Although China's economy is experiencing a slowdown amid global economic uncertainties, the number of Chinese super-wealthy is still increasing. There are over one million high net worth individuals in China and indications are that there is a clear trend among wealthy Chinese: their wealth is growing steadily; many send their children overseas for education; they are looking to move assets offshore and a growing number of them are willing to move overseas.
As the trend for Chinese families to investment offshore gathers momentum they are looking overseas for financial solutions and many have adopted western-style tools such as trusts because of taxation and succession considerations. Trusts are a widely used structure that protectsassets and family business against dispute, bankruptcy, divorce or other issues. Establishing the right structure in a right jurisdiction and obtaining good advice is the key to successes in terms of asset planning, wealth planning and family succession.
Trusts as a Protection and Planning Tool
In China, trust arrangements are generally different to what is traditionally known as a trust under common law jurisdictions such as Hong Kong. Trusts in China generally just hold clients' assets instead of making real arrangements for their family wealth and succession. In addition, the property to be settled under a China trust must be made public before it can be set up and this brings concerns of privacy. In contrast, setting up a trust in an overseas common law jurisdiction often gives more freedom and protection.Offshore trusts however, will generally only be applicable for offshore assets.
A common law trust refers to a relationship under which assets are held by one party for the benefit of others. The creator of a trust is called a settlor, who transfershis/her assets to a third-party, who is the trustee. The trustee has a legal obligation to hold and manage the property for the trust's beneficiaries, whom are named by the settlor.
Under such a scenario, the property's legal ownership, daily management, control of its equitable ownership and distribution of benefits are separated from the settlor.
The Chinese may find it contrary to their traditional concept of wealth management because the trustee is given the legal title to the assets under a trust. However, the trustee is obligated to act for the good of the beneficiaries. By transferring title of the assets to a trust there are some key benefits which include,tax-related benefits, security of succession of the family business interests,avoidance of inheritance tax, protection of beneficiaries even after the settlor has passed on and security of the assets against creditors. For example,the settlor may be protected from creditors and benefit from the trust assets without owning them.
As trusts become a more understood and utilised wealth planning vehicle, many jurisdictions have modernised their trust laws to keep pace with the growing trend. In Hong Kong for example, changes to the trust laws in December 2013 have provided some key improvements. These include the settlor’s right to make investment decisions on the trust, statutory duty of care requirements being imposed on professional trustees, the upholding of Hong Kong trusts against forced heirship provisions and the introduction of perpetual trusts.
Conclusion
Chinese families who have assets offshore to China should consider the advantages of a trust structure in order to maintain and grow their wealth and to provide orderly succession of such wealth to their families.Offshore jurisdictions with solid infrastructure, legal systems and trust law, such as Hong Kong, can provide them with the right tools and professional advice to assist them.
Carolyn Butler
Chief Executive Officer
The Hong Kong Trust Company Limited
Carolyn is the CEO of The Hong Kong Trust Company Limited which specializes in trust arrangements and structures for private clients, intermediaries and corporations. The Hong Kong Trust Company also provides custodial, escrow, private fund establishment and administration and family office services.
Carolyn has been a practitioner in the financial services industry in Australasia for over 20 years. She is past Chairman of the Hong Kong Trustees’ Association, a full member of the Hong Kong Securities Institute. She lectures at HKU Space on trustee/director duties. Carolyn holds an MBA with distinction and a Master of Business Law.
