Tolstoy: “Happy Families are all alike; every unhappy family is unhappy in its own way.”
What if, as a wealthy person in today’s China, you were introduced to a legal solution which offered benefits, including the provision of a mechanism for controlling your wealth, and more specifically, how it would be dispensed to beneficiaries, years and generations into the future? This solution could be designed to preserve your wealth from external attack from creditors or from division, if there were divorces within your family. Under this solution, the holding of your private assets would become “opaque” to outsiders, whereby your assets would be held in the name of a foreign entity, but the benefits of your wealth would be readily available to beneficiaries which you nominated. Moreover, this solution could potentially protect against inheritance taxes, currently under consideration in China.
Welcome to the new world of Offshore Private Trusts which offers promising wealth planning solutions for high net worth families in China.
- Why would a client consider an Offshore Private Trust Structure, if Chinese law provides for domestic trust structures?
China’s environment for trust laws is an imperfect one. China has had a trust law since 2001, however, it is currently conceived as a commercial product and a form of “investment fund”, and is not viable for personal planning.
As such, in recent times Chinese citizens have been attracted to the benefits of offshore private trusts based on the laws of jurisdictions other than China, which are robust and well-established. There is no prohibition in China regarding its citizens establishing an offshore trust, a trend which is driven by the internationalization of Chinese wealth. Consequentially, Chinese citizens who use offshore trusts would commonly do so for asset holding, estate planning and privacy, amongst other reasons.
- What benefits do Offshore Private Trust structures offer China’s wealthy families?
Offshore private trusts offer a broad range of benefits for China’s wealthy, including the following:
Asset Protection. One of the key benefits is asset protection. A properly structured trust may provide protection against any or all of the following types of claims: (a) protection against creditor’s claims (e.g. bankruptcy, director’s liability or professional liability); (b) protection against divorce claims which involve matrimonial property; and (c) protection against claims regarding an individual’s will. In view of rising divorce rates in China, unstable economic indicators in the Chinese economy, and rising levels of personal wealth, the asset-protection benefits which trusts offer against risks can no longer be ignored.
Inheritance Planning. China’s wealth accumulation creates new challenges for inheritance planning. For instance, there may be unique family situations including the need to provide for “multiple wives” and “multiple families”. There is also the desire for the wealthy to ensure that their fortunes serve as a legacy for their children, or future generations’ education, maintenance and medical needs, in the event that they are not there to provide guidance. Many people these days do not want their assets to pass to heirs according to rigid legal guidelines, known as “forced heirship”. A well-structured offshore trust offers multiple, flexible options for inheritance planning.
Tax Planning. Offshore trusts offer exceptional options for tax planning. A properly structured trust may provide substantial savings in income tax, capital gains tax, inheritance tax, gift tax and stamp duty.
Flexibility. Offshore trusts offer a mechanism to protect the welfare of infant children, the aged, and the disabled. Alternatively, an individual may wish to preserve family wealth as a legacy for future generations, with the possibility of controlling and allocating funds according to a plan which is agreed upon during an individual’s lifetime.
3. Will information about a client’s assets be publicly available if an Offshore Private Trust is established?
An offshore trust’s details are not publicly registered.
A trust is a private legal act by which a person called the “Settlor” transfers assets to a person called the “Trustee”, who manages or disposes of their assets on behalf of a “Beneficiary”. As such, no deeds or documents need to be filed for a trust. The control and administration of the assets in the trust is within the power of the Trustee.
The Trustee is subject to strict, legally enforced confidentiality. Beneficiaries’ details are only known by the Trustee and the Settlor.
Furthermore, an offshore trust provides an alternative legal solution to a will, for the transfer of assets upon the death of an individual, without the need for internal details to be publicly disclosed, as with a will. Based on the experience of other jurisdictions, during standard probate procedures, the tax authorities or the courts need to review the list of assets owned by a deceased person in order to make a tax assessment. This process makes the details of a family’s assets public, which would otherwise be private.
4. What if the family’s needs change over time? Can the Offshore Private Trust’s provisions be adjusted?
A “Letter of Wishes” is prepared by the Trustee to document the Settlor’s wishes regarding the Beneficiaries’ provisions. This can be amended at any time. We would recommend that it be reviewed and amended as required during every “Annual Review”, which the Trustee undergoes with the Settlor. If necessary, the provisions of the trust deeds could also be modified.
5. What benefits can an Offshore Private Trust provide for a client whose children are about to be married? Will a Trust protect the client’s wealth if there is a divorce?
With proper planning, an offshore trust can offer asset protection and protect a client’s assets. A trust could be developed to shield assets from claims raised by a child’s former spouse in a divorce situation. However, clients are encouraged to seek proper legal advice at the earliest time prior to the marriage so as to avoid the trust assets being characterized as matrimonial assets. Clients may also wish to draw on the experience of the Trustee – particularly if such a trustee has expertise in family law – to assist in the preparation of pre-nuptial agreements (common in many Western and civil law jurisdictions.) This would stipulate pre-agreed details about how matrimonial assets would be split during a divorce.
