Wealth Management &Inheritance from Generation to Generation
Thirty years after China’s “Reform and Opening Up Policy” began, hundreds of thousands of high-net-worth families have been created in the Mainland.Meanwhile, a huge market for asset management and inheritance has been created too. Currently, China's high-net-worth individuals are relatively concentrated within a certain age range, with about 70% of those interviewed aged between 40 and 60.
While high-net-worth individuals’ businesses are entering a peak period and a stable period, their children are growing up.In addition to inheriting family businesses, the inheritance of other assets (especially financial assets) is also a key concern. If the said children are not skilled at the overseeing of family assets (or are unwilling to oversee them), one of multiple options is for professional trust investment agencies (e.g. trust companies) to manage the assets and let the children enjoy a relatively fixed income.
The global economic downturn has resulted in a sense of crisis towards wealth protection. The last two decades have seen 20 years of rapid economic development in China, as well as 20 years of rapid wealth accumulation for private entrepreneurs and other high-net-worth families. In the last two years, however, the economic growth rate has slowed; all kinds of risks that were ignored in the past have been exposed gradually, and miracles are beginning to be dispelled. As businesses’ operational risks have increased, existing family properties usually find themselves "involved in" such risks,due to certain liability.The original high growth investments and "low risk & high yield"businesses have now gradually become part of a superfluous "high risk & low yield"industry, thus the corresponding family wealth and assets are in need of re-allocation.
Because of this, in the last two years institutions in China have launched the "family trust", so as to satisfy high-net-worth clients' demand for family wealth and inheritance management from generation to generation.
Trust Companies in Transition
In the last decade, the main business of trust companies in China was to provide enterprises with financing other than that from the mainstream banking system, but the private wealth management business for high-net-worth clients was still in its initial stage of development. Since the second half of 2012, related supervisory and regulatory authorities have deregulated the asset management market, so that asset management, insurance asset management, and fund subsidiaries have all moved into the asset management field one after the other, directly competing with trust companies. The coming of age of asset management of a high standard has made trust companies face unprecedented competition in financing and investing in businesses. In comparison, trust companies have system-related advantages in the affairs management business: in line with the Trust Law, only a trust company can establish a trust with a person other than the trust or as the beneficiary. In addition, trust companies – relying on the product advantages and client resources they formed in the past –are in a good position to seize the opportunities presented by private wealth management business’development.
In April 2014, the China Banking Regulatory Commission implemented the“Directive Opinion on Supervision and Regulation of the Risks of the Trust Companies”, expressly formulating the general requirements for the transitional development of the trust industry and pointing out the specific direction of its development. Driven by market pressure and policy guidance at the same time, the business structure of the trust industry has begun to be optimized in a direction that is more consistent with the origin of trusts, and market demand. In the process of transition and optimization, trust companies actively help family trust businesses to transition from credit alternative businesses to traditional trust businesses.Thus,the business of family trusts (which are, essentially, wealth management by means of trusts) has become one of the new businesses listed by trust companies.
From Family Trust to Affairs Management
Currently, the family trust in China mainly has two functions: family wealth management and family affairs management.
Family wealth management means that a trustor entrusts a trust company to manage part of his family’s assets. Such a trust company handles professional portfolio management by making investments that finally result in a steady stream of wealth. A professional team then distributes such gains on investments to family members in the form of "trust interest distribution", as per the trust contract or according to the client's instructions.
Family affairs management, in a broad sense, includes inheritance planning, asset diversification, reasonable allocation among family members,wealth inheritance from generation to generation, pre-nuptial property arrangements, children support payments, venture startup capital support,charitable payments, and so on.
It is normal to differentiate between the purely financial aspects of family trusts and family affairs management.
Exploring and Moving Forward to the Future
Though a number of trust companies, private banks, and third-party agencies, such as Chinese law firms, have spent a tremendous amount of energy researching and popularizing family trusts, this structure is still in the incubation and exploratory stage.There is still a very long way to go before it matures as a foreign concept brought into mainland China.
Firstly, as with the legislation and theoretical research of the Trust Law, there are still a lot of legal issues to be further clarified. For example, the unavailability of clear provisions on trust registration causes certain doubts as to how to differentiate the properties registered under the name of the trustee from the trustee's own properties,for example, and whether a trust’s legal conduct shall be specially treated under Tax Law, and not be deemed as a transaction which is subject to turnover tax.
Secondly, from the point of view of industry-based experience, trust companies, private banks or law and accountancy firms providing professional services are still at the stage of accumulating experience. Overseas experience is, to a certain extent, of significance for practitioners in China; meanwhile, it should be clarified that there are big differences between the overseas established family trusts based on English and American laws, and those based on the Continental legal system.
Thirdly, high-net-worth clients are generally still at the stage of "client education" and are at a rather immature stage with regards to acceptingthe separation of property ownership and beneficiary rights, and trusting professionals to manage properties in the long term, and lowering children’s expectations, for example. Family trusts are a novelty, and some high-net-worth clients still have a "wait and see" attitude, believing that family trusts won't be considered seriously until they mature.
Still, the industry is confident in the development of family trusts in China. As a matter of fact, some of our clients have witnessed that in the current legal framework, family trusts area tool for making inheritance arrangements which have more purposes than costly life insurance. Some entrepreneurs who establish family funds generally choose family trusts as one of their inheritance vehicles.
There will inevitably be doubts and setbacks on the way, but we strongly believe that, judging from the perspective of the market, family trusts will definitely become one of the key choices for wealth management and inheritance for those high-net-worth clients whose asset size cannot reach the access threshold of a family office.
By Chen Han
Mr. Chen Han is a senior consultant at Hankun Law Offices. His practices include transnational marriage, transnational succession, family business, second-generation inheritance and family constitution, etc.
