In recent years, with the all-round implementation of the One Belt One Road (OBOR) initiative and other policies, China’s private wealth has continued to grow rapidly. According to statistics from New World Wealth, China’s private wealth growth rate reached 198% between 2007 and 2017, the second highest growth rate of private wealth in the world. In addition, according to the Hurun Report, the number of households with more than six million yuan of investable assets in the Greater China Region has reached 1.61 million, with Beijing, Shanghai and Guangzhou ranking in the top three. The growth of China’s private wealth has made an increasing number of families and individuals pay more attention to wealth management and family trusts and foundations, which are common tools for wealth management that are gradually becoming familiar.
In March of this year, 90-year-old Li Ka-shing officially announced his retirement. However, why is the “Superman Li” era able to continue? Contributions to the “Third Son” family trust established through the Li Ka-shing Foundation did not go unnoticed. In September this year, Ma Yun, the founder of Alibaba Group, announced that one year after the occasion of the 20th anniversary of Alibaba’s establishment, on September 10, 2019, he would no longer serve as the chairman of the group’s board of directors, and would be replaced by the current group CEO Zhang Yong. It is reported that he will make prepare for the Ma Yun Foundation and engage in education. This situation shows that both family trusts and foundations have become one of the most common tools for wealth management and planning for wealthy and high-net-worth clients.
In the following text, this paper briefly analyzes the current practice and development of family trusts and foundations in China in order to explore their development models.
There is currently no specific law in China to regulate family trusts, and theoretical research on family trusts is also relatively weak. Judging from the current legal system, family trusts apply the general provisions of the Trust Law of the People’s Republic of China. However, in view of the current provisions of the Trust Law, there are still many shortcomings concerning the ownership of trust property rights, trust registration and other aspects. Taking the ownership of the trust property as an example, the trust property under the Anglo-American legal system follows the dual ownership model of both the settlor and the trustee. However, in China, according to Article 2 of the Trust Law: “Trust in this Law refers to the act in which the settlor, on the basis of confidence in the trustee, entrusts certain property rights to the trustee and the trustee manages or disposes of the property rights in its own name in accordance with the intentions of the settlor and for the benefit of the beneficiary or for specific purposes.” That is to say, the trust property right still belongs to the settlor, and “the settlor, on the basis of confidence in the trustee, entrusts certain property rights to the trustee”.
Although this provision can prevent the trustee from having too much power, the legitimate rights and interests of the settlor are maintained to a certain extent. However, it is in fact contrary to the nature of the trust, and the independence of the trust property cannot be guaranteed. The purpose of establishing a family trust is for wealth management and wealth inheritance, for inter-generational inheritance and asset isolation. However, if the property rights of the family trust are still vested with the settlor, the settlor can still control it at will, and the trust will not be able to realize the basic function of family trust property isolation, and the family trust will also lose its original advantages and its essential significance.
On August 17 this year, the Trust Department of the China Banking and Insurance Regulatory Commission issued the “Circular on Strengthening the Supervision of Trust Management during the Transition Period of the Asset Management Business to the Banking Regulatory Bureaus” (Trust Letter [2018] No. 37), which is often referred to as “Circular No. 37” by industry insiders. Although Circular No. 37 clearly states that public welfare (charity) trusts and family trusts do not apply to the relevant provisions of the “Guiding Opinions”, for the family trust industry, the article still has incomparable significance.
First of all, Circular No. 37 clearly defines the meaning of the family trust. The family trust refers to trust services where the trust company, under the entrustment of an individual or a family, provides customized transaction management and financial services in areas such as property planning, risk isolation, asset allocation, children’s education, family governance and public welfare (charity) businesses mainly for the purpose of protection, inheritance and management of family wealth.
Secondly, the article establishes a certain threshold for the family trust, that is, the amount or value of the family trust property may not be less than 10 million yuan. Thirdly, the article stipulates for the first time that the beneficiary should include family members, including the settlor, and that the “family” can act as the “settlor”. In addition, Circular No. 37 clearly states that the settlor should not be the sole beneficiary. The pursuit of the preservation and appreciation of the trust property is the trust’s main purpose, and a trust business with a separately managed property and asset management account does not belong to a family trust.
Although Circular No. 37 has no other provisions on family trusts, policies and discussions about family trusts are springing up all the time, bringing hope and development prospects to the family trust industry. It is foreseeable that legally-compliant family trust businesses will become an inevitable trend.
Foundations face a similar situation to the above-mentioned family trusts. At present, the laws and regulations in this regard in China are limited. The United States has the largest number of foundations and the most frequent foundation activities, including the well-known Rockefeller Foundation. A foundation is a non-profit fund organization. According to the relevant US authority, the US Foundation Center, “The foundation is a non-governmental, non-profit organization. It has its own source of funding (usually there is only one source of funding, that is, a person, a family or a company), it has its own activities. The foundation is under management by a board of directors. The purpose of establishing a foundation is to develop or help education, society, charity, religion or other public welfare activities, mainly to provide financial support to other non-profit organizations.” According to Article 2 of China’s “Regulations on the Administration of Foundations”, the term “foundation” as used in these Regulations refers to a non-profit legal person established under the provisions of these Regulations by using the property donated by natural persons, legal persons or other organizations for the purpose of public welfare undertakings.” That is to say, in China, the foundation is still a non-profit legal person with a public welfare nature.
As a special property management system, financial instrument, and legal act, family trusts currently have four main business models in China: the trust company-led model, the private bank-led model, the private bank and trust company cooperative model, and the insurance company and trust company cooperative model.
