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INTRODUCTION TO LABUAN TRUST
Trust is a legal relationship, normally constituted by a written document known as “trust deed”, which binds the trustee to deal with assets vested into trust for the benefit of specified beneficiaries.
Settlor sets up a trust, who is the person who entrusts the assets to a trustee.
The management of the assets is in accordance with the terms stipulated in the trust deed. A trust can be vested with any legal assets such as cash, works of art, real estate, securities etc.
Trust, a common law solution, provides affluent families, or individuals the avenue for structuring and administering their wealth and estate planning.
Key roles in trust
Settlor
A person who transfers his/her specific assets to a trustee. The settlor can retain certain powers, including revoking, amending or varying the terms of the trust.
Trustee
A person who becomes the legal owner of the specific assets transferred by settlor. Trustee is responsible for the roles which the terms set out in the trust deed and the law governing the trust, and perform its obligation to administer the trust in the best interest of its beneficiaries.
Beneficiary
A person who has equitable title to the assets held in trust and the right to benefit from them. Settlor may be beneficiary.
Protector
A person or a company who monitor activities of the trustee to ensure the management of the assets are in accordance with their mandate.
Type of Labuan trust
There are few types of trust:
- Purpose Trust
- Special Trust (Reserved Powers Trusts, share trust)
- Charitable Trust
- Spendthrift or Protective Trusts
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Introduction to trust
The Labuan trust is governed by Labuan Trust Act 1996 (LTA) and Labuan Islamic Financial Services and Securities Act 2010 (LIFSSA).
A Labuan trust can be created by a will or other instruments in writing, including through a unilateral declaration.
Creation of a Labuan trust
Any person including a corporation can set up a Labuan trust for a specific purpose which could be charitable or otherwise. It is optional for a Labuan trust to be registered under LTA.
Where a trust property includes Malaysian property, prior approval must be obtained from the regulator to include the Malaysian property into the trust.
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Labuan trust companies and Labuan managed trust companies are required to submit a status update on Labuan trust in which they are the trustees to Labuan FSA on half-yearly basis.
Operation of a Labuan trust
- Registration of a Labuan trust needs to be filed through its trustee which also a Labuan trust company
- A Labuan trust needs to maintain its registered office in Labuan, which is the office of its trustee, which in turn is a Labuan trust company. Any documents or records relating to the trust needs to be kept at the registered office.
- Activities of a Labuan trust shall always comply with Anti-Money Laundering, Anti-Terrorism Financing and proceeds of unlawful activities act 2001.
- The LTA provides for a fraud disposition period of two years.
Registration of Labuan trust
name of the Labuan trust
The registration of a Labuan trust shall be effected by filing with the Authority a statement (Form no.1) containing:
Types of the trust
date of its creation
the name and address of the trustee
a declaration by the trust company acting as trustee that the trust satisfied the conditions as a Labuan trust.
the proper law of the labuan trust (country); and
the address of the registered office of the Labuan trust;
Trustee remuneration and expenses
A trustee shall not be entitled to any remuneration for services rendered unless authorized:
by the terms of the trust
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by the consent in writing of all the identifiable or ascertainable beneficiaries; or
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Labuan trust may exist for a fixed duration, unless otherwise stated, it may continue to exist for an unlimited period or be terminated in with LTA
Trustee may be authorized via the trust deed to alter the duration, be it from a fixed, to unlimited period, or to extend the duration of a Labuan trust.
Duration of Labuan tax
Any income derives from the trust properties is subject to the Labuan Business Activity Tax Act 1990. However, where the trust properties include Malaysian property (situated in Malaysia) would subject to Income Tax Act 1967.
Tax treatment to Labuan trust
Annual fee
A Labuan trust that opts for registration is required to pay a one-off registration fee amounting to USD 200/ RM750 to Labuan FSA.
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Purpose trust
A purpose trust is created for a particular purpose which may be charitable or non-charitable.
- Objects must be clearly stated in the terms of trust
- Specify an event or date upon the occurrence of which the trust ceases to be a purpose trust
- Provide for the disposition of the property of the trust when the trust ceases to be a purpose trust
- Require to have an enforcer whose duty is to enforce the trust
- The trustees own no duty to any person entitled to such property when the trust ceases to be a purpose trust, or in relation to any purpose for which such property are then to be applied.
Common use:Refinancing arrangements that requires holding of shares in special purpose vehicle used in off-balance sheet transactions.
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Special trust
- Labuan special trust (LST) can be used to hold & retain shares indefinitely in a company, which in turn may be used to own assets such as a cash, real estate etc.
- Allows director to manage the company without the intervention of trustee.
- LST shall no have fiduciary responsibility or duty of care in respect of the property of, or the conduct of the affairs of, the company.
- If it is sole trustee, it must always be Labuan trust company. Trustee shall not be the director where shares are held by the said trustee
- Letter of wish – could be used to set out guideline to trustees in matters affecting trust (particularly distribution) for situations that may arise. Though not legally binding, trustee normally referred as guide.
Advantage of Labuan special trust
- Trustee shall not perform any action against any of its directors for breach of duty to the company.
- Full protection from creditor’s claim provided the trust is established prior to the creditor’s cause of action, or two years after it
- Suitable for high-net-worth individuals or families who recognize that the members of the next, younger and better educated gen may wish to attempt more sophisticated investment options; yet by separating the roles indicated above. The founder can still keep their legacy intact.
- Existence of the trust in perpetuity
- Does not have provision of enforcer
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Reserved powers trust
When a settlor creates a Reserved Powers Trust, he can reserve to himself, or grant to a third party (eg. a protector), certain rights and powers, through enabling the settlor to direct the trustee to issue to him a limited trading power of attorney in the trust deed. Most commonly, settlors will wish to reserve:
- Authority to appoint / remove investment managers, brokers (deal directly with broker)
- Authority to make decision on investment (trustee’s powers are suspended)
However, the degree of settlor’s control has to be balanced against the fundamental concept of trust.
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Labuan share trust
- The Labuan Share Trust’s function is to hold shares in a Labuan company.
- The beneficiaries are entitled to the distribution of shares when they reach the age of majority, under the proper law of a trust or the law of his domicile. Otherwise the trustee shall hold a minority portion of shares until they reach the age of majority, if no appointment of a legal guardian.
- Both Settlor and Trustee retain option to revoke the trust and the extent and exact scope for this will be elaborated in the trust deed.