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. This publication has been issued by Royal Bank of Canada on behalf of certain RBC® companies that form part of the international network of RBC Wealth Management. RBC Wealth Management offers trust and fiduciary services via the principal operating companies detailed below. Services outlined may be provided by a variety of Royal Bank of Canada subsidiaries and offices, either independently or acting together, operating in a number of different jurisdictions. You should note that the applicable regulatory regime, including any investor protection or depositor compensation arrangements, may well be different from that of your home jurisdiction. 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