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.”