Forward Planning: Important role of trusts in property inheritance

In last week's article, I talked about the many ways of passing one's estate on to one's heirs: the traditional ones with all their financial risks like probate, creditors, lawsuits, judgments, lawyers and death taxes or the case of dying intestate, another situation where our loved ones and heirs are faced with many legal difficulties.

On the other hand, I have mentioned the process of estate planning where certain tools are used to avoid the said financial risks and problematic situations. In the advanced world like the U.S. and Europe, inheritance and estate laws provide for the safe transfer of property and the ability of doing estate planning.

The UAE is a fast-progressing country which is becoming a very advanced society attracting businesses and wealth from all over the world. To meet this challenging situation, our laws must advance and change accordingly.

Lawyers, accounting firms and life insurance companies must get together and propose to the authorities, both on the local and the federal level, some changes and improvements to the existing laws aiming at reducing financial risks and minimising the complications of passing properties on to the heirs.

An important step would be to allow the establishment of trusts in the country, a process bringing great benefits and solutions in the kind of situations mentioned above. Other types of contracts such as joint tenancy are also very much needed.

Going to court and fighting for someone's inheritance share has become a very common occurrence for many people in the last few years, due to which businesses are not continued and often end up being sold cheap by court orders. Properties also face the same fate.

An estate planner will use many tools like a trust, a will, joint tenancy-and life insurance contracts either separately or in combination thereof, depending on the size of the estate and other factors. A Trust is a legal entity or device that provides for ownership of property by one person for the benefit of another.

The grantor assigns a trustee, called the manager of the trust, who has the title to the property but without ownership or benefits from it. He/she has a legal obligation to manage the property and its assets in a prudent manner for the benefits of the trust beneficiary only.

If the trustee fails to do so, he/she becomes personally liable for financial losses of the trust. Although a trust is a private agreement, the laws recognise it as an independent legal entity. As a matter of fact, trusts are independent entities very much like corporations: they may conduct business activities, own property, file tax returns and pay taxes, they may own bank-and investment accounts, earn income, distribute profits to the beneficiaries, etc.

There are many advantages in establishing a trust such as avoiding probate, reducing death taxes, managing the estate in case of mental incapacitation, controlling the transfer of properties to the right heirs and ensuring protection against lawsuits and property seizure.
There are two types of trusts: Living Trust which is established and functions during the life of the grantor, and Testamentary Trust which deals with the disposal of the property at the death of the grantor who has designated the properties to be placed in the trust and described the way the trust is to be managed.

In some cases a trust is not necessary: for example, if the estate is small and a probate not needed, if a joint tenancy agreement is safe enough to be used, if death taxation is very small, if there is no scheduled pay-out at a certain date in the future (like school/maintenance funding for a child or disabled person) or if a mental incapacitation won't effect the transfer of properties.

A will can also be used instead of a trust for the same above-mentioned reasons. Trusts are important tools in satisfying the wishes of property owners in passing their properties to the right people and in many cases to protect businesses and financial interest from any form of loss.

The writer is managing director of Gulf Insurance Consulting and a licensed insurance consultant and financial planner.