About Labuan Foundation

What is a foundation?

As defined by John Goldsworth, a founding editor of “Trusts and Trustees”, Private Foundation is defined as an independent self-governing legal entity, set up and registered or recorded by an official body within the jurisdiction of where it is set up, in order to hold an endowment provided by the Founder and/or others for a particular purpose for the benefit of Beneficiaries and which usually excludes the ability to engage directly in commercial operations, and which exists without shares or other participation”.

Why Foundation and not Trust?

an independent self-governing legal entity – unlike the Trust, Foundation is a separate, self governing legal entity. It is not an “obligation” as with a Trust, but a completely legal entity.
set up and registered or recorded by an official body within the jurisdiction of where it is set up – It is a registered legal entity which is always not an obligation with a Trust. The Foundation owns the property concerned. Therefore, it may be said that a Foundation is arguably more structured and it is governed by its Charter and Articles or Regulations. The roles of Council, Officers, Supervisory Person and Secretary need to be spelled out and provisions have to be made for meetings. Arguably a Foundation provides more certainty than a Trust and is less likely to be treated as a sham.
in order to hold an endowment provided by the Founder and/or others – Assets placed into Foundation may come from the Founder and/or others. Unlike Trust, the Settlor places assets into custody of a Trustee to be administered and held on behalf of the Beneficiaries named by the Settlor. Third parties may contribute to an existing Foundation.
for a particular purpose for the benefit of Beneficiaries – Similar to Trust in this regards.
and which usually excludes the ability to engage directly in commercial operations – Trust may be used for certain commercial purposes whereas Foundation limit the use to non-commercial users.
and which exists without shares or other participation – There are no shares or shareholders. Rather there are Beneficiaries. Unlike the Beneficiaries of a Trust however, the Beneficiaries of a Foundation generally have no legal or beneficial participation in the Foundation until the assets are actually distributed to them from the Foundation. The Foundation Council is also bound by fiduciary and legal duties to act in the best interest of the foundation similar to the directors of a company.

Why Foundation is better than Trust?

A Foundation is a separate legal entity unlike a Trust.
Foundation has characteristics of both a company and a trust. It can be used for charitable purposes as well as private purposes such as succession and estate planning
Assets placed into a Foundation become the property of the Foundation itself both legally and beneficially and are separate from the Founder and any Beneficiaries whereas with Trusts ownership is less clear and is split between the Trustee and the Beneficiaries. Therefore, it may be said that a Foundation is arguably more structured and it is governed by its Charter and Articles or Regulations. The roles of Councils, Officers, Supervisory Persons and Secretary need to be spelled out and provisions have to be made for meetings.
Reassurance to the client that Foundation is an incorporated body with clear statutory laws and regulations governing it in the jurisdiction.
No question about the ‘validity’ of a Foundation.
Foundations are clearly governed by the law in the jurisdiction where established. Trusts are somewhat similar, however questions about where they are “managed and controlled” and hence what law should apply are not always so apparent.
One can place assets into a Foundation and then transfer “ownership” of the Foundation in a number of ways to indirectly transfer the underlying assets of the Foundation. This is not possible with a Trust.
For succession planning, a Trust that is to take affect after the death of the Settlor must conform to the formalities of a will. When a Foundation is created to take effect after the Founder’s death, the formalities need not conform to making a will.
Those who administer a Foundation are personally liable to the Founder and to the Beneficiaries if they act outside the governing rules of the Foundation. Trustees have unlimited liability in respect of the Trust; if those administer a Foundation and the Founder comply with the requirements of the Charter and the Articles, they are not personally liable for the debts of the Foundation. The liability of a Foundation is limited to the value of its net assets. The Founder may have liability to transfer assets, which he has agreed to endow the Foundation with. Unlike Trust, once it has been set up, the interests of the Beneficiaries are paramount, even though the Settlor may provide a letter of wishes. With Foundation, the will and intention of the Founder may carry more weight.
The assets of the Foundations are protected against enforcement of foreign claims. Judgments cannot be enforced with regards to succession rights, claims of creditor in event of solvency and also with regards to the personal or proprietary consequences of marriage.

Why Labuan?

Labuan Foundation offers you flexibility, confidentiality, asset protection and excellent value for money, with the Labuan Foundation Act 2010 in place Labuan has much to offer and that you may be able to structure your wealth management with the setting up of the Labuan Foundation.

Confidentiality – i) Section 71 of Labuan Foundations Act 2010 (LFA) deals with this and provides a criminal offence with a possible custodial penalty for wrongful disclosure of any information concerning the Foundation. ii) Section 73 of LFA also provides strict confidentiality requirements on Council members, the Supervisory Person and any Officer and the Secretary.
Redomicile – Section 23 and 24 of LFA provides the redomiciliation of a Foundation, thus all the rights under the existing structures from other jurisdiction if migrated to Labuan will remain the same.
Asset protection – Section 8 of LFA provides provisions that cover the fraudulent disposition to a Foundation which will leave the Foundation liable to meet the claims of creditors. Section 61, provides prevention from a foreign claim or judgement being enforced against a validly established Foundation. Section 65 also provides good default provisions concerning distribution to a Beneficiary.
Section 67 to Section 69 of LFA provides a good legislative framework for dissolution and entitlement to property remaining at the end of dissolution.

What is required to establish a Labuan Foundation?

There must be Founder, Beneficiary, Council member, Officer and Secretary – A Founder or beneficiary who is not an officer may be appointed as a council member. A Founder or beneficiary who is not a council member may be appointed as an officer. The Founder shall before registration of the Labuan Foundation appoint a Labuan Trust Company who shall be the Secretary to the Labuan Foundation.
Every Labuan Foundation shall have a Charter, which shall be signed by each Founder
The name of the Labuan Foundation shall end with the words “Labuan Foundation” or “(L) Foundation”