How the New Trust Law in UAE Will Transform Wealth Management?
The United Arab Emirates (UAE) has recently introduced a new law intending to lend much-needed support to the wealth management industry in the country. According to the Ministry of Finance, the Decree-Law No. (19) of 2020 regarding Trusts is expected to make the financial services sector more competitive and attractive. It will provide companies with new ways to better manage trusts and funds. The Ministry observed that the law “was an important addition to the advanced legislative structure of the UAE.”
The Law also allows the setting up of ‘private trusts.’ These trusts are set up for engaging in different forms of securities trading in financial markets. They are formed to set up pension funds and can also offer guaranteed benefits as retirement funds do to those who make regular contributions to the trust. It is also applicable to charitable trusts.
What does the Trust Law say?
The Decree was issued by President Sheikh Khalifa bin Zayed Al Nahyan and gives capital owners the right to manage their wealth as a Trust. They can select qualified professionals or institutions – known as ‘Trustees’ – to manage the wealth entrusted to such a Trust.
During the media briefing, Younis Haji Al Khoori, Undersecretary of Ministry of Finance, said that “The Ministry of Finance issued the Trust Law to create legal tools that enable companies or people who own various capital and financial rights to hand over this wealth and rights as a financial trust to a Trustee who is entrusted with managing and developing said funds.”
What is the Trust Deed?
To formalize the right to manage funds in a trust, the capital owners and trustees will need to draw up an agreement known as the Trust Deed. It is a document that electronically records the assets forming part of a Trust. These can be financial assets or real assets. After this, the official record of these assets reflects the existence of Trust rights on them.
The Trust Deed is the key to the new Trust Law being applicable on trusts and their managed assets.
Why was the law passed?
Forming a Trust and appointing asset managers for it, along with separating ownership into legal and beneficial, is an accepted practice around the world. However, it is novel for the UAE. Up until now, there were only two areas in the country in which it was applicable – the Dubai International Financial Centre and Abu Dhabi Global Market. With the new Trust Law coming into force, this arrangement will be extended throughout the country, effectively bringing it onshore.
Investment, private, and charitable trusts are already well known to UAE citizens. There was pre-existing demand for such a law because of the appetite for privately held family trusts, real estate investment trusts, and other similar arrangements. Though the aforementioned two financial free zones already had these structures, they did not include the major thrust which resided outside these zones. Because of this, there was a pressing need to give form to these legal structures. The new law will eliminate the problem of free zone trust agreements being unable to enforce rights on onshore assets.
This law follows the introduction of the Federal Decree-Law on Financial Covenants in October 2020. That law aligned the wealth management industry’s regulatory structure with that seen in advanced countries and standard practice. Primarily, it focused on strengthening investor protection norms, thereby bolstering their confidence. The past few months have also seen the country’s leadership make changes to the commercial companies’ law which now lets foreign entities own 100% of a business.
According to Al Khoori, the new law will make the country’s financial legislation and policies more efficient. It will also make the industry more competitive and bring it in line with countries that have already ingrained this practice. Additionally, the law can help preserve capital and encourage entities to invest it within the country itself. It reinforces UAE’s position as a leading financial hub and aims to contribute to the country becoming the best in the world by the UAE Centennial 2071.
In terms of its implementation, Dr. Hussam Al Talhouni, legal advisor at the Office of the Minister of Finance, said that the trust registry for family businesses has already been established and the Ministry is working on the same for private trusts.
Beneficiaries of the Trust Law and Wealth Management
While the new law aims to benefit everyone whether they are natural or legal entities, the Ministry of Finance noted that family-owned companies are particular beneficiaries. This is because the law will allow them to better plan their assets with a long-term view. The integrated system in the law will allow for wealth management by professional and qualified Trustees who have experience with investment risks and are aware of methods to deal with them.
The decree is a huge boost to the wealth management sector simply because it can support private businesses in the form of a Trust and Foundation, both. The law will also encourage contributions to charitable organizations. It brings UAE in line with various countries to manage wealth and plan for fixed assets. It will help in preserving capital within the country rather than have to sell or merge with an outside entity.
This innovation gives UAE investors a novel structure via which they can legally hand over their assets and have qualified professionals manage them. If family-owned businesses need to shift focus to a foreign country, they can ensure a continuity of their existing businesses within the UAE in the hands of a Trustee.
This has deepened the wealth management sector in the Emirates and brought about an elaborate scope of changing the fund management aspect.
Now as a UAE business owner, you can set up Trusts to invest in financial markets for various assets along with creating pension funds for the owners where the investments can be directed towards guaranteed payments to the family members.
Electronic legal documentation is an exercise in succession planning as well to ensure the right and just use of family office assets for the future.
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