INTRODUCTION

Trusts are legal arrangements that allow a person (the “settlor”) to transfer property to another person (the “trustee”) for the benefit of a third person (the “beneficiary”) or for a specific purpose. Trusts are flexible and useful tools for estate planning, asset protection, and charitable purposes. However, until recently, the legal framework for trusts in the United Arab Emirates (“UAE”) was relatively underdeveloped and unclear.

This changed with the issuance of Federal Decree No. 31 of 2023 (“New Law“), which repealed the previous Federal Decree No. 19 of 2020 (“Old Law“) and introduced substantial changes and reforms in the realm of trust law. The New Law provides a comprehensive and modern regulation of trusts, covering various aspects such as the creation, management, and termination of trusts, the rights and obligations of the parties involved, and the competent authority and court for overseeing and resolving trust-related matters.

In this article, we will delve into the key features and innovations of the New Law, providing insights into the implications of these amendments within the trusts landscape in the UAE.

LEGAL FRAMEWORK AND SCOPE

The New Law applies as law to any trust established in accordance with its terms, except for the application to trusts within financial free zones that have their own legislation regulating and enforcing the trusts established within them. The New Law is structured into 11 chapters and 55 articles, covering a comprehensive range of aspects related to trusts.

LEGAL PERSONALITY OF TRUSTS

A pivotal change introduced by the New Law is the recognition of trusts as legal entities from their registration date. This endows trusts with financial and administrative independence, as well as the capacity for litigation. Importantly, it distinguishes trust property as separate from the personal assets of the settlor, trustee, and beneficiary, safeguarding it in cases of death or bankruptcy.

CREATION AND REGISTRATION OF TRUSTS

The process of establishing a trust necessitates a written trust instrument, which must be approved and registered by the relevant authority in each emirate, following the procedure established by the Cabinet based on the Minister of Finance’s proposal.

The instrument should detail essential information such as the settlor’s intent, the beneficiary, trust property, its duration, and the appointed trustee. The purpose of the trust must be clearly defined, lawful, and attainable. The settlor may also transfer additional funds to the trust and retain certain powers related to the trust, such as terminating or revoking the trust, amending the trust instrument or the trust purpose, adding or excluding a beneficiary, appointing or dismissing a trustee or a trust protector, or issuing instructions to the trustee regarding the management of the trust property, provided that the trust instrument expressly allows it.

The settlor may also withdraw from the trust in whole or in part, or amend the trust instrument, if the trust instrument stipulates that this is permissible, and provided that the right of the settlor to withdrawal or amendment does not affect any legitimate act carried out by the trustee relating to the trust before he receives the notification to amend the trust instrument or withdraw from the trust.

TRUST FUND REQUIREMENTS

The ownership of trust funds is transferred to the trust when it comes under the responsibility of the trust. The funds transferred to the trust must meet the following conditions:

1. The funds must be owned by the settlor of the trust, who has the right to dispose of them personally or through a legal representative, in accordance with the provisions of the New Law and any other legislation applicable in the UAE.
2. The funds to be transferred to the trust must be disposable and free from any fixed rights of third parties. In the event that the funds are associated with a fixed right of a third party, the ownership of those funds shall be transferred to the trust, linked to that right.
3. The funds must be specific or determinable, including funds that will be realized in the future.

Any transactions involving trust funds are registered under the name of the trust in the official records for these funds, in accordance with the applicable federal or local legislation in the UAE.

The trustee holds all the authorities and powers over the trust funds, including but not limited to:

1. The authority to transfer ownership of trust funds according to the trust deed.
2. The power to sign documents related to trust funds without the need for approval from the settlor or the beneficiary.

ROLES AND RESPONSIBILITIES

The New Law clearly outlines the roles and responsibilities of the settlor, trustee, beneficiary, and trust protector.

The settlor initiates the trust, transferring property to it. The trustee, who can be an individual or a legal entity, is entrusted with the management of the trust. The beneficiary is entitled to the trust’s dividends, and the trust protector oversees the trust’s operation. Each role comes with specific rights, obligations, and potential liabilities.

The trustee is the person appointed by the settlor or in accordance with the trust instrument, to whom the authorities and powers identified in the trust instrument and the New Law are transferred to achieve the purpose of the trust. The trustee who is a natural person must have the eligibility of performance and be of good character and conduct, and the trustee who is a legal person must be a professional legal person licensed in the UAE. The trustee may be one or more, and if there are multiple trustees, the trust instrument must stipulate the distribution of authorities and powers, the responsibility, and the method of decision-making among them.

The trustee may accept or reject his appointment, resign or request to be relieved from his position, or be dismissed or suspended for certain reasons, in accordance with the trust instrument or the New Law. The trustee shall perform his obligations and exercise his authorities and powers in accordance with the terms of the trust instrument and the New Law, and he shall exercise due diligence, preserve the trust property and its value, represent the interests of the trust, disclose his personal interest that conflicts with his duties, keep and maintain books and records, and report to the settlor, the trust protector, or the beneficiary.

