Brief introduction:
Huaitao Wong, Lawyer
Managing Partner at IBK Financial Group, co-founder of IBKFO, director of Shanghai Thinkoo Law Firm, and member of the Shanghai Bar Association’s Merger, Acquisition and Reorganization Research Committee.
With over eight years of experience as a lawyer, Mr. Wang specializes in identity-planning, family wealth protection, management and inheritance, family trusts, private foundations, and legal services related to various other financial products. Mr. Wang currently serves as legal counsel for over one hundred financial institutions at home and abroad, and provides wealthy Chinese families with wealth protection and inheritance services.
Limhay, Lawyer
Senior researcher at IBKFO and lawyer at Shanghai Thinkoo Law Firm.
Mr. Limhay holds a Master’s degree in Law from East China University of Political Science and Law, and began to practice law in 2007. He is mainly engaged in fields including identity-planning, private equity funds, and family trusts. Mr. Limhay provides several financial institutions and wealthy families with programs and services related to wealth inheritance, foundations and identity-planning.
IBKFO, headquartered in Shanghai, specializes in offering high-net-worth individuals, wealthy families and financial institutions custom-made solutions for global identity-planning and immigration, family trusts and foundations, global asset allocation and management, tax planning in the context of CRS, family inheritance and management, and support in daily life. As a family office offering legal and financial services, IBKFO now has operational centers in London, Hong Kong, Qingdao, Chongqing and Chengdu.
Generally speaking, family wealth is inherited through family trusts and foundations. However, because the family trust in its true sense doesn’t yet exist in China, and using foundations in China has many disadvantages, most wealthy families adopt a model that combines charitable trusts with foundations.
The foundation has an independent corporate status, but it has no shareholders and it can also exist forever. With the exception of several countries that allow private foundations to exist, generally speaking, foundations are non-profit organizations. In Singapore, for instance, non-profit foundations are classified as public companies limited by guarantee. At present, several virtual currency companies have set up foundations in Singapore.
Charitable trusts are another kind of trust. In fact, any trust designed for charitable purposes is a charitable trust. According to the latest data from official Chinese social organizations’ websites, there are currently 69 registered charitable trusts. The fund with the largest holdings (RMB 492 million) is “CITIC · He Xiangjian Charitable Foundation 2017 Shunde Community Charitable Trust” with “Midea Holding Co., Ltd.” as the trustor.
The establishment of charitable trusts is achieved through the signing of trust deeds and wills. The charitable trust system was born and matured under the Anglo-American legal system. The earliest statutory law was not specific, but because of the jurisprudence and equity methods, the trust system was gradually perfected. Because the use of the trust system for public charity is understood by various countries, using trusts to carry out public charity is gradually being accepted by more and more countries, and has spread from Britain to the whole world accordingly.
Nevertheless, significant differences exist between these two tools of wealth inheritance. In terms of their establishment, the foundation is more like an entity which can issue invoices and which enjoys preferential tax treatment, while the charitable trust is a paper document. From the perspective of their supervision mechanisms, charitable trusts have greater flexibility. Regarding professional competence, charitable trusts require more professional investment management skills to better preserve or increase the value of donated assets. From the perspective of their professional capacity, a charitable trust has no corporate capacity, so it cannot own properties by itself or bear corresponding responsibilities.
Due to the fact that it is difficult for large amounts of money to leave the country and that some assets (such real estate and stock rights) are exclusive or subject to certain jurisdictions or requirements to demonstrate the most significant relationship, high-net-worth customers and wealthy families in China have to consider using local tools to protect and pass on assets.
At present, foundations and charitable trusts are both optional tools for planning family wealth inheritance. In practice, foundations have advantages in terms of fundraising from small-sum public funds and the implementation of charitable projects, while charitable trusts have advantages in dealing with large donations from enterprises and high-net-worth individuals, as well as in the management of charitable assets, account management, and information disclosure. Foundations and charitable trusts complement each other by their nature, so the dual-track model of foundations and charitable trusts has come into existence in China, where it is even expected to become a trend.
Under the above-mentioned dual-track system, family members or family enterprises set up trusts with most of the assets intended for charitable purposes. A small number of assets are set up as foundations, and are retained at the level of a trust. The proceeds are donated to the foundation as charity-related expenditure, according to the demands of the charity program.
