By Xu Haibo.
As one of the major types of civil trusts, The trust structure is currently at its infancy in China. The development of the family trust will represent the general trend in the foreseeable future. This is primarily due to the robust growth of the economy and the internationalized financial management of wealth Chinese families.
Based on its unparalleled system advantages, family trust has played a key role in planning and managing wealth of a whole family. It has gradually become an international practice to plan family relations, corporate governance and intergenerational transfer of various interests through contract documents of a trust.
As for the kind of family wealth that should be managed and how to use family trusts to manage family’s wealth, depends on the type of trust property, the purpose of establishing the trust, the legal provisions of the jurisdiction where the trust is established, etc.
The Problems to be Settled by a Family Trust
I. Intergenerational transfer. Everyone will experience birth, aging, illness and death. How to transfer wealth to future generations, how to better protect the interests of minor children and how to balance the legal relationship between various stakeholders in a family are core issues family trusts are meant to deal with. From the perspective of intergenerational transfer, in addition to trust, there are two traditional ways to transfer wealth: donation inter vivos and inheritance. However, neither of them has the advantages of trust systems. Furthermore, neither of them can easily solve some complex problems arising from the transfer of family property.
II. Asset allocation worldwide. In today’s era of globalization, there are strong political and economic uncertainties around the world. As for families with large-scale wealth, how to allocate assets to maximize global returns, how to maintain reasonable control and how to achieve effective transfer are issues that must be considered by the actual controller of a family trust.
III. Financial aggregation and sustainable development of family enterprises. Especially for families with huge business empires, it is always an important issue for the owner to ensure sustainable development of family wealth.
IV. The issue of inheritance tax. In recent years, there have been rumors that the country is preparing to introduce inheritance tax, which often arouses strong repercussions in the market because lowering tax reasonably and legally has always been one of the important reasons the actual controller of family wealth will consider in establishing a family trust. It is worth mentioning that inheritance tax has always been the trump card when a cross-border wealth management company promotes the overseas trusts business.
Paths to Develop Chinese Family Trusts
In this paper, the so-called Chinese family trusts include: (1) family trusts established by the major property controllers of Chinese families in the territory of China, domestic family trusts for short; (2) family trusts established by the major property controllers of Chinese families in jurisdictions beyond the territory of China, overseas family trusts for short. How to establish these two types of family trusts is of great importance to the development of family trusts, offshore finance, internationalized wealth management, etc.
More generally, a family trust is trust for personal and family interests as well as planning, management, protection and transference of private wealth. From this point of view, family trust should be a civil trust.
How can a trust be established effectively? Generally speaking, the following conditions shall be satisfied: firstly, trust does have a legitimate purpose; secondly, there is definable legitimate trust property; thirdly, there is an eligible trustee subject; fourthly, the beneficiary or the scope of beneficiaries is determined; fifthly, there is no violation of any prohibiting law in the country; sixthly, ownership of trust property is really transferred.
Currently, most of domestic family trust products are established mainly based on cash assets, with specific purposes and functions. The divisions of private banking of some banks and the family business divisions of some trust companies have tried developing this type of business. In general, such trusts will center on children’s education and establishment of business, pension security of family members, protection of children’s rights after a divorce, etc. Taking a fund trust established for a child’s education as an example, cash assets of no less than 30 million yuan or 50 million yuan will be used to establish a single fund trust, with the trustee, beneficiary and trust protector being previously determined. In accordance with the arrangements in the trust contract, the trustee will disburse the funds corresponding to the trust interests to the beneficiary. Such funds will be separated from the family enterprise, in order to achieve bankruptcy remote and fully protect the interests of minor children in education, marriage, establishment of business, etc.
In addition, insurance trust products integrating good insurance products also begin to appear in China. In some divorce disputes, some lawyers have begun to introduce trust systems to address education, security, property inheritance and other issues of children after a divorce, through a designated trustee.
It is quite easy to establish a trust with cash property and very easy to deliver and transfer the property thereof. The core of such trust relies only on the preparation of two documents: one is the trust contract based on which the trust is established, the other is the fund supervision document prepared for depositing and managing the trust fund.
According to the status quo of domestic asset management, it is a very pragmatic approach to begin from family trust products with a single function. When such products become diversified, family trusts will be more widely accepted and rules for trustees, quality of trustees, etc. will gradually develop. What is more, China’s legal environment will gradually improve and such top business of family trusts as comprehensive family trust products and even family offices will be developed as well.
