Now, a family trust is a popular topic, sweeping across the legal and financial world. But for this imported product, in fact, we have too many questions and confusion. Many basic legal problems need to be solved urgently.
I．The Question
As the head of the cross-border wealth planning and inheritance team of Shanghai Landing law firm, my team often involves one kind problem in the business processing: the trust property of the testamentary trust abroad (mainly Anglo American law system) is pointing in the mainland of China.
The common case is as follows: Overseas testator will establish their trust in his/her testament, including all their personal property (also those in mainland China). The following passage comes from a will made in Hongkong:
Weng* made a will on Nov. 6 of 2001 before his death, appointed Weng**, Yang Weng**, Weng**, Cai** as executor, divided his inheritance into 17.2 parts, share out in the form of trust like as follow: 1. 2.5 parts is entrusted with Weng He** as absolute beneficiary; ………10. 1.0 part is entrusted with Weng** to hold until his age reaches 18 years old; 11. 1.0 part is entrusted with Weng** to hold until his age reaches 18 years old; 12. 0.6 parts are entrusted with ANDREASTEPHENIEYUNG to hold until her age reaches 18 years old; 13. 1.0 part is entrusted with CLAUDIANATALIEYUNG to hold until her age reaches 18 years old.…
Another example:
I devise and bequest all my real and personal estate whatsoever and wheresoever after payment thereout my just debt and funeral and testamentary expenses unto my trustee upon trust to sell call in and convert the same into ready money without being liable for loss and to divide the proceeds of such sale calling in and conversion and my ready money into three (3) equal shares and to pay...... (names of beneficiaries designated)
In dealing with the cross-border succession cases involving many successors, our team tends to simplify the procedures, hoping that they choose one or two representatives to inherit all the heritage and represent all successors to possess the heritage in China (usually requires registered real estate or share). In mainland China, such arrangement is simply to sign the so-called Entrustment Agreement in law, but the similar situation in the Anglo American law system is actually a real trust, that is, the one or two successor representatives as trustees to obtain the legal title and represent it and hold it for the benefit of all the successors (trust beneficiaries). And assign it now or in the future when it is cashed. So, can we arrange for the client to set up a trust abroad for the inheritance in China?
The key to this issue is whether the overseas trust which is a target to the property in China is valid under the background that mainland China's laws are not perfect enough to establish a family trust.
II． British Case Study
In the process of studying this kind of trust’s validity, a Verdict from the British Supreme Court in 2017 makes me be suddenly enlightened.
The plaintiff Saad Investments Co Ltd (hereinafter referred to as SICL) is a company located in the Cayman Islands and was in bankruptcy proceedings. Mr. Al Sanea is a Saudi Arabian businessman holding a stake in Saudi Arabia's domestic banks. SICL and Saanea made a series of transactions about the shares mentioned above, forming a trust arrangement in which Sanea acts as a trustee with the above shares as trust property and SICL acts as beneficiary. Subsequently, Sanea transferred the shares in the trust to Samba in a financing transaction which Samba Financial Group (hereinafter referred to as Samba) acts as a third party to meet Samba's liabilities. The liquidation team of SICL considered that Sanea's transferring of shares to Samba against SICL's interests, and therefore the transaction mentioned above should be recognized as invalid since SICL enters the bankruptcy proceedings. The above-mentioned shares should be regarded as the bankruptcy property of SICL. An important fact needs to be added is that the applicable law for the trust between SICL and Sanea is the law of the Cayman Islands, but Saudi Arabia, where the trust property (that is the shares mentioned above) located, is not an Anglo-American law system, and its domestic law does not admit the separation of trust’s or similar legal title and beneficial title.
The verdict of this case is not directly related to the topic of this article. But in the reasoning process, the judge made a penetrating explanation for how-to knowledge and understand the trust when the trust is under the Anglo American law system but the trust property is under the civil law system or other non-Anglo-American law countries.