The dual-track system has obvious advantages. Family assets can be better managed through trusts. Proceeds from trusts are donated to foundations. Accordingly, foundations have continuous income from donations and, in such a way, “sustainable” foundations become possible. A decision-making committee is set up at the trust level to give the entrepreneur or their family control. A foundation can issue tax-exempt invoices. By integrating these two approaches, a win-win situation for wealth inheritance and charitable purposes can be created.
The above-mentioned dual-track model can also be applied in practice. For example, by setting up “CITIC · He Xiangjian Charitable Foundation 2017 Shunde Community Charitable Trust” on May 27, 2017, the trustor Midea Holding Co., Ltd. entrusted RMB 492 million to Guangdong He Xiangjian Charitable Foundation and CITIC Trust Co., Ltd. for joint management. According to the latest data, a total of six registered charitable trusts have adopted a dual-management model of “Foundation + Trust Company”.
Trust properties have dual ownership in the context of the Anglo-American legal system while, in the context of China’s “one-property one-right” system, the ownership of trust assets can only be processed in an obscure way. In the Anglo-American legal system, it is very clear that when the trustor entrusts property to the trustee, the ownership is also transferred. In Chinese Trust Law, once the ownership is transferred, then other people are not entitled to any recourse. In the legislative process, however, this is not fully recognized. It is only expressed in a non-specific way: “the trustor entrusts his/her property rights to the trustee”. It doesn’t define the transfer of property rights, leaving great deal of uncertainty for the judiciary and causing risk exposure for property protection and inheritance.
Within China’s existing legal framework, the dual-track model of the foundation + charitable trust has to be carefully designed or it tends to appear “un-acclimatized”. Charitable trusts were defined in the Trust Act of 2001. In practice, however, since the Trust Act does not specify clearly who the management institution of charitable undertakings is, no single department is willing to take the initiative to take on this responsibility. Therefore, the dual-track model cannot fully realize its benefits in China.
For families with both domestic assets and foreign assets, adopting a combination of onshore and offshore models is a better choice. For example, in 2005, Niu Gensheng promised to donate all his shares in Mengniu Dairy Company through Chinese and foreign channels respectively. In China, he donated 25% of his stock rights to the Lao Niu Foundation each year and completed the donation by July 2010. Outside China, his equity donations were mainly made through charitable trusts. The public trust was set up on December 28, 2010 via Hengxin Trust under Credit Suisse Trust. The beneficiaries of the trust include many charitable organizations, including the Lao Niu Foundation, and non-charitable beneficiaries including Niu Gensheng and his family. This charitable trust, under the guidance of the committee of protectors (mainly consisting of the council of the Lao Niu Foundation) carries out charity work through charitable organizations in the list of beneficiaries.
Therefore, choosing an offshore trust model to establish a charitable trust becomes a better choice for implementing the dual-track model of the foundation + charitable trust. Firstly, offshore trusts are normally set up in politically stable, tax-advantaged offshore financial centers such as the Cayman Islands, Jersey, Singapore and Bermuda. Once the trust is set up, ownership is transferred to the trustee. Even if the trustor is bankrupt or incurs debts, such assets cannot be used to pay the debt because they are no longer owned by the trustor. Even if the client encounters serious commercial risks, an economic crisis, currency devaluation, or personal risks in his home country, his trust assets abroad will not be impacted. Secondly, offshore trusts are a better way for passing on wealth via generational inheritance. The intention of families in setting up offshore trusts is not to avoid taxation, but to pass on the family’s assets more smoothly without affecting future generations’ family relations, and to prevent family members from squandering assets or affecting the family inheritance.
The family office in the modern sense appeared in the mid-nineteenth century when some magnates seized the opportunity of the Industrial Revolution to gather financial and legal experts to study how to manage and protect their family's wealth and wide commercial interests. In the contemporary era, in developed countries, the family office has already developed into a large comprehensive service institution which integrates property protection, identity allocation, wealth management and inheritance planning.
In modern China, the following factors are promoting the rapid development of family offices:
2. Judging from the scale of China’s wealth management, new regulations on asset management are around the corner. After that, asset management products will be divided into public offerings and private equity products, which will indicate the arrival of an era of big capital. How large is the scale of Chinese wealth management? Private equity funds amount to 50 trillion, public funds amount to 12 trillion, and trusts amount to 20 trillion. In addition to other asset management plans, the total scale exceeds 100 trillion, which is a lot of space in the family office market.