With regards to foundations, because foundations under the current legal system in China are of a public welfare nature, such as charitable foundations, there is nothing more to be discussed on this topic in this article.
As mentioned above, the primary problem facing the current development of family trusts and foundations in China is that the legal system in China is still not well developed. Under the current legal system, family trusts and foundations are more or less subject to corresponding restrictions. Therefore, in the legal system, it is necessary to further clarify the independence of trust property, ensure the security of trust property, clarify the trust registration authority and procedures, ensure the independence and isolation of trust property, improve the effectiveness of trust registration, and ensure the privacy of family trusts, and so on.
Secondly, under the premise that the legal system is still not perfect, both bad and good trust companies and asset management institutions exist simultaneously. The lack of professionals and other factors has also created the need for them to strengthen their own asset allocation and management capabilities. At present, in rendering financing services, many trust companies are more inclined to sell wealth management products to their customers. However, family trusts and foundations are not just pure financial instruments, but a comprehensive tool integrating wealth management, finance and law. Therefore, the current service organizations still need to upgrade their professional standards so as to provide customers with professional and flexible integrated wealth management services.
In the long run, family trusts and foundations have broad market prospects. As wealth increases, more and more families and high-net-worth clients will need wealth management and wealth management agencies to provide services. However, in the face of the current mixed situation of wealth management institutions in the market, it is necessary to carefully select the appropriate wealth management agencies.
Firstly, real wealth management agencies need to truly separate ownership and beneficiary rights. Wealth management agencies should only act as trustees, providing the settlors with appropriate advisory services and wealth management advice. During this process, it is necessary for wealth management agencies to have professional operational and risk control mechanisms, and to design a reasonable trust structure and trust terms.
Secondly, as described in Circular No. 37, family trust refers to trust services where the trust company, under the entrustment of an individual or a family, provides customized transaction management and financial services such as property planning, risk isolation, asset allocation, children’s education, family governance and public welfare (charity) business mainly for the purpose of protection, inheritance and management of family wealth. Therefore, a real wealth management agency should not only be involved in wealth management, but also in comprehensive and integrated management services, including law, taxation, financial management, education, etc.
Thirdly, the current legal system is still not perfect. Therefore, in fulfilling the fiduciary duty, the wealth management agency itself must have certain restrictions and an industry bottom line. In addition, it should have certain industry influence, industry credibility and brand awareness, and endorsement by relevant authorities, that is, there is a certain reputation and brand. In general, most of the wealth management agencies currently on the market still belong to traditional asset management agencies, which are nominally “family offices”, but actually “financial companies”. Therefore, in choosing wealth management agencies, they must be compared in order to choose comprehensive and integrated service agencies with industry influence, brand, reputation, professional endorsement, and comprehensive talent.
The Investment Banking Family Office (IBKFO), the world’s first multi-family office, the pacesetter for the local Chinese family office, and the first licensed family office, is headquartered in the Shanghai Tower, with branches in the United Kingdom, the United States, Dubai, Hong Kong, Guangzhou and other cities. It also has operations centers in more than ten Chinese provinces and cities in Ningbo, Chongqing, Qingdao, Kunming, Jinan, Chengdu, Wuhan and Taiwan. The family think tank under IBKFO brings together more than 150 legal, financial, tax and family office experts from well-known law firms, asset management institutions and research institutions at home and abroad, specializing in education, training, research, consulting and product design of trusts and foundations at home and abroad, foreign and domestic asset allocation, legal structure, tax planning, estate tax, immigration, large-scale insurance policies, cross-border collaboration, global financial licenses, etc., as well as providing tailor-made comprehensive solutions for family wealth management and inheritance for high-net-worth individuals and wealthy families.
At present, with the strong support of cooperation partners such as China Multi Family Office Association, J&K Wealth, Wealth Plus magazine, National Institution for Finance and Development, Zendai Financial, Creditease, Bao’s Culture Society and Financial Weekly, IBKFO has become a multinational company and enjoys an excellent reputation in the relevant service market, providing customers with wealth protection and inheritance programs that are more in line with local needs.
Contributed by IBKFO
September 21, 2018
About the Authors
Wang Huaitao
Mr. Wang is the founder of Investment Bank Family Office (IBKFO) and the company’s chief strategy consultant and chief legal consultant. He is a renowned financial lawyer and founder of the Chinese family office industry. Mr. Wang has extensive experience in the fields of family inheritance, strategic family structure, and global asset preservation within the trend of global economic integration. He initiated the multi-family office model and is an advocate of the symbiotic win-win ecosystem within the family office industry.
He has lectured on the practical operation of family offices at many events and institutions, including the Asia Outbound Financial Summit and the National Institution of Finance and Development. He is often invited to exchange information on offshore finance and wealth management with political leaders such as the Prime Minister of Saint Kitts and Nevis and the Ambassador of Malta. He is often interviewed by mainstream financial media to express legal opinions on major events in the current capital market.
Mr. Wang Huaitao has provided services to hundreds of wealthy families, private equity funds, third-party wealth management and asset management companies at home and abroad. He specializes in family trusts, identity planning, private equity funds, and cross-border mergers and acquisitions, and is committed to providing the best wealth management solutions for wealthy families and financial consortia.
Lin Hai
Mr. Lin is IBKFO’s senior researcher and a lawyer at Shanghai Xingu Law Firm. He has a Master’s in Law from East China University of Political Science and Law, and has long been engaged in research in foreign law and comparative law. Since 2007, he has been engaged in legal work in business areas mainly involving immigrant property, private equity funds, and family trusts. He provides solutions and services for identity planning, legal planning, global asset allocation, and offshore structure development for a number of financial institutions, high-net-worth clients and families.
