The ubiquitous fiscal chatter among Lawyers/Trustees/CSP/Bankers in the financial centers of the UAE usually revolves around Foundations. I will admit both IFC’s have rolled out their Foundation proposition to great fanfare and it has gathered momentum in a very short period of time. Its meteoric rise forms the subject matter for any financial gathering from STEP to Hubbis, portraying the UAE Foundation as the “go-to” solution to whatever wealth planning problem comes your way.
Foundations are nothing new with their roots closely aligned to that of Trusts. Lichtenstein is accredited with the first recognized Foundation as we know them today with ADGM/DIFC respectively launching their own versions in the last 10 years. Their popularity is so great that it has almost blanked out any consideration for other forms of planning to the detriment, I would wager, to some pundits who believe it is the only solution.
In modern HNW wealth planning, I have yet to see a solution that addresses all the issues facing complex families who have assets in multiple jurisdictions and, ergo, exposure to various taxes as a result. There is never a “one size fits all” solution and I aim to debunk some of the myths and blinkered attitude some Foundation acolytes, particularly for investors who have assets in the US.
Everyone espouses their disdain for the US, while simultaneously investing there – go figure! What few realize, that when investing in the US, either directly or via your Bank/Online platform/Trust and indeed a Foundation, you are exposed to US taxes. In particular, Estate Tax (40%) on any asset/portfolio and Withholding Tax (30% per annum) on any income/dividend/coupon/rent from said assets.
A non-resident alien (NRA) i.e. someone who is not a US citizen, has no green card or US passport, attains US estate tax exposure when owning US situs assets such as US listed shares, ETFs, and certain US real estate interests. Estate tax rates may reach 40%, both at a State and Federal level, with married US citizens having a generous tax-free limit up to $30m. However, for NRAs this figure drops dramatically to a mere $60,000 unless a DTT (Dual Taxation Treaty) applies. Alas, the UAE has no such treaty so the 40% applies to all US assets above $60k. You might want to read that again …
A properly structured Foundation may help mitigate US estate tax (only) if the Foundation genuinely owns the underlying assets and the founder no longer retains effective ownership or control. However, Foundations can be vulnerable to IRS “look-through” treatment where founders retain excessive powers or beneficial enjoyment. In those situations, the IRS may argue that the assets remain personally owned.
PPLI is commonly viewed as a stronger solution for pure US estate tax mitigation on investment portfolios because the insurance company legally owns the underlying investment assets. The policyholder owns the insurance policy rather than the US securities themselves. This distinction significantly reduces estate tax exposure if the structure is properly implemented and PPLI, a well-recognized US innovation, invariably ticks the box with the IRS.
In addition, PPLI provides enhanced privacy, asset protection and robust succession planning options. With rapid liquidity at death and no delays from probate/Sharia’h, PPLI is increasingly popular among HNW and GCC families … if they know about it!
Foundations have their place for governance, family constitutions, succession planning, Sharia’h-sensitive structures, and intergenerational control. If HNW families blend Foundations with PPLI, they effectively address and plug the gap for robust tax optimization, privacy, governance and succession simultaneously too.
Ultimately, successful international planning depends less on the label of the structure and more on ownership (who), control, governance, and ultimately the ability of the arrangement to withstand scrutiny from tax authorities like the IRS. With the latter having representation in the UAE, it makes sense to ensure your US situs is structured correctly and that all options are explored to ensure your assets are protected.
Tim has been offshore 30 years, partnered with the Maktoum Family, providing boutique tax advisory having sold his previous company, Globaleye, to a FTSE listed PLC. He is a full member of STEP (Society of Trust and Estate Practitioners), part of their Special Interest Group on International Clients, a Fellow of the Worshipful Company of Tax Advisers and qualified CII (Chartered Insurance Institute of London). Frequent conference speaker, radio and writes for various global publications. He is married with four children, a former Naval Officer, keen hiker and star of “Fiscal Hikes”.
Dubai | London | Geneva