3. From the perspective of customer groups, many large families are, in fact, the actual controllers of listed companies, top ten shareholders of listed companies, and shareholders of acquired companies. At the current speed of several hundred IPOs per year in China, the present capital scale of the Chinese stock market is about RMB 60,000 billion, accounting for only 1/7 to 1/6 of the American stock market, valued at about 60,000 billion dollars. According to the current IPO speed, in 5-10 years, the scale of the Chinese stock market will be equivalent to that of the American stock market. By then, many major shareholders, large retail investors and top ten shareholders who obtain revenue from listed companies will need customized asset management, as well as the protection of their assets for inheritance and other purposes. These all fall under the family office’s scope of business.
4. From a sociological point of view, China's population peak was in 1987. People who were born in 1987 are now 31 years old, reaching the point in time when they inherit wealth. This is exactly the problem which needs to be solved by the family office. Data shows that China’s current Gini coefficient is 0.73, while developed countries are at 0.15, making the wealth gap huge. Generally speaking, countries with a Gini coefficient higher than 0.3 need to collect inheritance tax, but China has not yet implemented such a tax. It is anticipated that China will probably start to collect inheritance tax in the near future. Now, it is not only ultra-high-net-worth individuals but also ordinary families that need reasonable tax avoidance tools. Insurance, overseas trusts, identity planning and foundations are all options to be considered, and will surely promote the development of the family office.
5. As China’s credit system improves further, personal credit will have an increasingly positive or negative impact on individuals. In China, a deadbeat who is included in the court’s blacklist cannot take a plane or high-speed train. It will be hard for him to do business after incurring debt, too. Not long ago, the Zhejiang court introduced new regulations on restricting the driver licenses of such deadbeats. Besides, with the establishment and improvement of personal credit evaluation systems such as Zhima Credit, the cost of breaking the law is higher and higher. It will also drive businessmen to isolate corporate assets from individual or family assets. How to comply with the above is the business of the family office.
6. As a result of globalization, global taxation under CRS and FACTA has led to a change in the global tax avoidance pattern. Who will be influenced most? Definitely, the wealthiest people. These people have to take immediate action and make adjustments. That’s also the business of the family office.
7. The middle class in China is keen on investing in real estate and stocks and buying insurance overseas, all of which are considered overseas asset allocations. However, with the increase of wealth, will they consider setting up foundations and family trusts overseas? From a political point of view, family trusts and private foundations are a game between wealthy groups and the state. It is anticipated that when society has developed to a certain degree, family offices will become a must.
We all know that the family office is the pearl in the crown of wealth management, and that the professional requirements are high. This requires qualified, professional talents. The core of the family office is to make full use of legal, financial and asset management talents. The legal talents are responsible for setting up the structure. The financial and taxation talents are responsible for reducing the costs. The asset management talents are responsible for assets’ value and preservation. This requires the involvement of professionals like lawyers, accountants, tax accountants and financial planners. Besides the above-mentioned personnel, it is also necessary to maintain sound communication with experienced professionals from the banking, trust, funds, asset management, brokerage, insurance, and other fields. In other words, the family office not only requires talents, but also needs to be close to the source of the market.
At present in China, there are only a small number of professionals who truly understand the inheritance of family wealth. A few forerunners do things separately in their own way with small teams, carrying out research and practices within an extremely limited scope. Such research and practice is, to a large extent, tantamount to making vehicles behind closed doors.
IBKFO has adopted a new business model: The Ultra United Family Office. In this model, a specialized consultant team is established to help families screen talents and consultants. Such professionals belong to different organizations and have their own expertise in the fields of law, taxation or asset management. Finding the “best matching team”, in the context of the Internet and artificial intelligence, can better provide users with service value beyond the traditional family office. At present, IBKFO has over 150 senior experts at home and abroad, including professional lawyers, accountants and financial planners. We expect more senior experts to come together at IBKFO, learning from and cooperating with one other, making progress together, and jointly promoting the development of the Chinese family office.
An article from IBKFO
March 12, 2018
