Using Foundations for Estate Planning and Modern-Day Wakafs

One of the worries people might have as they accumulate wealth is how to distribute it in the event of their departure from this world and how to ensure such distribution is Syariah-compliant.

It is well-established that one of the common means of wealth distribution in Singapore is to establish a trust. The person creating a trust, the settlor, names a trustee who will hold legal title over the properties in the trust. This allows the named trustee to handle the properties under the aforementioned trust. However, the beneficial interest of the properties will vest in the beneficiaries of the trust. This would mean that though the trustee is able to do as he wishes with the properties, he is accountable to the beneficiaries and must ensure that transactions he enters into with respect to the properties are in the beneficiaries’ interests. This very same method has been used by many big, well-known Muslim families in Singapore.

However, as Singapore follows the common law system, the trusts created under this system have one drawback. According to the common law, when a trust is created, there is a rule against perpetuality. This means that the trust cannot last forever. It must have an end date. Thus, it is common to see trusts that are created to last for 100 years, 9 generations and other such permutations. The problem with such arrangements is that the settlor has no power to decide what happens to his own properties after the end date, or he cannot create an everlasting legacy.

One of the ways around this rule against perpetuality is to create a charitable trust, where the settlor hands over his properties to people whom he names as trustees to manage for the sake of charity. This would mean that beneficial interest vests in the charitable purpose. Under Muslim law, properties under such charitable trusts are known as wakaf properties. In Singapore, by virtue of section 59 of the Administration of Muslim Law Act, such properties are automatically managed by Majlis Ugama Islam Singapura (“MUIS”). Such an arrangement could become tedious if the settlor wishes for part of his properties are to be used by his family and part of it for charity as there will be separate groups of people handling different properties. It might be difficult to come to an agreement as to how the said properties should be handled.

As a solution to this problem, the concept of a Labuan Foundation (“LF”) may be more palatable as such foundations are not affected by the rule against perpetuality. LFs are governed by Labuan International Business and Financial Centre, Malaysia (“Labuan IBFC”). As LFs work like companies and are registered entities, they can hold and manage assets. They can be perpetual in nature or exist for a specified period, depending on the instructions of the founders.

Once the founder sets up a LF and assets are transferred by the founder to his LF, the LF owns these assets and the same cannot be transferred later on unless such powers are reserved by the founder through the LF’s Charter. The Charter would therefore include important information such as the object of the LF, the duration of the lifetime of the LF as well as the rights reserved by the founder for himself or named persons.

The founder of an LF must appoint at least an officer, a secretary and a beneficiary. The officer is responsible for administering the LF in a manner that achieves its objects. The secretary of the LF must be a Labuan trust company, which incorporated under the Malaysian legislation, the Labuan Companies Act 1990 (“the Act”). The beneficiary is a party who may receive distributions from the LF in accordance with what was set out by the founder. A point to note would be that the beneficiary has no equitable or beneficial interest in the properties of the LF.

The founder may also elect to set up a Council and appoint Council Members to represent the LF. The Council is responsible for ensuring that the LF, complies with the Charter as well as the Act. A Supervisory Person may also be appointed in lieu of or in addition to the Council to supervise the LF.

A LF thus allows individuals to leave a perpetual legacy, not only for charitable purposes but also to their families. An LF also provides individuals with the power to decide exactly how they want their legacy to be managed without interference from any other organisation, no matter the nature of the beneficiaries of the LF. It therefore solves the issue of a limited lifespan where trusts are concerned. It also solves the issue of possible conflict in the administration of properties if an individual wishes for some of the beneficiaries of his trust to be charities, and the rest to be family members.