Trust is a legal contract. The settlor transfers the assets to the trustee, and the trustee needs to hold and manage the assets for the beneficiary according to the wishes of the settlor and the trustee can arrange the property effectively to the designated beneficiary. Set up Trust is becoming more and more popular, and the cost of setting up is becoming democratized. The banks can also set up a simple trust structure for its customers.
Family Trust Can Give Full Play to Different Guarantees
Family trust is often misunderstood as the asset allocation agreement set up for the family members and descendants of an established family. Up to this day, many middle classers have protected their assets by trust, because family trust can play a role in proper management, so as to continue the asset rights and interests, tax-deferred, and distribution and inheritance of heritage without limit. Some people mistakenly believe that family trusts are the same as a testament and are allocated to designated beneficiaries according to his/her wishes after the testator’s death, but this is only one of the functions. According to the place where the trust is established, the assets can be passed on to the beneficiaries by stages from one hundred years to indefinite duration, reducing the risks that the successors or offspring will tear the whole family apart because of the distribution of property, and continuing the wishes of the founders.
Some areas are in tax-free or low-tax areas, such as the Cayman Islands, BVI, Hong Kong, and Singapore, so they are also popular places for trust establishment. Some countries, such as China, have inheritance laws, which distribute the inheritance of assets successively according to parents, wife, children, and other relatives, rather than according to the wishes of the testator. This is another function of trust to supplement the execution of the will and reduce the argument after death. As the ownership of assets is transferred to the trust company, the trust company manages and distributes the benefits to the beneficiaries according to the wishes of the settlor. If the settlor encounters any debt problems and the joint liability goes back to the personal property, the assets in the trust may not be reimbursed, which reflects the function of the protection of wealth.
Trust can obstruct the risk crisis
Family trust also serves as a barrier to risk. By transferring assets to trust under settlor’s name and agreeing to be irrevocable trust types, the assets are separated from the settlor, and with proper planning, family trust may have a result like an asset isolation so then avoid involving the trust property in a dispute over obligation or bankruptcy liquidation. In addition to acquiring personal debt isolation after the establishment of family trust, it can also be applied to the marriage and family. The pre-marital property can be managed and distributed independently in the pre-marital trust. In case of facing a marital crisis and alimony disputes, the possibility of dividing the pre-marital property can be reduced.
The example of the Hengfeng family case in 2014 was the largest alimony judgment in Hong Kong, which absolute decree that the former daughter-in-law could receive alimony up to 410 million yuan. If the property is built on trust step by step and the husband or wife is entrusted with the property’s management or the related partnership enterprises’ running, then the continuity of the property after marriage can be guaranteed by the change of the marital relationship. By entrusting others to continue to operate the business through the trust, the business will not be broken off, also the property will not be broken off because of the marital relationship, such as bereft of one's spouse, serious disease or the other half’s obnubilation which causing the property to be given to others. Marriage breakdown and alimony disputes also affect the quality of children's lives and the burden of their upbringing expenses. The client can set up children to support trust and allocate some financial assets to be managed and controlled separately. Special funds can avoid the impact of the marital crisis on children's upbringing fees. As for marital property, isolation of risk between marriage and property can be achieved by nesting different ownership structures and giving consideration of the flexibility of management, the fair arrangement of benefit distribution, and the control of assets.
Trust can retain the painstaking efforts of the enterprise’s founder before listing
Another kind is the popular pre-listing trust. With the unicorn companies coming to Hong Kong to be listed, the main managers control the company's operational rights, but the proportion of shareholding is low, so they will choose to set up a stock trust before listing. Lei Jun, the founder of MIUI, is an example of this kind. Before going public, he arranges the unlisted shares to be held in the form of family trust, and entrusts the trust company to act as the trustee to arrange the benefits for himself and his family members according to the wishes of the settlor. Setting up company stock trust before the listing is not only conducive to market financing, but it is also a complete tax planning, asset protection planning, and helping for CRS declaration and exchange data requirements.
Now, at least 30% of the 216 listed family companies in Hong Kong hold shares in the form of the family trust. Usually, Using the company's basic structure to layout the trust. The founder of the company will set up a family trust fund and entrusts the offshore company to hold the shares held by family members on behalf of the family members, thus achieve the family enterprises’ equity control. Through the appointment of listed companies’ directors in holding mainstay level, which usually appoints a trustee or other family members as the director, can separate the beneficial rights from the management rights and lay the foundation for the family members’ quitting from the management in the future. Through trust company to hold shares of listed companies can also avoid the equity structure and the internal benefit distribution mechanism to be easily seen by an outsider. Meanwhile, it ensures that family members must act in concert to reduce internal conflict which might damage the operation of listed companies, and retain private space for negotiation.
Tax Advantages of Trust Funds in Hong Kong
Hong Kong is the second-largest private equity market in Asia. By mid-2018, Hong Kong's private equity fund under management had reached US$152 billion, while Hong Kong's assets under management had reached US$3.1 trillion, and non-Hong Kong investors account for two-thirds. The establishment of offshore funds is becoming more and more popular, which can be used as a way of property protection, wealth management, and inheritance, etc. Offshore funds are not regulated by laws and regulations of countries or regions beyond the offshore jurisdiction, but fund managers must be regulated by laws and regulations of the countries or regions where the managers are located. In contrast, onshore funds are managed and operated in Hong Kong, but not registered outside of Hong Kong, both registration and management are carried out in Hong Kong. Now, offshore funds sold by private in Hong Kong enjoy the profits tax exemption, but onshore funds sold by private cannot enjoy the profits tax exemption. Hong Kong has a Double Taxation Avoidance Agreements network and a large number of professionals. Including introducing the open-ended fund companies by the company registry last year, which enables investment funds to be established as companies, and investors can buy and sell funds through flexibly issuing and canceling shares.
Whatever the reasons for the formation of trust, various kinds of trusts enable asset management to be coherent and help clients handle tax and property matters properly without having to go through lengthy and expensive testamentary procedures. In transferring assets, the settlor can also achieve the need to manage assets, you can implement them both.
