The so-called family trust is a means of property management by which high-net-worth individuals entrust professional trust institutions to manage and handle their family properties in order to make their wealth planning and inheritance a reality. In recent years, family trusts have become an increasingly common way of managing family properties. Countries also regulate and manage family trusts through laws and taxation.
As a method for long-term planning and isolating risks associated with family wealth, family trusts are sought after by a wide range of high-net-worth individuals. As the population of high-net-worth individuals in China increases, so family trusts are becoming known and accepted by a growing number of people in the country. However, due to factors such as Chinese law lagging behind and a lack of supporting laws, family trusts in China still have a long way to go. High-net-worth individuals often rely on professional institutions to set up overseas trusts to achieve optimal asset allocation for their needs.
Family trusts originate from Western countries such as the United States, where the trust legal system is highly developed. High-net-worth individuals can find professional institutions to help set up revocable or irrevocable trusts, living trusts, etc., according to their specific needs. It is common practice in the US to set up and operate family trusts due to the flexibility of trust laws. Family trusts have their own characteristics and advantages compared to other family wealth inheritance methods such as wills or donations.
1) Comparison of family trusts and other methods of wealth inheritance
A will is a legal act made by a testator before his death to personally deal with and dispose of his wealth and other affairs, where permitted by law, in a manner prescribed by law which becomes effective after his death. A donation is an act where a donor gives his property to a recipient for free.
In contrast to the two methods mentioned above, a family trust requires a professional institution to help set up the trust, which cannot be done by the testator or the donor. By using a family trust, high-net-worth individuals can avoid the overpaying of probate tax (in the case of a will) or income tax (in case of a donation) for the reason that the title to the properties and income rights under the family trust can be separated. Given the aforementioned characteristics and advantages of the family trust, more and more high-net-worth individuals have turned to family trusts to safeguard the inheritance of their family wealth.
2) Advantages of family trusts
According to the principles of trust laws, once a family trust is established, the property entrusted within the trust plan is independent. The property set up in the family trust plan will exist independently regardless of changes to the marital relationship, the death, or the asset status of the high-net-worth individuals. Therefore, by utilizing the skills of professional institutions, high-net-worth individuals can ensure the safety of family wealth through family trusts, thus achieving their inheritance goals. Specifically, family trusts are advantageous in the following respects:
(1) Risk isolation
According to trust law principles, once a family trust is established, the trust property is independent of the property of the settlor and the trustee, and will not be affected by the marital relationship, change in asset status, or even the death of the settlor or the trustee, ensuring continual benefits for the beneficiaries and achieving the goal of isolating the risks associated with family wealth inheritance.
(2) Tax planning
High-net-worth individuals are particularly concerned about reasonable tax planning. By establishing a family trust, it is possible to avoid paying estate taxes or other tax liabilities arising from changes in the ownership of assets. For example, after the death of the settlor, the legal heir (as a beneficiary) only needs to pay the corresponding taxes for the trust income during the long-term trust period, without having to pay excessive estate tax.
(3) Corporate governance
Family trusts can effectively assist the separation of the operations, management and beneficiary rights of a family business, allow professional institutions to manage family assets, and achieve the continued prosperity of the family business. In addition, the equity rights of a family business can be entrusted within the family trust so as to effectively reduce the negative impact on family businesses due to conflicts of interest or changes in equity rights within the members of the family group.
1) Relevant provisions
As far as the provisions of the family trust are concerned, the establishment of family trusts in China is mainly subject to the basic provisions of the Trust Law of the People's Republic of China (hereinafter referred to as the “Trust Law”). For example, Articles 7 and 10 of the Trust Law are provisions for trust property and trust registration. The property set up in the family trust shall be the property legally held by the settlor and tradable, and the trust property shall be subject to the corresponding registration formalities. Otherwise, the trust will have no legal effect. However, due to the fact that family trusts are not regulated in the Trust Law, and no detailed rules for family trusts have been issued by the China Banking Regulatory Commission (CBRC) and other administrative organs, the establishment and operation of family trusts in China still requires reference to the Trust Law.
2) Chinese family trust models
China’s family trusts are usually controlled by trust companies. Trust companies are responsible for the design and choice of trust products. The reason is that the major trust companies have strong trust and investment management capabilities and can rely on their own customer resource base and their management capability in trust investments.
In practice, the structure of the family trust in China is as follows:
3) Problems with developing family trusts in China
Since there are no specific laws and regulations on family trusts, family trusts face the following problems in China:
On August 25, 2017, the China Banking Regulatory Commission (hereinafter referred to as the “CBRC”) officially issued the “Administrative Measures for Trust Registration” (hereinafter referred to as “the Measures”), which stipulates that China Trust Registration Co., Ltd shall have information about trust products, their beneficiary rights, and other information prescribed by CBRC, with all changes recorded. However, the Measures does not involve the registration of trust property, and does not fill the gap in the long-term deficiency of the Chinese trust property registration system. If the trust property includes equity, real estate and other assets, it will lead to practical problems such as how to confirm the rights and how to register. As a normative legal document issued by CBRC, the Measures has not yet solved the problem of how to coordinate with the law on property rights and housing registration.
Under the premise that the trust property can successfully solve the abovementioned registration problem, the tradable assets transferred from the settlor to the trustee (such as real estate and equity) enjoy no special tax incentives for the current establishment of trust compared with the transfer under the general commercial transaction transfer. This still requires that a higher tax is paid in accordance with the transfer of the transaction, resulting in the relatively high cost of setting up the trust.
1) Overseas trust practices
Given the various limitations on family trusts in China, some high-net-worth individuals choose to set up trusts overseas, especially in the United States. Here we have taken the setting up of a trust in the United States as an example. The general process is as follows:
2) Problems faced by overseas family trusts
(1) Taxation issues
On August 31, 2018, China passed the Amendments to the Individual Income Tax Law of the People's Republic of China, which introduced comprehensive anti-tax avoidance clauses for the first time. The establishment of overseas family trusts by high-net-worth individuals in the future may lead to a high tax burden.
(2) Problems with the overseas transfer of assets
At present, if high-net-worth individuals in China choose to set up overseas family trusts, in addition to complying with local laws and regulations, they need to consider how to transfer domestic personal assets legally and reasonably to overseas trust holders. This requires planning by professional legal and taxation personnel in order to establish a reasonable model.
As a means of long-term planning and risk isolation of family wealth, family trusts are sought after by a wide range of high-net-worth individuals. After considering the factors of tax burden, convenience, and cost, high-net-worth individuals in China can choose to set up family trusts abroad or in China in order to rationally allocate assets and family wealth inheritance. The establishment of family trusts in China has the advantages of increased efficiency and speed and low transaction costs, but it is still necessary to take into account the registration problems and the adverse effect of future tax burdens. Establishing a family trust abroad has the advantages of optimizing asset allocation and reducing policy risks, while enjoying the benefits of a well-established foreign trust legal system.
However, in the context of China’s overseas investment, foreign exchange and other legal policies, ways in which to reasonably and legally transfer assets to overseas trusts and avoid taking on unnecessary high tax burdens still need to be reasonably planned and handled by professionals. In summary, high-net-worth individuals need to consider their own needs and set up the best family trust model with the help of professional legal and tax professionals to achieve long-lasting family wealth.
