Wealth preservation and succession planning: Why use Labuan private foundation?

APRIL 26 — Succession planning and wealth preservation can be a thorny issue. One may want to achieve a delicate balance between fair distribution of wealth and maintaining harmony among family members, whilst exerting control over how the assets are managed. To achieve these objectives, why not consider using a Labuan Private Foundation? What are the key differences between a Labuan foundation and a trust arrangement?

A Labuan foundation is the only private foundation vehicle available in Asia for purposes of succession planning and is accorded protection under the Labuan Foundations Act 2010. A Labuan foundation is a separate legal entity from its founder. Unlike a trust, a Labuan foundation may exist in perpetuity or it can be set up for a defined period of time. There is also an option to incorporate a Labuan Islamic foundation to be operated in accordance with Shariah principles. A Labuan foundation can function as an investment holding entity for assets (situated in and outside Malaysia) endowed in the foundation by the founder.

Whilst trust assets are held in trust by the trustee, a Labuan foundation is usually managed by a council, whose members are appointed by the founder. The founder can also be a council member, whilst the majority of the council members shall be independent of the founder. The council is required to ensure that the endowed assets are used in accordance with the purpose and object of the foundation.

For wealth preservation and succession, a Labuan foundation can be designed to fulfil the personal wishes of the founder. Each Labuan foundation has its own charter which specifies the purpose of the foundation and identifies the beneficiaries of the foundation. Assets endowed in a foundation can be passed on to the next generation without the need for a probate which may be time consuming and subject to legal tussles. Being a separate legal entity, the endowed assets are legally owned by the foundation, and is protected from any lawsuits against the founder or family disputes. The use of a Labuan foundation can mitigate possible conflicts among family members and ensure continuity of the family business and legacy. A Labuan foundation which has an indefinite lifespan is a useful vehicle to hold assets in perpetuity to provide annual distributions to the beneficiaries.

For individuals with philanthropic intentions, a Labuan foundation can also be used as a vehicle to further charitable causes such as for the advancement of religion, culture, arts, heritage education, etc. within or outside Malaysia. The founder can delegate the power to administer the foundation to the appointed council and a management team so that the charitable activities can be managed by appointed professionals. It is also a great opportunity to allow participation of other family members in the philanthropic vision of the founder. Once the foundation’s objectives are met, the foundation can be dissolved and any remaining assets can thereafter be distributed to the beneficiaries.

From a tax perspective, income received by a Labuan foundation from investment holding activities (with the exception of income derived from Malaysian real estate situated outside of Labuan) is exempt from tax, provided that substantive requirements in Labuan are met. If the Labuan foundation is carrying on Labuan trading activities (i.e. activities other than investment holding), the Labuan foundation is taxed at a preferential rate of 3 per cent, subject to meeting the substantive requirements. In addition, stamp duty exemption is accorded to instruments executed in connection with a Labuan business activity. It is advisable to seek advice from tax professionals before embarking on any Labuan structure or transaction to mitigate any unforeseen tax risks.

Inheritance planning may be a sensitive or awkward conversation to have with our loved ones, but is necessary to ensure that they are supportive of our wishes posthumous. Proper inheritance planning can give us peaceful rest (pun intended) knowing that we leave behind a lasting legacy for generations to come.



Source: Malay Mail

For more information, please contact:

Celine See
Tricor Services (Malaysia) Sdn Bhd
Director, Business Development

Tel: +6 03 2783 9191
Email: [email protected]

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