It is well known that offshore companies are widely used in China with Hong Kong, BVI and Cayman companies being the most common. Such structuring is of great benefit particularly in relation to outbound investment. As time moves on, entrepreneurs and investors are giving increasing attention to matters of estate planning to ensure that the fruit of their labours can be passed to the next generation as efficiently as possible, and ideally in such a way that assets do not need to be broken up or sold in order to settle inheritance tax bills.
It is with such planning in mind that important decisions need to be made. In the UK, trusts have been used for some 800 years and are an integral part of many transactions ranging from estate planning, to investments and insurance. However, trusts are a product of common law and explaining the benefits of transferring wealth to trustees, and the control of that wealth presents challenges for clients from civil code countries, and particularly so in China.
Historically in the UK, if a trust was to be established, a family would appoint their solicitor or a family member as trustee; somebody with a long established and detailed knowledge of the family and its businesses. In today’s globalised world, this is less practical and often the resources of a professional trust company are better served to meet the complex and often international needs of the family. The key challenge is for the trust company to combine the personal approach of the traditional family solicitor with the increasing complexity of modern family aims and objectives. This is particularly important in China where personal relationships are key in conducting business.
A Question of Control
Having gained the confidence of the client, the variety of financial services centres and within them the broad number of structuring options provide plenty of scope to achieve those family objectives. More often than not this involves the thorny question of control. There will inevitably be those clients who are reluctant to relinquish complete control of their assets and a number of provisions are available to remedy this situation. Protectors may be appointed, or certain powers reserved to the settlor can create peace of mind. There are trusts specifically designed to avoid the need for the trustees to interfere with the operation of a business, such as VISTA in the BVI. A Private Trust Company (PTC) is another solution. A PTC is a company which is the sole corporate trustee of the family trust. The board of directors of the PTC will include family members sitting alongside professional trust company officers.In some PTC arrangements the head of the family will own all the shares of the PTC.
We have also noticed considerable recent interest in foundations, a civil law version of a trust, but with some key differences. Foundations have a similar legacy within continental Europe to UK trusts, with medieval and largely ecclesiastical origins. The use of foundations for financial and estate planning became more widespread in the 1920’s with the enactment of Liechtenstein’s Foundations Law. Over the past 20 years, foundations laws have been introduced in a number of International Finance Centres such as Jersey, Guernsey and Seychelles, with a view to broadening the estate and wealth planning options to suit clients in both civil and common law based countries.
It is the comparison between trusts and foundations that has generated consistent interest from our Chinese clients and contacts.
Themain similarities between trusts and foundations are:
- Both may be created for asset protection, succession planning and wealth preservation.
- The settlor/founder can transfer assets to both.
- Both can be set up during the founder/settlor’s lifetime
- Both entities have the ability to be revoked(with appropriate drafting)
- A Protector or Enforcer can normally be appointed for both.
With certain types of trust, such as a BVI VISTA the settlor is able to exercise the power to direct the investment functions (including the power to sell or retain trust assets and to direct the investment). Where he is director of the underlying company he can control the management of the company owned by the VISTA trust. Similar conditions can be replicated in a foundation where the Founder, as a member of the Council, can exercise control over the foundation assets.
Notable Differences Are:
A trust does not have separate legal identity from its trustees. In contrast a foundation has an independent legal identity and holds assets in its own name. The foundation therefore goes through a registration procedure, whereas the trust doesn’t, it is established upon the execution of the trust instrument and transfer of assets from the Settlor to the trust. As a trust does not have separate legal personality the trusteesmust contract personally in their own names, however,a foundation can contract in the name of the foundation. It does not require the mediation of a trustee or council member to hold title to assets.
Foundation Regulations (which govern the foundation) are private but the Foundation Charter (containing basic information) is a public document. In contrast, the trust instrument remains private.
The beneficiaries of a foundation do not have equitable rights over the assets of a foundation, whereas beneficiaries of a trust do have equitable rights. The rights of the beneficiaries of a foundation are essentially contractual.
The foundation is usually established with the sole purpose of holding wealth or assets and in some jurisdictions legislation prevents any commercial activity being conducted by foundations.
A foundation council must comply with the precise terms of the regulations of the foundation as set by the founder, whereas the trustee must act at all times in the best interests of the beneficiaries.
What Would You Choose?
While the foundation is a rival concept to the trust and has many advantages, it is a fact that the trust will continue to be widely used in international tax and wealth planning for two key reasons.
Many countries do not recognise the concept of trusts but this can be an advantage because countries that do not recognise the trust concept cannot enact specific anti-avoidance legislation against trusts;
Even where countries recognise and enact anti-avoidance legislation against trusts it is possible to advise with greater certainty in relation to such legislation and its impact on settlors and beneficiaries; trusts have been widely used as family succession planning vehicles for many years in prestigious jurisdictions, so a large body of case law has built up which makes advice in the context of trusts arguably more certain.
Topical Debate
This debate of trusts versus foundations has also recently become very topical in the context of company legislation in the UK and the subsequent impact this has on China outbound/UK inbound investment.
The Small Business Enterprise and Employment Act was passed on March 26th 2015. A consequence of this legislation is the creation of a new register that all UK companies must create: a register of “persons with significant control” (PSC) or human individuals with a beneficial interest in over 25% of the shares in a company. This is a public register and is anticipated to become effective in April 2016. This is part of an EU wide initiative and similar provisions will be introduced throughout the European Union in due course.
From our experience, many foreign investors in UK businesses prefer to keep their interests away from the prying eyes of competitors, the media and general public. For such clients the creation of a trust to hold shares in UK companies presents a viable option as trustees are considered to be PSC’s. Foundations may achieve similar results.
So, Trust or Foundation?
The current interest from China in trusts and foundations illustrates a growing appreciation of the importance of wealth and estate planning. Whilst pure company registration business remains a key element of outbound investment, trusts and foundations will play an increasingly crucial role in the management of intergenerational global wealth.
Either choice can be very effective for succession, asset holding and privacy issues and as with any matter relating to professional services, the pros and cons of each will be determined by each individual situation.
By John Swann
John has worked in the corporate services industry for over 30 years, and has been at Jordans since 1986, in which time he has run Jordans operations in Gibraltar and the BVI. Now based in the UK, John has responsibility for overall business development, with a focus on Asia, and specifically China.