6. Will an Offshore Private Trust help families to manage children who prefer to spend money, rather than make money?
Families in China can benefit from the experience of wealthy Chinese families in Hong Kong, Taiwan and the West, who have had a longer exposure to trusts. If there is concern about “spendthrift” beneficiaries, the trust can be devised as a solution to dispense money as the Settlor determines.
Trusts can make money available to children, grandchildren, other relatives, or even non-relatives for educational purposes, such as university tuition, medical care and living expenses. A trust can be used to dispense funds year-by-year to a Beneficiary, and then a final sum could be distributed at certain age when the Settlor is comfortable that a Beneficiary will be mature enough to protect and value the money. Alternatively, a Settlor may reach the decision that the family fortune should not be divided and distributed, but only function as a perpetual “fund” to meet the needs of future generations.
7.How can an Offshore Private Trust assist wealthy Chinese families if inheritance taxes are introduced into China?
China’s tax system is evolving, with inheritance taxes under consideration for the past decade. Inheritance taxes normally comprise estate tax and gift tax components, and are paid by beneficiaries. At present, over 100 countries around the world have imposed inheritance taxes. The tax was stopped in Hong Kong in 2006, but continues to be imposed in other places in East Asia including Taiwan (estate tax applied at a flat rate of 10%), Japan (estate tax applied on a sliding rate up to 55%) and South Korea (estate tax applied on a sliding rate, comprising a set sum and up to 50%).
If inheritance taxes are introduced, many potential heirs or inheritors stand to pay millions in renminbi before they can enjoy their inheritance. Although the law is still in a draft format, certain details are in public circulation, including a proposed exemption threshold (RMB800,000), a sliding tax scale such that the wealthy would be expected to pay a higher percentage of tax, and the stipulation to settle taxes in cash within a set time-frame, for example three months.
In the event that such a tax is introduced, wealthy Chinese families are strongly advised to consider solutions such as trusts which, if properly structured, offer significant asset protection and estate-planning benefits. Proper legal advice should be obtained to confirm that the solution is feasible.
- What other solutions are there besides Trusts? What are Foundations?
Trusts are a legal concept developed under English common law, while Foundations were originally a civil law concept.
Private Foundations require the registration of a foundation charter at a Public Registry. While this process may have the effect of making public certain limited information regarding a Foundation, one positive factor is that Private Foundations can grant the status “independent legal person”.
In the Private Foundation, the power of control and administration rests with a Foundation Board, which resembles the board of directors of a company. Noting that Chinese law is based on 19th Century German civil law codes, which included foundation concepts, Chinese clients may well feel more at ease with a Private Foundation, rather than a Private Trust solution.
Conclusion
Within a generation, China has witnessed dramatic personal wealth accumulation which presents broad challenges for China’s wealthy families. This has transpired within the fast-moving domestic context of changing Chinese regulations, an evolution of the economy, as well as the fresh financial challenges on the horizon.
Laws and circumstances permitting, the use of Offshore Private Trust structures may be one method to streamline the holding of family wealth. The following factors single out Offshore Private Trusts when it comes to identifying a diverse and all-encompassing solution for families:
- Offshore Private Trusts have a long history, and have offered an effective, proven and harmonious answer for wealthy Chinese families, and families in general, in Greater China, Asia and elsewhere;
- Offshore Private Trusts offer the many benefits outlined above, and are readily accessible in the current era of openness and maturity in Chinese thinking about family asset holding;
- Offshore Private Trusts are in line with trends of internationalization for Chinese families, who are developing diverse cross-border business empires and personal asset portfolios. Moreover, the members of these families are relocating internationally, both for immigration and education, which in itself raises questions about optimal modes for holding family wealth;
- Chinese clients are now, more than ever before, able to interact with the many cross-border Trustees and advisors who are geared to provide tailored solutions which are adapted to each family’s unique
If, from a Chinese client’s perspective, there exist reasons to consider sophisticated planning which will ensure the future harmony and prosperity of their families, then there are indeed positive reasons to consider a move at this time towards Offshore Private Trust structuring.
By Leon Mao
Leon Mao serves as an Executive Director and Head of Trusts of the First Advisory Group’s Hong Kong office. Leon heads a team of wealth advisers at First Advisory Group’s Hong Kong office whose primary focus is servicing high net worth clients in the East Asian market. His office oversees the provision of wealth advisory, foundation and trust solutions.
Leon has spent equal periods of his life in the East and West; providing a diverse perspective, enabling him to interpret and implement client needs, whether they be Chinese or Western.
Educated in Australia, Leon earned undergraduate degrees in international relations and law, and a master degree in the area of foreign investment law. His professional career has been based in Hong Kong and China where he has almost 20 years’ experience in providing advice and solutions in offshore law, specializing in corporate and commercial law and trusts.
In terms of offshore legal professional qualifications Leon has legal admission and/or extensive practical experience in the British Virgin Islands, the Cayman Islands, Bermuda. In relation to onshore jurisdictions, he is admitted as a lawyer in England and Wales and Australia.
