Rise of UAE foundations as wealth management sector matures

Unsplash

• Influx of global HNWIs is prompting interest in new legal entities
• Foundations combine features of private company and charitable trust 
• Succession planning now viewed as crucial part of wealth management 

The UAE’s richest people are increasingly setting up foundations to structure and preserve their wealth for the future.

Regional wealth managers told AGBI they have noticed a “significant increase” in the number of foundations being established in the UAE, and in the volume of enquiries they are receiving about setting one up.

Bradley Moran, an associate at law firm BSA Ahmad Bin Hezeem & Associates in Dubai, said his enquiries, not including those of his colleagues, have “tripled since this time in 2022”. 

“The patriarchs of many family businesses in the UAE are growing older and looking for means to ensure that the transition of their business to the next generation is handled smoothly without risking the implications of inheritance division and disputes under sharia law,” Moran said.

• Influx of millionaires stokes UAE demand for private bankers
• Indian families shift wealth to UAE in ‘unprecedented numbers’
• World’s richest families are shifting investments to Gulf

“The UAE has also seen a marked increase in wealthy individuals globally looking to relocate their businesses and assets here.” 

A foundation is a hybrid entity that combines features of a private company and a charitable trust. Like a trust, a foundation is established for a beneficial purpose determined by its founder.

But, like a company, it retains an independent legal identity and holds assets in its own right, rather than transferring ownership to a trustee. The foundation is governed by rules set out in a corporate charter and overseen by a council or board of directors.

Because of this corporate personality, foundations can offer more flexible structures for private wealth management than charitable trusts, experts say. These include asset protection, succession planning, tax planning, corporate structuring and creditor protection. They are not usually used as trading or commercial vehicles, but it is possible to create an underlying entity for this purpose. 

Foundations are a relatively new type of financial vehicle in the UAE, and can only be established within the free zones, Abu Dhabi Global Market, where the UAE’s first regulations governing foundations came into effect in 2017, Dubai International Financial Centre (DIFC), where regulations were launched in 2018, and Ras al Khaimah International Corporate Centre, from 2019.

• 

• 

BSA established the DIFC foundation for the Kaizen global group of companies last February. The Kaizen Group was founded by Japanese management consultant Masaaki Imai in 1985. 

Before the free zone laws it was not possible to set up a foundation in the UAE and a trust was the most obvious structure available to the wealthy.

But experts say there are already around 500 foundations in the UAE, and their number is expected to increase as the country’s wealth management landscape becomes more sophisticated and the number of local high net worth individuals (HNWIs) grows. 

“You always hear about the region’s new generation of wealthy individuals and that the wealth is being passed down to them,” Francois Farjallah, head of Middle East at EFG Bank, said.

“This is happening right now and it’s about how they’re dealing with this shift.

“What we’re seeing is that when you have so much local wealth you need to properly plan your estate.

“There are laws governing foundations now, and they can hold assets such as real estate so we are seeing rising interest in them and more are being set up.” 

Ahmad Chahidi, executive director of wealth planning at Swiss private bank Julius Baer Middle East, said: “Foundations may provide families with a flexible structure for holding their wealth.

“They are often used to consolidate business interest and private wealth under one overarching structure, facilitating smooth intergenerational transfer.

“We have also seen that foundations have a role to play in Dubai real estate acquisition and succession plans.” 

Several factors are driving this trend, he added. They include a focus on health, wealth preservation, and intergenerational change prompting families to look at the wealth transfer process and how they structure assets. 

“We expect that demand for foundations and other tailored wealth structures will grow exponentially with the expected wealth transfer in the region in the coming years,” Chahidi said. 

The UAE was predicted to attract the world’s largest net inflow of HNWIs (those with assets over $1 million) in 2022, estimated at 4,000 people compared to around 1,000 per year before the pandemic, according to Henley & Partners. 

• 

• 

In addition, the number of centimillionaires (people with more than $100 million) living in the UAE has risen by 70 percent over the past decade, from 175 in 2012 to 295 in 2022, according to Andrew Amoils, head of research at analyst New World Wealth.

These wealthy migrants are mainly coming from India, Turkey, Egypt, Russia, Lebanon, the UK, Saudi Arabia, Pakistan and Nigeria.

High oil prices, an attractive lifestyle and international free zones with common law regulations are among the driving factors, Amoils said. 

Globally, private wealth has proven “extremely resilient” despite economic downturns, the pandemic and other challenges, EFG’s Farjallah said.

He cited Capgemini’s World Wealth Report 2022, which showed that the world’s HNWI population expanded by 7.8 percent year-on-year in 2021, and they grew their wealth by a combined 8 percent. 

There were 392,000 UHNWIs (ultra high net worth individuals – those with assets of $30 million or more) in the world in the first half of 2022, according to Altrata’s World Ultra Wealth Report 2022. Those individuals had a combined wealth of $41 trillion, of which the Middle East accounted for almost $2.7 trillion. 

In the region personal finance has traditionally been viewed as a “sensitive” subject, Farjallah said. But this is changing and succession planning is being regarded even by older family members as a crucial part of financial management.