Selecting the appropriate legal structure is essential when it comes to estate planning and wealth protection. DIFC Foundations and DIFC Trusts are two notable vehicles for high-net-worth individuals and families working in or from the United Arab Emirates, especially in the Dubai International Financial Centre (DIFC).
Selecting the best structure for your financial plan requires an understanding of its differences. Here’s a guide on DIFC foundation vs trust in Dubai, UAE, and which one is more suited for you –
Understanding DIFC Foundations
An organization created in accordance with the DIFC Foundations Law is known as a DIFC Foundation. Like a company, it has its own legal identity and is run by a founder, a council (which functions similarly to a board of directors), and occasionally a guardian. A charter and bylaws that specify the foundation’s goals, governing principles, and distribution procedures establish it.
Because DIFC Foundations are so adaptable, their founders can customize their goals to include corporate structure support, philanthropic facilitation, inheritance, or family wealth management. They are able to engage into contracts, own property, and file lawsuits under their own names.
In order to preserve control in line with their vision, the founder retains authority over the foundation, including the ability to change or revoke important governance documents. Compared to a trust, a foundation is considered more flexible, where you can tailor services according to your needs.
Understanding DIFC Trusts
In contrast, a DIFC Trust is a partnership created under the DIFC Trust Law in which a settlor gives assets to a trustee to manage for the benefit of designated beneficiaries rather than a distinct legal organization. The assets are legally owned by the trustee, but in order to benefit beneficiaries, the trustee must act in accordance with the terms specified in the trust deed.
Trusts, which usually concentrate on managing and allocating assets in accordance with the settlor’s intentions, provide strong asset protection and estate planning advantages. The settlor frequently has no further involvement after transferring assets, while the trustee, who has fiduciary duties to the beneficiaries, retains much of the control.
Key Differences Between DIFC Foundations And Trusts
Here are some key differences between a DIFC foundation vs trust. It’s important to understand them to make the right choice for a structure and jurisdiction for better compliance.
Structure and Personality of the Law:
- Like firms but without shareholders, DIFC Foundations are perpetually existing, independent legal entities. They possess assets in their name, have the ability to sue or be sued, and have their own legal standing.
- Legal arrangements having no independent legal identity are known as DIFC Trusts. Under a fiduciary framework, the trustee holds assets on behalf of beneficiaries.
Control & Governance:
- A council chosen in accordance with the charter and by-laws oversees the management of foundations. By taking on governance responsibilities or retaining specific amendment powers, founders can maintain a great deal of control and influence.
- Only the terms of the trust deed and the trustee’s fiduciary obligations regulate trusts. The transfer of assets usually results in the settlor giving up control.
Goal and Adaptability:
- Foundations have more general uses, such as corporate holding structures, family wealth management, and charitable activities. They can help with long-term, intricate plans.
- Trusts, which frequently have a more beneficiary-centric architecture, are primarily concerned with asset protection, estate planning, and allocating wealth to beneficiaries.
Requirements for Regulation and Reporting:
- The DIFC Registrar of Companies requires registration from DIFC Foundations. They adhere to the same yearly filing and reporting requirements as corporations, which promotes formal governance and transparency.
- Trusts protect beneficiary confidentiality by being private agreements with little public disclosure.
Tax-Related Considerations:
- The favorable tax environment in the United Arab Emirates generally benefits both structures. Family foundations may be eligible for tax transparency and exemptions under recent modifications, such as Ministerial Decision No. 261 of 2024, especially when it comes to investment and asset management functions. This helps in securing your assets, offering flexibility.
- Due to the UAE’s restricted income tax regime on trusts and linked companies, trusts enjoy tax neutrality.
Confidentiality and Openness:
- While the name and purpose of the foundation are publicly registered, information about the beneficiaries and assets is kept private. Therefore, you have the benefit of the beneficiaries being extremely confidential.
- Trusts are extremely private and confidential agreements that are not disclosed to the public registry.
Factors To Consider When Choosing Between Foundations and Trusts
Now that you have understood the key differences between trusts and foundations, you must think of a few factors to choose the right structure. Think about your objectives when choosing between DIFC trusts and foundations:
- A DIFC Foundation might be your first choice if you’re looking for a formal legal entity. The foundation’s purpose is to provide a legal framework with an endless lifespan and the power to influence governance through council participation or modifications. It is appropriate for owners who wish to uphold organized control over family wealth planning, participate in philanthropy, gain exemption from corporate tax, or protect family legacies.
- A trust is a separate legal entity that provides a clear-cut, adaptable, and transparent alternative for estate planning and asset protection without the formalities needed for foundations. Trusts may provide greater privacy, ease of use, and direct beneficiary-focused management if these are your top priorities.
- Because foundations are recognized as legal entities, they are more frequently accepted by international families with civil law backgrounds who are not familiar with trusts.
- Recent legislative improvements help DIFC foundations, where tax efficiency in family office arrangements or investment structures is crucial.
Nonetheless, these are a few factors to consider when you are deciding between trusts and foundations in DIFC.
Which One Is Right For You?
In the UAE, DIFC Foundations and Trusts are both effective instruments for succession planning and wealth protection.
High-net-worth individuals and families can choose the best DIFC foundation vs trust for their wealth management plans and legacy objectives by being aware of the basic distinctions between them in terms of legal personality, governance, control, and purpose.
The best structuring in line with tax, family, and personal goals can be ensured by speaking with legal and financial consultants knowledgeable about DIFC and ADGM law.
Need Help With DIFC Foundation or Trust Setup?
If yes, let an expert business consultant help you in your journey. Xpert Advisory can be your partner in setting up a seamless foundation or trust, depending on your needs and situation. Contact us for a quick consultation and let us guide you through the features and pros of each so you can choose the best setup to manage your wealth. Call us today!
FAQs
Is It Possible For A DIFC Foundation To Do Commercial Business?
The main purposes of DIFC Foundations are asset holding, philanthropy, and family wealth management; they are not allowed to engage in commercial profit-generating activities.
Can a DIFC Trust Be Later Changed To A Foundation?
Since each structure is created under different laws and needs its own formation procedure, there is no straightforward legal way to turn a trust into a foundation.
For What Duration Is A DIFC Foundation Or Trust Permitted To Exist?
While trusts typically survive for the time period indicated in the trust deed or under relevant law, which is sometimes restricted to a set number of years or until certain conditions are met, DIFC Foundations enjoy everlasting existence unless dissolved.
