison of Will, Trust and Foundation
| Feature | Will | Trust | Foundation |
|---|---|---|---|
| Purpose | For estate planning | For asset protection, estate and tax planning | For asset protection, wealth management and succession planning |
| Maintenance Cost | Low set up fee | Varies depending on assets value | Relatively low |
| Registration | Optional | Optional | Registration is required |
| Legal Structure | Effective after death. Need to go through probate process. | Effective after Trust instrument created. Trustee to execute according to Letter of Wishes. | Effective when the Foundation is registered. Foundation can be dissolved and distribute its assets to the beneficiaries. |
| Ownership of Assets | Legal title remains with the Testator prior to demise | Trustee having the legal title on the asset and the beneficiary having the beneficiary ownership | The Foundation having legal title on the asset that endowed by the Founder |
| Creditor / Forced Heirship Proof | No creditor / forced heirship proof | Yes, after 5 years | Yes, after 2 years |
| Constituent Document | Will or any other legal instrument | Trust Deed | Charter and/or Articles |
| Duration | The latest Will supersedes the earlier Will | Fixed duration or perpetuity | Fixed duration or perpetuity |
| Rights of Beneficiaries | Upon execution of the probate | Upon distribution in accordance with the Trust Deed | Upon distribution in accordance with the Charter and/or Articles |
Similarities Between a Labuan Foundation and a Labuan Trust
- Assets may be transferred / endowed to both structures
- Revocable
- Created during the settlor / founder lifetime or on death
- Unlimited in duration (perpetuity)
- Can appoint Protector or Enforcer
- Pooled family investment planning
- No capital requirements
- Can be established for any lawful purpose
Differences Between a Labuan Foundation and a Labuan Trust
| Feature | Labuan Trust | Labuan Foundation |
|---|---|---|
| Origin | Common law origins | Civil law origin |
| Legal Entity | Not a legal entity with separate legal existence | Separate legal entity |
| Assets | Assets, upon being vested in the trust, are legally owned by the trustee | Assets are legally owned by the foundation (still under the Founder's control) |
| Relationship | Fiduciary | Contractual |
| Registration | No requirement | Registration is mandatory |
| Constituent Documents | Trust Deed | Charter and/or Articles |
| Key Management | Trustee | Officer and/or Council and/or Supervisory Person |
| Flexibility to Amend | Not flexible | Can be done at any time |
| Maintenance Cost | 2-3% of the total value of the assets | Fixed |
Labuan Foundation Instead of a Will?
For a Will, an Executor is needed to execute the Will. A Court Order (Probate) is required, thus engaging legal service to obtain the Court Order. The issue is that the money in the bank is frozen and not allowed to be used upon the demise of the person. However, if you use a Labuan Private Foundation, your beneficiary does not need to go through the hassle of going to court. The beneficiary interest is clearly spelt out in the Foundation.
Your assets might not be discovered by your beneficiary and your Will might not be up-to-date or inclusive. However, for a Labuan Private Foundation, whatever assets that are endowed into the foundation will be the asset of the foundation, thus will be distributed or managed in accordance with the Charter and/or Article of the foundation.
Your assets distributed through a Will might be subjected to any form of tax applicable in the jurisdiction where the assets are situated. However, if you use a Labuan Private Foundation there is no tax in any form if the assets remain in the foundation.
If you are using a Will, your business affairs will be disrupted pending the execution of your Will, which might take some time. It worsens if your Will is challenged in any courts. However, your business will be well taken care of in accordance with the foundation.
Key takeaway: A Labuan Private Foundation provides faster access for beneficiaries, better asset protection (creditor proof after 2 years), no probate requirement, tax efficiency, and clearer documentation of your intentions compared to a traditional Will.
The information contained in this document is provided for information purposes only. It does not constitute legal advice and should not be relied upon as such. Readers may need to obtain professional advice on legal or tax issues before relying on it. Signature Trust Ltd tries to ensure that the content is accurate, adequate, or complete, but does not represent or warrant, express or implied, its accuracy, correctness, completeness or use of any of the information. Signature Trust Ltd expressly disclaims any liability to any person for loss or damage incurred as a result of reliance placed upon the information contained in this document. All rights reserved © 2024 Signature Trust Ltd.