Why discretionary family trusts are great for asset protection and estate planning

05 Jul 2021

As the world continues to navigate its way through Covid-19, many are concerned about taking care of their loved ones should the worst come to pass. Indeed, the pandemic has brought asset protection and estate planning to the forefront of financial planning. Whilst it is completely normal to hold shares of a family business in the owner’s individual name, many are now looking at ways to restructure their shareholding to avoid potential succession issues.

At IQ-EQ Mauritius, we’re seeing increasing interest from our clients in discretionary family trusts as a way of holding shares in Mauritius-based companies. In this article, we will discuss the benefits of using this type of vehicle to hold company shares.

Complexities surrounding the inheritance of company shares

Let’s start with an example: an individual holds shares in a company, such as the Global Business Corporation in Mauritius, in his own name. What happens to the shares upon his death? Will they be transmitted to his heirs in a seamless manner? These are crucial questions that one should ask when looking at the shareholding structure of a company.

It is important to note that under Mauritius law, the principles applying to the inheritance of property are:

  • Lex rei sitae (the law where the property is located) – applies to immovable property
  • Lex domicilii (the law of the domicile of the deceased) – applies to movable property.

As far as shares in a Mauritian company are concerned, these are deemed movable property under Mauritius law. The Companies Act 2001 of Mauritius also provides that:

  • The heir of a deceased shareholder may transfer a share even though the heir is not a shareholder at the time of transfer and such share transfer will be valid as if he/she had been such a shareholder at the time of execution of the instrument of transfer
  • Before entering a transfer as provided above, the directors of the company may require the production of proper evidence of the title of the heir of the vesting order.

As such, it is important to determine the identity of the heirs of the deceased before effecting the transmission of shares.

Another important consideration is whether there is a will or if the person died intestate, as the process differs in the country of domicile of the deceased person. Where there is a will, a grant of probate needs to be obtained by the court of domicile. Where there is no will and the person died intestate, the necessary process needs to be undertaken under the law of domicile to determine who the heirs of the person are, and a legal/court document must be produced. This means that the shares cannot be validly transferred to the heirs until a grant of probate or legal/court document (as the case may be) has been obtained.  

It is also noteworthy that certain risks relating to succession intentions are associated with passing assets through a will (or via intestate), including forced heirship rules in many civil law domiciles as well as possible challenges by disgruntled heirs in common law domiciles. There is often also privacy concerns associated with the probate or similar process(es), including possible public disclosure of one’s succession wishes, heirs and assets.

In addition, the directors of the company will normally require a legal opinion from a lawyer in the country of domicile to advise on the grant or legal/court document and to provide confirmation on certain aspects such as the laws of inheritance at the individual’s date of death, who are the executors and heirs of the deceased under the terms of his will, and so on. It is only after receiving all of the necessary information and confirmations that the company will proceed with the transfer of shares.

So in short, this process can be lengthy, costly, has risks and is often tedious for the heirs and can cause unwanted publicity and upheaval among family members.

Why is a discretionary family trust an effective solution?

Holding shares in a company through a discretionary family trust not only relieves heirs from the cumbersome cross-border enforcement procedures linked to share transfer but also allows for proper, smoother and more efficient asset protection and succession planning.

The key benefits of using a discretionary family trust are as follows:

  • Quick and easy to set up as there is no registration requirement
  • Confidential vehicle subject to applicable Mauritius laws
  • The governing law is the Trusts Act 2001, which is an innovative and progressive piece of trust legislation
  • Cost-effective to establish and maintain
  • Avoids legalisation, registration and other court formalities related to the succession of shares in the company
  • No forced heirship rule, meaning that the person settling the trust has free rein to choose the beneficiaries that will receive the company shares upon their death
  • Provides for protection against unforeseen creditors at the time of set-up subject to the provisions of the Trusts Act 2001
  • Where the settlor and beneficiaries are non-resident in Mauritius throughout a fiscal year, the trust can become a non-resident trust and thus will not be subject to income tax in Mauritius upon filing a declaration of non-residence (of course tax rules in the jurisdiction(s) of the settlor and beneficiaries must also be considered)
  • No capital gains, inheritance or withholding tax in Mauritius.

One thing that the Covid-19 pandemic has taught us is that it is imperative to plan ahead when the ‘skies are clear’, so to speak, and proactive estate planning is an essential part of securing one’s financial legacy and maintaining peace of mind for the family now and well into the future.

Written by Rehma Imrith, Commercial Director at IQ-EQ Mauritius.

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