Asset Protection, Wealth Management and Estate Planning

A practical comparison of the will, the trust and the foundation: the three main options for protecting wealth and transferring it to the next generation.

Asset protection is a component of financial planning intended to protect one's assets from creditor claims. Individuals and business entities use asset protection techniques to limit creditors' access to certain valuable assets while operating within the bounds of debtor-creditor law. The truly wealthy understand that maintaining their fortune for generations is as important as actually earning it.

Benefits of Succession Planning

  • Distribute assets to heirs efficiently in a way that minimises cost, delay and court proceedings
  • Protect your assets from creditors or other claimants
  • Control how a beneficiary receives assets
  • Passing down of family wealth and values
  • Give to charity
  • Cross-border asset distributions to the beneficiaries
  • Tax planning and mitigation in some jurisdictions

Risks of Lacking Succession Planning

  • High legal costs and prolonged court proceedings
  • Inaccessibility of assets due to legal process
  • Family dispute and breakdown
  • Family business disruption
  • Negative publicity
  • Tax exposure in certain jurisdictions

Comparison of Will, Trust and Foundation

Purpose

  • Will: for estate planning
  • Trust: for asset protection, estate and tax planning
  • Foundation: for asset protection, wealth management and succession planning

Maintenance Cost

  • Will: low set up fee
  • Trust: varies depending on assets value
  • Foundation: relatively low

Registration

  • Will: optional
  • Trust: optional
  • Foundation: registration is required

Legal Structure

  • Will: effective after death. Need to go through probate process.
  • Trust: effective after the Trust instrument is created. Trustee to execute according to the Letter of Wishes.
  • Foundation: effective when the Foundation is registered. The Foundation can be dissolved and distribute its assets to the beneficiaries.

Ownership of Assets

  • Will: legal title remains with the Testator prior to demise
  • Trust: the Trustee holds the legal title on the asset and the beneficiary holds the beneficial ownership
  • Foundation: the Foundation holds legal title on the asset endowed by the Founder

Creditor / Forced Heirship Proof

  • Will: no creditor / forced heirship proof
  • Trust: yes, after 5 years
  • Foundation: yes, after 2 years

Constituent Document

  • Will: Will or any other legal instrument
  • Trust: Trust Deed
  • Foundation: Charter and/or Articles

Duration

  • Will: the latest Will supersedes the earlier Will
  • Trust: fixed duration or perpetuity
  • Foundation: fixed duration or perpetuity

Rights of Beneficiaries

  • Will: upon execution of the probate
  • Trust: upon distribution in accordance with the Trust Deed
  • Foundation: upon distribution in accordance with the Charter and/or Articles

Similarities Between a Labuan Foundation and a Labuan Trust

  • Assets may be transferred or endowed to both structures
  • Revocable
  • Created during the settlor or founder lifetime, or on death
  • Unlimited in duration (perpetuity)
  • Can appoint a Protector or Enforcer
  • Pooled family investment planning
  • No capital requirements
  • Can be established for any lawful purpose

Differences Between a Labuan Foundation and a Labuan Trust

Origin

  • Labuan Trust: common law origins
  • Labuan Foundation: civil law origin

Legal Entity

  • Labuan Trust: not a legal entity with separate legal existence
  • Labuan Foundation: separate legal entity

Assets

  • Labuan Trust: assets, upon being vested in the trust, are legally owned by the trustee
  • Labuan Foundation: assets are legally owned by the foundation (still under the Founder's control)

Relationship

  • Labuan Trust: fiduciary
  • Labuan Foundation: contractual

Registration

  • Labuan Trust: no requirement
  • Labuan Foundation: registration is mandatory

Constituent Documents

  • Labuan Trust: Trust Deed
  • Labuan Foundation: Charter and/or Articles

Key Management

  • Labuan Trust: Trustee
  • Labuan Foundation: Officer and/or Council and/or Supervisory Person

Flexibility to Amend

  • Labuan Trust: not flexible
  • Labuan Foundation: can be done at any time

Maintenance Cost

  • Labuan Trust: 2-3% of the total value of the assets
  • Labuan Foundation: fixed

Labuan Foundation Instead of a Will?

For a Will, an Executor is needed to execute the Will. A Court Order (Probate) is required, thus engaging legal service to obtain the Court Order. The issue is that the money in the bank is frozen and not allowed to be used upon the demise of the person. However, if you use a Labuan Private Foundation, your beneficiary does not need to go through the hassle of going to court. The beneficiary interest is clearly spelt out in the Foundation.

Your assets might not be discovered by your beneficiary and your Will might not be up-to-date or inclusive. However, for a Labuan Private Foundation, whatever assets are endowed into the foundation will be the asset of the foundation, thus will be distributed or managed in accordance with the Charter and/or Article of the foundation.

Your assets distributed through a Will might be subjected to any form of tax applicable in the jurisdiction where the assets are situated. However, if you use a Labuan Private Foundation there is no tax in any form if the assets remain in the foundation.

If you are using a Will, your business affairs will be disrupted pending the execution of your Will, which might take some time. It worsens if your Will is challenged in any courts. However, your business will be well taken care of in accordance with the foundation.

Key takeaway: A Labuan Private Foundation provides faster access for beneficiaries, better asset protection (creditor proof after 2 years), no probate requirement, tax efficiency, and clearer documentation of your intentions compared to a traditional Will.

You can read more in our related whitepaper on Using a Holding Company to Hold Property in Malaysia, and explore our services for Labuan Foundations and family trusts.

The information contained in this document is provided for information purposes only. It does not constitute legal advice and should not be relied upon as such. Readers may need to obtain professional advice on legal or tax issues before relying on it. QX Trust Co. Ltd tries to ensure that the content is accurate, adequate, or complete, but does not represent or warrant, express or implied, its accuracy, correctness, completeness or use of any of the information. QX Trust Co. Ltd expressly disclaims any liability to any person for loss or damage incurred as a result of reliance placed upon the information contained in this document.

For tailored advice on this topic, contact our team.