It is Difficult to Implement Property Trusts in China
In terms of property trust, currently, there are still some institutional blind zones in China, which shall be remedied gradually by China’s financial legislative branches and judicial branches. In the absence of a system for registration of trust property, the law of the trust industry and the law of trustees, it is very difficult to effectively prevent the moral hazards of trustees. In China, property trusts established based on non-cash assets develop very slowly and it is very difficult to implement family trust products on this basis.
How to solve the difficulty in implementing domestic property trusts? The author suggests that the personnel engaged in the trust industry may establish family assets-based innovative property trusts, by taking full advantage of the principle of contractual freedom in the Contract Law and with reference to the SPV model of business trusts, and thus achieve the functions of family trusts.
In the Trust Law passed in China in 2001, the provisions on the relationship between the rights and obligations of trustor, trustee and beneficiary show full respect for and embody the principle of “autonomy of will”. Although 74 terms and conditions in the “Trust Law” are somewhat principled, the person establishing the trust and his or her team of consultants can improve the trust structure through the arrangements in specific terms of the trust contract and lay down more specific provisions for the relationship between rights and obligations of various subjects of the trust, so as to ensure the purpose of the trust.
However, due to absence of a system for trust property registration, there is also a dispute in the industry on whether property trusts can be established effectively based on the existing Chinese legal system. According to certain reports published by some authoritative wealth management organizations, property trusts cannot be fully established based on China’s property law system based on the principle of “one property one right”. I do not agree with this point of view. According to China’s current legal framework, property trusts can be established effectively with the family wealth management. The specific reasons will not be further explained in this paper.
How to establish family assets-based innovative property trusts with reference to the SPV model? There are two points: one consists in establishing a mechanism for trust protector through terms of a trust contract, the other is to realize the independence and the isolation of risks of trust property through a special purpose company as well as its governance and arrangements.
The biggest problem in establishing equity or real estate-based family trusts (property trusts) lies in registration of trust property and isolation of trust property from the property of the trustee. Before the birth of the trust registration system, during the establishment of an innovative trust, it is crucial to establish a domestic SPV and innovate the model of property isolation and trust property management through determination of a trustee, as well as governance and arrangements of the trustee, with reference to the model of private trust company of overseas trusts, so as to realize normal trust property management. On this basis, a trust protector shall be determined and the rights and obligations of trustor, trustee and beneficiary shall be set forth in accordance with the provisions in the trust contract. Only in this way, it will be easy to achieve the purpose of establishing a family trust.
Establishment of Overseas Family Trusts
At present, more and more Chinese families begin to establish overseas family trusts mainly due to the following three reasons: firstly, the wealth structures of few wealthy families become internationalized; secondly, China’s environment of trust law is imperfect; thirdly, offshore wealth management institutions and investment banks have promoted family trusts vigorously in recent years. It is already known to the public that many families, including SOHO family, the actual controller of Longfor Properties Co., Ltd., have established overseas family trusts. Many actual controllers of listed companies and rich and powerful people in China choose to establish overseas family trusts. This is consistent with the openness of the era and the trend of internationalization.
The trust laws in overseas jurisdictions are rather sound. As markets are becoming more mature and more open, internationalization of domestic enterprises will become increasingly common and Chinese families will have larger and larger rights and interests in foreign countries. Through family trusts, the actual controllers of these enterprises can better achieve cross-border asset management and solve problems in intergenerational inheritance, corporate governance, asset allocation, inheritance tax, etc. They are certain to choose family trusts. So far, some actual controllers of Chinese concept stocks have established such family trusts. Establishment of perennial domestic family trusts will not be further explained in this paper.
Cooperation with Other Institutions during Cross-border Wealth Management
With growing market demands, to develop the business of Chinese family trusts requires integration and interaction with cross-border institutions engaged in the industry. Chinese market of family trust still needs to be nurtured. During the nurturing process, we should not just try to persuade domestic wealthy families into establishing overseas family trusts. While promoting the establishment of overseas family trusts, we should also promote local innovation in the business of family trusts and combine good legislative experience and innovative experience of foreign countries with China’s local legal environment.
I also believe that the Chinese Government will gradually improve the domestic environment of trusts, just as Hong Kong made a substantial revision of the trust law. After all, the profits arising from international management of wealth can flow around the world.
