The Trust Law replaces and repeals the Trust Law of 2005 (DIFC Law No. 11 of 2005), and it is an improvement over the old trust law to conform to worldwide best practices. In the DIFC, the new Trust Law establishes the fundamental legal framework for establishing, administering, and operating trusts. In addition, and particularly, it considers the needs of families when formulating succession plans.
The DIFC Law No. 4 of 2018 (the “Trust Law”) came into effect on March 21, 2018, and aimed at serving:
- Families in their wealth and succession planning; and/or
- Other entities such as family offices, entrepreneurs, and companies with a specific charitable goal.
Both local and international individuals are allowed to create trusts in the Dubai International Financial Centre Free Zone. Dubai trusts must register with the DIFC Authority, and the DIFC Court of Law will resolve any disputes. This article discusses the essential requirements for the creation of Trust in the DIFC free zone.
What is Trust?
A trust is a legal arrangement established by a settlor, in which assets are transferred:
- to a trustee for the benefit of a beneficiary, or,
- For a specific purpose.
The trust will be regulated by a trust document (such as a trust deed), which will set out the trust’s provisions, such as its duration, beneficiaries, and trustees’ authority, among other things. A trust document (such as a trust deed) will regulate the Trust, laying out the conditions of the Trust, such as its duration, beneficiaries, and trustees’ powers, among other things.
Essential Characteristics of DIFC Trust
The fundamental feature of a trust is that it separates legal ownership from beneficial interest:
- The trustee(s) become the legal owner(s) of the trust property in the eyes of third parties; and
- The beneficiaries may expect the trustees to manage the trust property to their advantage.
Parties to Trust under DIFC trust
Parties related to a trust are:
- A beneficiary is someone who is entitled to benefit from a trust;
- A Settlor is someone who establishes a trust and transfers the trust property to the trustee(s) for the benefit of the beneficiaries; and
- A Trustee is the legal owner of the trust property and has the authority to deal with it.
Creation of DIFC trust in Dubai
In Dubai, establishment of Trust can take place in one of two ways:
- The writing of a will or
- Through the drafting of a deed of Trust, commonly known as a codicil.
Article 33 of the DIFC Trust Law states the provisions for the creation of Trust under DIFC. It provides that the Settlor may create a Trust by:
1. Transfer of Property by Trust Deed:
A trust may be created by transferring property to someone as a trustee. Suppose the Settlor transfers property during his or her lifetime by writing a Trust deed, the Trust is referred to as an “inter vivos” or “living” trust. A living trust may be revocable, i.e., it may be amended in whole or in part, or irrevocable. If the Trust is established after the testator’s death, it is referred to as a testamentary trust. To establish a living trust, the trust property has to be effective, with appropriate transfer of the trust property to the trustee.
In the case of State ex rel. Teague vs Home Indemnity Co., 442 S.W.2d 276 (Tenn. 1967), the Court held that a promise or statement of intention in the future to hold or transfer property in Trust does not usually establish a trust.
2. By Drafting a Will (Testamentary Trust)
A trust may be established through a Will or another kind of disposition that takes effect upon the Settlor’s death. If the Trust is established after the testator’s death, it is referred to as a testamentary trust.
3. Transfer of property from one Trust to another
Another way of creating a Trust is to dissolve the former Trust. The simplest method to transfer the assets of an existing Trust to a new one is to dissolve the existing Trust and transfer the assets to the new one. It is also possible by creating a Revocable Trust.
4. Declaration of Trust by the Owner of Property
The Trust can also be created through the declaration made by the owner of the property. In other words, a trust is created when the property owner declares that the property is being held in Trust for another person. It is an act by which the owner of legal title to property or an estate recognizes and announces that he is holding the property or estate in Trust for the benefit of another person or defined purposes.
For example. Mr. A has a big home. Mr. A appoints himself as a trustee of the house on behalf of his Son, John. A trust is established after the declaration. Mr. A has been designated trustee for his Son John.
5. Exercise of Power of Appointment
A power of appointment may be used to establish trust. One person gives power or authority on another via a deed or will to appoint (i.e., choose and nominate) the person who will inherit and enjoy property or income from a fund after the testator’s death. A power of appointment is the authority conferred on another person by one person (the Settlor) to appoint (i.e., choose and nominate) the individuals who would receive and benefit from a fund or Trust after the testator’s death.
For example: A power of appointment is created with a statement, “I entrust A with my property in order for him to have the authority to select the new owner.”
The purpose of this article is to provide an overview of the subject. Someone interested in trust asset management should consult with HHS Lawyers and Legal Consultants about the options available and the potential consequences of executing a trust transfer. We can assist our clients in forming a trust that fulfils their objectives while also adhering to all legal requirements. Please feel free to contact us for further information on how to establish Trust under DIFC. Our legal professionals may also assist individuals who want to create Trust in Dubai.