Bloomberg Tax
Free Newsletter Sign Up
Bloomberg Tax
Advanced Search Go
Free Newsletter Sign Up

Navigating Estate and Succession Planning in the Middle East

July 28, 2022, 8:45 AM

There is a massive generational wealth transfer happening in the Middle East, and few wealthy families are adequately prepared. The consequences will have far-reaching implications not only for Middle East families, but also for the region as a whole.

Many families in the region have amassed enormous fortunes over the past 50 years or so. They often own large local businesses vital to the local economy and significant local real estate. They also typically have liquid and foreign assets, including investments, vacation homes, art, and possibly a yacht or two.

In most cases, the family’s wealth is held privately in the name of patriarch (or matriarch), whose estate and succession planning is nonexistent. The failure of many Middle East families to properly structure their generational wealth transfers is largely the result of three factors.

First, generational wealth transfers are a relatively new phenomenon in much of the Middle East. This is the first large-scale generational wealth transfer as, in many cases, the wealth has been created by a generation that is still alive, so the concept of estate and succession planning is often unfamiliar. Families can be reluctant to engage in it for fear of the unknown—a stark contrast with wealthy families from the West who not only are familiar with estate and succession planning but also have generations of experience implementing carefully designed plans.

Second, most of the Western world has a highly developed estate and succession planning industry for wealthy families because there are plenty of reputable and experienced institutions and professionals to help them. This is not the case in the Middle East. While there certainly are top-notch estate and succession planning professionals, there also are many who have inadequate knowledge and experience. Distinguishing between the two and knowing who to trust can be difficult, which often makes families reluctant to act.

Third, Muslims traditionally have had limited estate planning options due to Islamic law’s rigid estate distribution rules, which dictate the distribution of a Muslim’s estate.

In Islamic law, or Sharia, inheritance is distributed in shares based on a formula of primary beneficiaries and contingent beneficiaries. Primary beneficiaries are the patriarch’s beneficiaries, provided they are all Muslim. They consist of the patriarch’s spouse(s), children, and parents. Contingent beneficiaries are people who may receive inheritance depending on the existence of primary beneficiaries or lack thereof. Contingent beneficiaries may include grandparents, siblings, grandchildren, uncles, aunts, etc. The specific relationship matters, often in granular detail. A paternal grandfather inherits only if the father is deceased, for example.

Islamic law only recognizes wills of Muslims in a limited way. One-third of a Muslim’s estate may be disposed of via a will; the remainder is disposed of in accordance with Islamic law’s entitlements. In the UAE, non-Muslims are free to make dispositions in accordance with their own national laws.

In Muslim families, when the patriarch dies, his assets will be distributed as set forth above. Since it is typical for Middle Eastern families to be large—patriarchs generally have many children, often from multiple wives—his estate will be distributed among many heirs, often 10 or more.

For local assets, a local court will ensure that they are distributed according to Islamic law’s estate distribution rules. This is not necessarily the case for assets in other countries. While some countries outside the Middle East recognize and respect Islamic law’s estate distribution provisions, many do not. As a result, the assets pass according to that country’s intestacy laws, which are not compliant with Islamic law and can result in significant estate or inheritance taxes and probate costs.

A common outcome under such intestacy laws is that all assets go to the first wife, or partially to the first wife and partially to the children. The second and third wives often aren’t recognized and don’t receive anything. If they do receive assets, they usually aren’t afforded the same estate or inheritance tax exemptions typically available to the first wife, who is generally recognized as the wife for estate or inheritance tax purposes. This presents a significant risk that assets, absent proper planning, could be distributed contrary to the intentions of the patriarch and subjected to significant taxation.

Beyond distribution and tax issues, the patriarch’s assets, including businesses, are now owned by many heirs, each of whom may have their own opinion about what to do with the assets and how to operate the businesses. Each heir is at a different stage in life and has different priorities, business experience, and educational backgrounds. And as with all families, don’t forget about family dynamics and feuds, which may impair family members from working together constructively. Consequently, businesses are often crippled and can’t operate effectively because of infighting among heirs and mismanagement.

The solution for non-business assets is simple: Sell the assets and split up the cash. While this may be a desirable option for non-business assets, it’s generally in the family’s best interest to keep profitable operating businesses, as they can provide the family with long-term sustainable income. If the family can’t work together, and there are no effective arrangements for continuation of the business while family issues are being resolved, the only option may be to sell the businesses, which large multinational corporations are often all too eager to snap up—and often at a bargain price.

This picture taken on July 8, 2020, shows an aerial view of the Atlantis The Palm, luxury hotel resort located at the apex of the man-made Palm Jumeirah archipelago off the Gulf emirate of Dubai, during a government-organized helicopter tour.
Photographer: Karim Sahib/AFP via Getty Images

The UAE has always been a pioneer in the Middle East, and the areas of estate and succession planning are no exception. Private foundations can be formed in three of the UAE’s free zones: the Dubai International Financial Centre, Abu Dhabi Global Market, and the Ras Al Khaimah International Corporate Centre. Trusts also can be established in the DIFC and ADGM and outside those free zones (the mainland) pursuant to UAE Federal Trust Law. While the balance of this article specifically addresses the use of DIFC, ADGM and RAKICC foundations, the underlying principles apply in relation to trusts and endowments as well.

Since Muslims are permitted to make donations during their lifetimes, they can transfer assets to a foundation during their lifetime. Post-transfer, the assets belong to the foundation, but care must be taken that the transfer is a true completed donation.

For example, if the donation to the foundation were revocable, it may be possible that the right to revoke becomes part of the decedent’s estate and is exercised, in which case the establishment of the foundation may have been pointless. To be a valid donation, the Emirati Civil Transactions Law stipulates that the following conditions be met:

  • The parties to the donation contract shall have the necessary legal capacity to conclude it;
  • The gifted money shall be owned by the donor/giver; and
  • The donor’s offer shall be met with the beneficiary’s acceptance.

