General Manager, Galaxy Treasure International Wealth Management Limited
Galaxy Treasure International Wealth Management is a financial service provider based in Hong Kong. It is a subsidiary of Great Treasure International Inc. Limited
Galaxy Treasure International Wealth Management offers advice and services for the domestic market related to overseas investment, immigration by investment for high net-worth clients, wealth management products in relation to their children’s overseas education, setting up investment funds or trusts for investing in Hong Kong insurance, and other wealth management products connected to global asset allocation.
From blind aggressiveness to rational balance – Family foundations pass wealth down from generation to generation
Preface
According to the 2017 China Private Wealth Report jointly issued by China Merchants Bank and Bain & Company in June 2017, the number of high net-worth individuals with investable assets of RMB 10 million increased from 180,000 to 1,870,000 from 2006 to 2017. There are also 150,000 high net-worth individuals with investable assets of RMB 100 million. Capital outflows and inheritance issues have gradually become a concern.
The evolution of investment mentalities
China’s reform and opening-up has brought boundless opportunities to various industries and led to the evolution of high net-worth individuals’ investment mentality. In general, this can be divided into three phases:
The initial phase
At the stage of economic take-off in China, opportunities could be found everywhere. This created a group of nouveaux riche investors who only focused on short-term investments with high returns and didn’t believe in long-term investment. Therefore, products with high returns and high risks flourished.
The secondary phase
As economic development gradually stabilized, investors began to realize the importance of safeguards and financial security, and considered long-term capital appreciation. Coupled with the fact that many investors had made a loss from high-risk investments, the high net-worth group changed their mindset and shifted their focus to relatively solid investment products abroad.
The current phase
As information proliferates, high net-worth individuals have gained more thorough investment knowledge and have developed an increasingly mature attitude. They’ve gotten rid of the preference for high-risk high-return investments of the early days and started to rationally select appropriate financial tools for the purpose of balanced profits in the long run.
Investment orientation is becoming rational and pragmatic
Various portfolios aiming to satisfy different demands for asset allocation have drawn more and more attention. Private equity funds and equity investment funds have become some of the favorites among high net-worth individuals. In addition, the rise of Internet-based wealth management platforms has attracted a great number of high net-worth individuals thanks to their convenience, product efficiency, and low cost. As high net-worth individuals identify “wealth security”, “wealth inheritance”, and “children’s education” as long-term goals, “family foundations” have emerged to keep up with the times.
“Family Foundation”
Family foundations (as they are collectively known) can be conducted in different forms, such as the family trust, the offshore company – or they can even operate as a single account or bank account. This concept has long been popular in Europe and the United States.
“Family Trust”
Generally, a family trust is a service provided by a private banker to a high net-worth individual. It is an entrusted relationship in which the asset owner entrusts the ownership of his/her properties to the trustee. The trusted properties will become independent and no longer belong to the original owner, but the corresponding profits shall be collected and distributed according to his/her will. The trustee needs to manage the assets under the trust according to the trust agreement and transfer such assets to the designated beneficiary who is entitled to receive the trust proceeds rather than inherit the assets.
If, due to divorce, accidental death, or debt, the original asset owner divides up the family property, the assets will be completely preserved, provided that the assets and purposes of the trust are legal and legitimate. This serves to build a firewall between enterprises and individual wealth, to prevent the trustor’s family members from squandering or dividing up the wealth, and circumvents the potentially adverse effects of the company’s business risks on the family.
The initial trust asset of a family trust can be capital, corporate equity, or take on other forms such as real estate. A family member or any other person may be designated as the beneficiary who can be changed at any point. The rights of the beneficiary can also be established. As for the distribution of gains from trusts, different options are available, including once-off distribution, regular quantitative distribution, temporary distribution, and conditional distribution.
Due to different legal systems and environments, trust companies in China tend to treat trusts as an integrated investment instrument, raising funds for investment projects via trust schemes. In Hong Kong and other countries, however, the main form is the family trust and the main objective is to provide high net-worth individuals with service-based trusts to satisfy their demands for asset protection and inheritance, as well as taxation.
Family trusts are an extremely effective financial instrument which offers customers tailored asset allocation by signing standardized agreements and a customized letter of intent so as to achieve multiple purposes such as investment and wealth management, wealth appreciation, property heritage, and retirement planning.
Risks of establishing family trusts in China
Family trusts are not yet mature in China. Due to the lack of systematic regulations and juridical practices, incomplete rules on restraining trustees, and vulnerable social integrity, the trustor (who entrusts enormous wealth to the trustee by establishing the family trust) may suffer from the potential risks related to the capability and integrity of the trustee. Whether or not domestic trust companies, private banks and the third-party financial institutions – with their short history – can ensure the inheritance of family wealth from generation to generation has yet to be time-tested. If such institutions go bankrupt, close down or experience other institutional changes and accordingly cannot continue to manage the trusted assets, the question of how to deal with the assets under the family trust is high net-worth individuals’ greatest concern.
“Offshore Company”
The offshore company is a financial instrument frequently used by many large multinational corporations and high net-worth individuals. Many companies set up offshore companies in order to list overseas. As a form of commercial organization, offshore companies are not confined to the company (limited company, unlimited company, holding company, exempt company, international business company, joint-shares company, public company, etc.) but also include trust funds and partnerships.
Selection of offshore jurisdictions:
Local government doesn’t impose any tax on such companies and only charges a small yearly administration fee;
Major international banks recognize such companies, and facilitate the establishment of bank accounts and financial operations;
They have the following features: high confidentiality, tax exemption or reduction, no foreign exchange controls.
The main purposes of setting up an offshore company:
To conduct red-chip private placements overseas in order to get listed in America, Hong Kong, Singapore or Britain;
To bypass restrictions on foreign capital’s access to certain industries. In particular, to gain access to the Internet-based value-added telecommunications industry (TMT) in China, foreign investment adopts the “Sina” model, i.e. setting up an offshore company.
To implement cross-border mergers and acquisitions
To set up a holding company for capital operations;
To conduct tax planning, global transactions, and set up joint ventures, etc.
Many enterprises start by registering “offshore companies” in Hong Kong, the British Virgin Islands, the Cayman Islands and Bermuda, and then set up foreign-invested enterprises in China or get listed overseas and implement overseas acquisitions via these offshore companies.
“Family Office”
In addition, family foundations worth billions of yuan set up independent teams in the form of family offices to make investments, and to operate and manage large family assets in a more effective way. The family asset owner can keep a close eye on the balance sheet of the family via the family office team, and hire investment managers to manage the investment portfolio at his/her discretion without engaging any other financial institution, thus enabling the family to realize the objective of asset allocation more effectively in an environment without any conflict of interest, and which also ensures the administration and inheritance of family wealth. Besides ordinary investments, these independent family offices also offer high-end financial services, such as taxation, real estate and even the purchase of private planes. It is the uppermost method of family wealth management.