In this case, SICL argued that the above shares held by Sanea who act as trustees constituted a living trust, and SICL, as a beneficiary of the trust, has equitable proprietary interests in the above-mentioned shares. Furthermore, it believed that Sanea's transferring of the above-mentioned trust property to Samba was equivalent to dispose of SICL's property. Therefore, according to Article 127 of the British Bankruptcy Act of 1986. The judgment should be invalid and Samba should return the trust property mentioned above and treat it as the bankruptcy property of SICL. As a demurrer, Samba believed that the claim of SICL is untenable because the law of Saudi Arabia doesn’t admit the so-called equitable proprietary interests. In other words, Samba actually denies that there is a valid trust for the above shares.
Obviously, the claim above is tit for tat, the essential problem is: whether trust established under Anglo-American law can be validly existing when the trust property located in civil law countries.
（i） In personam in trust legal relation
This question was answered by the court from four aspects. However, there seems to be only one main point: the British courts will judge according to their tradition in personam of the rule of equity. When the trust established under the Anglo-American law. Even the trust property is located in the jurisdiction area of nonrecognition of trust and the rule of equity, between beneficiaries and trustees, the beneficiaries cannot claim property right and interests of the trust property but can claim the rights against the trustees according to the validity of trust it is similar to creditor's rights in civil law system; in other words, this kind trust which established according to Anglo-American law won’t be invalid or inoperative just because the law of the place where the trust property is located does not admit the trust legal system.
Paragraph 29 of the verdict is very convincing. Please see as follow:
Both A and B are British residents. A invests in B and requires B to buy real estate on behalf of A and registers it under B’s name. Then B purchases the real estate as agreed. The consequences of this transaction should be governed and determined by British law. If it is governed by the law of the real estate’s location, the consequences will be confusing. More than that, this rule will lead to the absurd conclusion in the following transactions: if the instruction A gives to B is to purchase different real estate in different countries, the same transaction will have different transaction consequences depending on the location of the real estate. Similarly, if the instruction A gives to B is that B can free to decide to purchase real estate, it would give B a situation in which B can unilaterally decide the legal consequences of this transaction with A, which is obviously absurd.
The purpose of this reasoning is to show that the legal relationship between the beneficiary and the trustee should be determined by British law after the trust is established so that the trust can be established, survived, and enforced without being affected by the law of the place where the property is located. On the contrary, British courts, based on British law, will recognize the validity of trust as long as the legal relationship between the beneficiary and the trustee is identified, regardless of where the trust property is located.
（ii）Proprietary interests in trust legal relation
It is obvious that it is not enough only to pay attention to in personam in trust legal relations, and we must also discuss the proprietary interests in the trust at the same time which is the beneficiary has the direct power to the trust property. Under the traditional trust law in the British, the beneficiary enjoys equitable proprietary interests to the trust property, like the following and tracing to the trust property.
This is also discussed in the verdict that it focuses on the influence of the bona fide acquisition system to the trust in the law of the place where the property is located. Paragraph 20 of the verdict states that this legal precedent of The English Court of Appeal sets the following legal norms: if the property location’s law provides that the transfer of property by the trustee to a third party will result in the extinction of the equitable interest (which usually exists under British law), then this legal effect should be considered as a valid right of defense for the third party assignee against to the trust beneficiary’s claim for rights. In paragraph 42, the judge deems that the trust among the parties, in this case, gives the beneficiaries equitable proprietary interests of the trust shares and can be enforced among SICL, Sanea and any third party, Of course, this third party here does not include the transferee (bona fides third party) who acquires the above-mentioned shares’ title validly under Saudi law.
Obviously, the British Supreme Court recognizes the equitable proprietary interests of the trust beneficiaries in foreign trust property and is willing to enforce that. It is necessary to point out that the proprietary interests here cannot be simply understood as the property right under the Chinese property rights law, it is more about the right to gain benefits from a specific property.
III． Conclusion
In a word, this verdict of the British Supreme Court has great value for the trust lawyers in the continental law system to understand and study the trust system of the Anglo-American law system. But the problem is far from clear without doubt. For example, in the case of recognizing trust beneficiary’s proprietary interests of overseas trust property, how to apply the property recourse system under the British Trust Law and how to apply the Saunders V Vautier Rules to allow the beneficiaries to acquire the property rights of the overseas trust directly, these still need to be further explored.
