As result of this outstanding economic growth, China has become the world major incubator of high net worth individuals. According to the renowned Hurun Wealth Report, by the end of 2011 in China, there were approximately 1,020,000 individuals identified as millionaires (with assets over RMB 10 million) and 63,500 super rich individuals (with assets over RMB 100 million).
Incontrast with the westernhemisphere, where a more matured class of high net worth individuals can be observed, Chinese new millionaires are mostly young striving entrepreneurs in their late thirties who have accumulated wealth taking advantages of the current flourishing economic growth of China. Since they are first generation entrepreneurs, their main objective is still the creation of wealth for future generations.
Wealthy Chinese families are no strangers to the advantages of asset internationalization. A large percentage of these family enterprises have begun to invest overseas and have also purchased real estate in countries such as the United Kingdom, United States, Canada and Australia. For many of them this is the first stage in a journey to send their children to study abroad or to immigrate to those countries. With the accumulation of wealth, both inside mainland and abroad, this first generation of rich entrepreneurs will now be challenged with a dilemma they will need to know how to ensure their wealth and how to keep the so appreciated family business sustainable and be safely passed to the second and subsequent generations.
Even though there is so far no estate or gift tax in China, many Chinese high net worth individuals are starting to be aware that they will require more sophisticated legal instruments like the trust or private foundations. These two figures are legal tools that can allow them to efficiently structure their assets and minimize administrative and tax burdens. This should be considered, particularly, if they have acquired or purchased assets abroad, as they will be subject to their inheritance and tax laws.
Although China has enacted its trust law in 2001, many Chinese lawyers consider that the same is inapplicable for the purposes of estate planning and asset protection, which are concepts closely related to the trust. In fact, trust being offered in China are comparable to financial or investment products. For that reason, Chinese elites are forced to seek assistance in major offshore jurisdictions where specialized fiduciary services can be provided. Offshore jurisdictions such as British Virgin Islands and Panama have well established trust legislations, regulated and licensed Trust Companies that can act as trustees and trained legal practitioners that can appropriately address the concerns of high net worth individuals and efficiently provide them with advice on wealth management and inheritance planning.
The concept of trust is similar in any offshore jurisdiction. In simple words, a Trust is created when a person (settlor)transfers assets of its own to a third party, the trustee. The trustee then becomes the legal owner of the transferred assets and will also be responsible for the preservation and management of those assets in favor or benefit of another third party, the beneficiaries, who can be the settlor himself. The trustee at all times shall observe and follow the wishes set by the settlor in the trust deed.
Trust structures have been used thoroughly for a variety of purposes especially for asset protection and most importantly for succession planning. Because the trustee legally owns the assets, claims from the settlor or beneficiaries creditors can be prevented. The trust can basically isolate those assets from any lawsuit fulfilling the objective of asset protection.
In our experience at MMG, most of our Chinese clientele are using trust as an upper tier structure to hold shares of underlying companies. This kind of trusts will allow wealthy families to synthesize the ownership of their global assets in one single structure. Such consolidation facilitates family business management in the international arena and reduces administrative cost and tax concerns. Trust structures are also relevant for succession planning. Most trust jurisdictions have no estate tax and do not recognize forced heir ship; this is relevant for those Chinese elites that have purchased properties in Countries that impose heavy estate tax and probate regulations. A smooth and efficient succession plan can be achieved by transferring the ownership of such assets to an offshore company and which shares will be held by a trust set up in a favorable offshore jurisdiction. Consequently, the trust can transfer those company shares and their underlying properties to the next generation without causing probate proceeding or estate taxes in the country where such properties are located.
One common challenge with Chinese clients is that they find difficult to understand that for this structure to be functional they must relinquish their assets to the trustee. This transfer of assets to a trustee might make them feel that they are losing control over their wealth. Therefore, the trust should be structured in a way that they can maintain certain degree of control over the assets and the management of their family business. The British Virgin Islands especial Vista Trust is very suitable for Chinese clients, because it allows them to allocate the shares of their family company under a trust that disengage the trustee from management responsibility. In this kind of trust, the client company affairs will remain being managed by the directors without intervention of the trustee.
In addition to the trust, Chinese wealthy people who are familiar with corporate structuring may find it easier to comprehend and accept the Private Foundation as another alternative. The Private Foundation is considered a legal entity and it should be incorporated or registered on a public registry. As a legal entity the Private foundation is the legal owner of all assets transferred to it, those assets will be managed by the members of the Foundational Counsel, who are appointed by the founder, in favor of the beneficiaries in accordance to what is stipulated in its charters and regulations.
The Private Foundation gives Chinese ease of mind since their assets will be transferred to an entity created by them and where they can maintain direct control of their businesses through the Foundational Counsel. It should be pointed out, that a Private Foundation can accomplish the same purposes of asset protection and estate planning that can be achieved by a trust. Several jurisdictions have enacted their own Private Foundation legislation, but Panama Private Interest Foundations remains to be well-known because of their flexibility, reliability and cost effectiveness.
As it can be seen, both fiduciary instruments are effective and attractive choices for wealthy Chinese who are looking solutions for their ever growing need of protecting their assets and reducing the hurdles of succession process in an international context. Even though the use of offshore trust and private foundations are still in the early stages in China, it is expected to grow steadily in the years to come and will surely increase drastically if the Chinese Government decides to adopt estate and gift taxes. It is also important for Chinese high net worth individuals to get proper advice from experts who will be able to guide them through the different jurisdictions and to establish suitable legal structures. This will help them to encompass their worldwide wealth, reduce administrative costs and allow them to efficiently manage their business and family affairs.