The trustee shall be liable for any loss or destruction of the value of the trust property as a result of his breach of the trust instrument, or due to his intentional error, or as a result of his gross negligence in managing the trust. The trustee shall also be entitled to fees and compensation for his services and expenses, in accordance with the trust instrument or the New Law. The trustee may also delegate some of his duties to another person in certain cases and under certain conditions.

The beneficiary is the person entitled to a personal right by virtue of the trust instrument, including the person entitled to or may be entitled to, in accordance with the trust instrument, obtaining dividends or property of the trust, and any person to whom the trustee has the power to grant the dividends of the trust, including granting the security right in his favour on the property of the trust.

The beneficiary of the trust must be identified either through his name or capacity, or by reference to his current or future kinship with the settlor, or by stipulating in the trust instrument the mechanism for identifying the beneficiary of the trust. The beneficiary shall have the right to receive the trust dividends, and he has the right to demand that the trustee fulfil the obligations stipulated in the trust instrument and the New Law and to preserve the rights of the beneficiary related to the trust property. The beneficiary may also assign his right to the dividends of the trust, in whole or in part, for the benefit of the trust, in accordance with the trust instrument and the New Law. The rights of third party creditors of the beneficiary are limited to the beneficiary’s share of the trust dividends and do not extend to any other part of the trust property or any right against the settlor, the trust protector, or the trustee.

The trust protector is a person appointed by the settlor or in accordance with the trust instrument, to protect the trust, and he may be granted certain powers, such as reviewing the performance of the trustee, demanding that he carries out his duties and prosecuting him if he does not commit to his duties, appointing or dismissing a trustee or adding another trustee, and determining the trustee’s fees. The trust protector shall not be considered a trustee merely by exercising the powers stipulated in the trust instrument or the New Law. The trust protector is prohibited from putting himself in any position that conflicts with his duties, unlawfully benefiting or making financial gains from the trust, allowing or causing any other person to be enriched by the trust, or concluding deals with the trustee for his own account or for the benefit of the trustee. The trust protector may resign from his position, or be dismissed for certain reasons, in accordance with the trust instrument or the New Law.

DURATION AND TERMINATION OF TRUSTS

Article 5 of the New Law mandates that the duration of the trust must be defined in the trust deed and in the absence of a specified duration, the term is considered indefinite unless circumstances dictate otherwise, according to the discretion of the competent court.

Additionally, Article 8 of the New Law allows linking the termination of the trust term to a specific achievable event, provided that it is explicitly stated in the trust deed.

The New Law also stipulates the conditions and procedures for withdrawing from, amending, nullifying, and terminating the trust, as well as the distribution of the trust property upon termination.

COMPETENT AUTHORITY AND COURT

The New Law establishes the roles of the competent authority and court in overseeing and resolving trust-related matters.

The competent authority is the local authority in the concerned emirate competent with verifying the validity of the trust instrument created in that emirate and registering it in a record maintained by the competent authority in such emirate. The competent authority shall review the structure, terms and conditions of the trust instrument, issue the trust validity certificate, complete the initial registration, issue the registration certificate, and maintain and disclose the data and information entered in the record in accordance with the New Law.

The competent court is a court having the competence according to the civil procedures law, and it shall have jurisdiction over matters related to the trust, as stipulated in the New Law, such as approving the authorisation of the trustee, appointing a new trustee or a trust protector, deciding on matters related to the trust that are not expressly stipulated in the New Law or the trust instrument, nullifying the trust for certain reasons, terminating the trust for certain reasons, and deciding on the distribution of the trust property.

PENALTIES FOR VIOLATIONS

To ensure compliance, the New Law imposes penalties for violations. These include imprisonment and/or fines for actions that damage the trust, the settlor, or the beneficiary as a result of wilfully violating the provisions of the New Law, or impersonating the trustee and exercising his powers in this capacity. The penalties are without prejudice to civil liability or any severer penalty stipulated by any other law.

CONCLUSION

The issuance of Federal Decree No. 31 of 2023 marks a significant milestone in the evolution of trust laws within the United Arab Emirates. This comprehensive legal framework not only repeals the previous trust law No. 19 of 2020 but also introduces essential amendments aimed at enhancing clarity, addressing practical challenges, and aligning with evolving legal needs. The New Law also boosts the attractiveness of the UAE as a destination for investors and business owners who wish to establish trusts in accordance with the UAE legislation and benefit from the legal personality, financial and administrative independence, and confidentiality of trusts.

Authors: Yousef Alamly, Partner,and Salma Farouq, Associate.

For further information, please contact Alex Saleh (alex.saleh@glaco.com) and Yousef Al Amly (y.alamly@glaco.com).