A succession plan is a blueprint that is drafted to facilitate the transfer of wealth or a change in ownership through a set of legally drafted step-by-step instructions. A professionally crafted succession plan is meant to benefit everybody concerned and avoid legal complications in the future.
Every business needs a succession plan for smooth operations and to ensure that clients don’t experience a disruption in service. There are several scenarios in which a business can change ownership. It could even be for an unexpected situation, such as illness, accident, death or the need to sell a business outright.
The GCC including the UAE has a vast amount of family owned assets that will witness an inter-generational transfer of wealth when the current generation is ready to take over the business and be the helm. An emerging trend in the region has seen families and closely held businesses opt for trust structures or the formation of a foundation to ensure a seamless succession plan. However, the option of having a will is available for expats.
Making a Will
Expats can create a will under the law of their home country to govern succession to their assets situated in the UAE. This process involves legalized, notarized and translated copies of the applicable home country laws and the Will itself. It is important to note that a judge must approve the will before its terms can be enforced.
The DIFC Wills and Probate Registry was established as a mechanism for expats to make and register a Will. The DIFC Wills and Probate Rules are based on common-law principles and create legal certainty for the inheritance of assets in the UAE. Currently, these rules only cover assets in Dubai and Ras al Khaimah (RAK).
Forming a Trust
A trust is formed when a person (the settlor) hands over legal custody of their assets to another person or a group of people (the trustee or trustees) in order to ensure it benefits a third party (the beneficiary). When a trust is formed, the assets no longer belong to the settlor as it becomes the responsibility of the trustee/s, who now have the legal rights to these assets on behalf of the beneficiary.
Registering a Foundation
On the other hand, a foundation is an independent legal entity which holds assets separately from the founder’s personal wealth. When a foundation is registered and the assets have passed from the settlor to the foundation, it is the foundation itself that owns and has legal responsibility for those assets. A foundation is governed by its charter and by-laws, which together reflect the desires of the founder.
Although both trusts, foundations are designed to hold an endowment provided by the founder for a specific purpose and for the benefit of beneficiaries, it is important to know the differences and similarities between a trust and a foundation.
- Neither a trust nor a foundation have shares or members
• A trust is a contractual agreement in a trust relationship; trustee legally owns the assets and enters contracts on behalf of the beneficiaries
• While foundations forms a distinct legal entity. A foundation legally owns assets in its own name and can enter into contracts
• It is mandatory for a trust to have beneficiaries while it is optional for foundations
• A trust can be used for commercial purposes while a foundation can only be established for strictly non-commercial purposes
• A Foundation must be registered within a common law jurisdiction and have an unlimited lifespan. While a trust is not registered and can be formed with a time bound purpose.
Listed below are the most common types of small business succession plans if the owner doesn’t necessarily want to keep their business within the family but wants to ensure business continuity.
- Selling the Business to a Co-owner – Many partnership businesses prefer to draft a mutual agreement which, in case of the untimely death or disability of one of the partner’s, allows the remaining owners to purchase their business interests from their next of kin.
- Nominating the Right Heir for the Business – Choosing an heir to be the rightful successor is a popular option for business owners, especially those who run a family business.
- Selling Your Business to a Key Employee – In the scenario that there is no co-owner or family member to entrust the business, a key employee might prove to be the right successor.
- Outright Sale of a Business to a Third Party – Business owners may look to the business community in case there isn’t an obvious successor to take over their business. Perhaps another entrepreneur, or even a competitor, that would purchase your business?
- Sell Your Shares Back to the Company – This is a good option for businesses with multiple owners. An “entity purchase plan” or a “stock redemption plan” is an arrangement where the business purchases life insurance on each of the co-owners. When one of the partners is no more, the business uses the life insurance proceeds to purchase the business interest from the deceased owner’s estate, thus giving each remaining owners a larger share of the business.
Since there are several on-shore and off-shore options available for individuals and businesses, it is advisable to consult and use the expertise of professional corporate service providers when you need to finalize your wealth and succession planning structures. At Sanctuary Corporate Services, our experience and understanding of all the prevailing laws and legal implications assist in deciding the right structure and method to ensure that your assets are fully secure and protected while ensuring a smooth transition of business control.