Assets within a foundation are managed by the foundation’s council, analogous to company directors. Councilors could include family members, professionals, or a combination. Management can be consolidated in the hands capable business people who can manage and grow the family’s wealth, which is an obvious advantage. And with proper succession planning, it is possible to ensure that the foundation’s assets are sustainably and competently managed long-term for the family’s benefit.

The foundation can even provide tax benefits in that beneficiaries who become residents of high-tax countries are unlikely to have foundation assets and income attributed to them; they would generally just pay tax on distribution received. This can result in significant tax savings and give family members the freedom to live and spend time where they want without being “burdened” by their wealth.

While it is possible to transfer liquid and foreign assets to a foundation either directly or through an intermediate holding company, transferring domestic UAE assets to a foundation can present potential issues.

In some cases, local companies require a local majority owner, and some land in the UAE may only be owned by UAE or, in some cases, GCC nationals. Transferring these assets to a foundation either directly or indirectly may be problematic if local ownership requirements are not met by the foundation—if it can be accomplished at all. Both the DIFC and RAKICC foundations legislation contain provisions directed to ensuring that local ownership requirements are met by those foundations. Ultimately, the local registration authorities need to be satisfied on a case-by-case basis that a transfer is permitted.

Dispute resolution is another issue. Foundations are generally subject to the jurisdiction of the common law courts in the free zones in which they are formed, and rights arising in connection with them are determined under those laws. Local matters, on the other hand, are subject to the jurisdiction of local courts that apply both local statutes, based on the Egyptian civil code, and Islamic laws. This presents potential problems in which a dispute arises between a foundation in a free zone and a person on the mainland. Transactions of foundations on the mainland will normally be governed by those laws, although parties to contracts on the mainland do have the right to select the laws of the financial free zones as the governing laws of their contracts.

Last, there is a danger that a disenfranchised heir of a deceased Muslim could challenge the transfer of property to a foundation. In such a case, two legal principles potentially conflict. On the one hand, under Islamic law, a person is entitled to give away their assets during their lifetime as they wish. On the other hand, they are not free to do so after death, apart from the one-third share that can be freely disposed of. It is certainly foreseeable that a disenfranchised heir could attempt to set a transfer to a foundation aside claiming that the transfer had the effect that they didn’t receive what they would have been due under Islamic law’s estate distribution regime had the transfer not been made, and that they were thereby damaged. Article 361 of the UAE Law of Personal Status provides that transfers with intent to defeat Sharia obligations are void.

In such a case, the heir’s cause of action would arise under UAE local law and not under the law of the free zone where the foundation is formed. Were a local court to side with the disenfranchised heir, the solution for local assets is simple enough: invalidate the transfer, and transfer the assets to the heirs. But what about other assets, such as liquid and foreign assets? This is less clear, as the judgment of the local court will need to be enforced against the foundation in the common law courts of the free zone where it is formed.

Camels walk across the Liwa desert, some 250 kilometres west of the Gulf emirate of Abu Dhabi, during the Liwa 2018 Moreeb Dune Festival on January 4, 2018.
Photographer: Karim Sahib/AFP via Getty Images

Foundations should be effective succession planning tools for local Muslim UAE families in respect of local assets so long as they are irrevocable and the assets are transferred to them via completed donation. But their true effectiveness won’t be known until the extent of the operation of Article 361 is clarified by the courts, although the recognition of trusts and endowments in mainland laws suggests its operation will be limited.

It’s a different situation for other Middle East families. In these cases, it is clear that judgments and heirship laws from their home countries won’t be recognized by the UAE free zone courts, as foundation laws in the UAE don’t recognize foreign judgments or foreign heirship laws.

One strategy for UAE families to avoid possible challenge may be to structure their foundations to make distributions according to Islamic law’s estate distribution rules. In this way, assets would continue to be held by the foundation for generations, but when distributions of income or capital occur, they would be compliant with Islamic law.

Another possible solution—one that has been utilized by some UAE families—is to get an Islamic cleric’s approval of the foundation structure. While the legal weight this carries isn’t clear, it strengthens the argument that Islamic law was complied with.

A possible alternative to foundations is the new UAE Trusts Law, known as Federal Decree Law No. 19 of 2020 Concerning Trusts, which ntroduced the concept of trusts into local law. Before that, the only vehicles under UAE local law for centralized wealth management, asset protection, and estate and succession planning were federal, Dubai, and Sharjah endowments laws.

One interesting aspect of the UAE Trust Law is that UAE trusts are given legal personality and must be registered in a significant departure from common law trusts. In these respects, UAE trusts more closely resemble foundations than common law trusts. As such, trust assets are registered in the name of the trust rather than in the name of the trustees. However, the trustees have full powers to deal with the trust assets, and the rights of the beneficiaries to the assets and the income therefrom are recognized, unlike the case with a foundation where the foundation property is held by it beneficially.

The UAE Trust Law is a welcome introduction that is designed to enable local UAE assets to be placed in a trust. Furthermore, local courts have clear jurisdiction over trusts established under this law, which resolves any possible conflict of laws issues with free zones. Its enactment confirms that property transfers for estate and succession planning does not, in principle, conflict with Sharia.

Proper estate and succession planning is key to Middle East families’ long-term financial security. However, care must be taken to navigate this relatively new world, and proper professional advice is essential.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jimmy Sexton, LL.M., is the founder and CEO of Esquire Group and the chairman of the International Business Structuring Association (Middle East Chapter).

Special thanks to David Russell, QC, for his assistance with this article.

We’d love to hear your smart, original take:  Write for Us