The importance of legacy planning

When building a new life in a new country, most people understand the importance of strategising their finances and planning for their futures. However, few take the time to consider the importance of legacy planning, and sadly this remains an afterthought or is even ignored completely.

This is a mistake, particularly for expatriates whose assets and liabilities span multiple countries and jurisdictions. Unfortunately, most expats are in the dark when it comes to understanding the implications that UAE inheritance laws have towards their assets, children and businesses and this can make the process of passing on assets more complicated, unpredictable and subject to different laws and regulations.

Well thought out legacy planning ensures that the assets and wealth you’ve spent your whole life building are protected in the event of your death and will be transferred to your loved ones in the most tax-efficient way. This provides peace of mind that your wishes will be carried out and that your loved ones will be spared any undue stress or uncertainty.

What is legacy planning?

Fundamentally, legacy planning is the act of preparing how you will bequeath your property and assets to your loved ones after your death. However, it’s application goes much beyond the simple act of writing a will. To ensure a lasting legacy, there are many options to consider, and all should work together cohesively. When preparing the plan for your estate, you should consider all of the options available to you and have a clear picture of how your wealth will be transferred, avoiding any unforeseen inheritor pitfalls or unnecessary taxes that may arise.

What are the key elements of good legacy planning?

Legacy planning is arguably the most confusing and complex element of sound financial planning. From the complexity of the legal documents required to the challenge of maximising the legacy left to your heirs.

A well thought out legacy plan involves five critical components:

Will

When preparing an estate plan, this is the first document that springs to mind. A will is the document that establishes how your assets will be distributed when you die and who will serve as guardian to your children.

Registration of a will in the UAE is particularly important since in its absence, inheritance matters are dealt with by the UAE Courts as per the prevailing Sharia Law. This can cause significant issues for non-Muslim expats with respect to dependent visas, guardianship of minors and the distribution of your estate.

Trusts

Trusts are legal arrangements which hold assets on behalf of a beneficiary or beneficiaries. Although not commonly used for legacy planning in the UAE, they are a useful tool for tax planning and managing assets held in the UAE and abroad. They allow the trustee to dictate how and when assets are passed on to the beneficiaries. They operate outside of probate which means that they can help save time, costly court fees and potentially estate reducing taxes.

Trusts are particularly beneficial for UAE expats as in jurisdictions such as the Abu Dhabi Global Market (ADGM) and the Dubai International Financial Centre (DIFC), they are governed by common law which provides assurance to expats that their assets will be legally protected and distributed as per their wishes.

Foundations

Foundations share many similarities with trusts. They are both used to manage assets and provide financial support to designated individuals or organisations. However, they differ in a few key areas.

A trust is established by a trustee who holds and manages assets on behalf of one or more beneficiaries, whereas a foundation is similar in nature to a company in that it owns assets in its own name and can enter into contracts.

Both have unique applications with respect to succession planning. A foundation typically allows for more control over assets and where to invest them whereas a trust and is purely used to manage assets on behalf of beneficiaries.

Taxes

Understanding your tax position is critical when creating a solid legacy plan, particularly for business owners and high-net-worth individuals. Without the right business structure to support your succession plan, your company, reputation and wealth could all fall outside of your control.

Creating a solid succession plan that factors in your residence, domicile and any double taxation agreements that the UAE has in place with your home country can help you reduce or eliminate any unnecessary taxation on your business and estate.

Power of Attorney (POA)

Powers of Attorney are another important consideration and an important element of legacy planning. They establish who has the power to make decisions on your behalf in the event that you become incapacitated or lose the capacity to make decisions for yourself.

Powers of Attorney can cover two areas: Your finances and your healthcare. A POA empowers someone of your choosing to look after your finances in case of physical incapacity. Under a POA, you can also allow someone to make decisions on your medical treatment: What treatment you get, where you receive care and even whether or not you receive life-sustaining treatment.

What are the challenges of legacy planning in the UAE?

Legacy planning is an important part of sound financial planning wherever you live but carries with it much more importance for expats in the UAE due to the governing laws of the country. In the event a deceased expat doesn’t have a will in place, succession is determined in accordance with forced heirship rules based on Sharia Law. This can have several negative implications such as frozen bank accounts and assets which could potentially lead to dilution, cancelled dependent visas and issues over the rightful guardianship of minors.

Fortunately, recent amendments to the Personal Status Law and the UAE Civil Code mean that non-Muslim expats can now register a will which avoids these issues and respects the laws and practices of their home country.

Concluding thoughts

In an increasingly globalised world where individuals and families have businesses, properties and other assets spread across multiple countries, legacy planning is more important than ever.

Events such as global pandemics, political instability and international conflict are an unfortunate reality that affect us all. However, sound legacy planning is one important tool that can enable us to guard against the unforeseen and protect those that we love for generations to come.

In the face of this uncertainty, the UAE’s forward-thinking policies and investment friendly policies make it a sound choice for wealth management and legacy planning.

With so many available options for legacy planning in the UAE, it is advisable to seek the help of a qualified professional to advise you on the best course of action and ensure that your estate is managed in the most appropriate and tax efficient way.