Regulating private wealth and family trusts

Na Ling
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Family trusts are when high net-worth individuals (HNWIs) trust their property rights to the trustees (normally a trust institution) and designate beneficiaries (normally family members). The trustees manage the family fortunes according to the individuals' wishes and recognise the protection, appreciation and inheritance of family fortune. The principles of trust law separate the rights to ownership and beneficiary, and therefore independence of trust property is not affected by divorce, division of property, accidental death or debt collection, which helps to secure the inheritance, isolate risk, control equity, balance interest and the privacy protection of HNWIs.

A type of trust product specially designed for HNWIs, family trusts are highly developed in foreign jurisdictions but have just started in China. The purposes are various and the legal issues are complex. Some provisions of the PRC Trust Law, which is currently the principal regulation in China, are comparatively outdated. These fail to match currently effective regulations such as the PRC Company Law, PRC Property Law and PRC Securities Law. Other trust regulations issued by departments such as the China Banking Regulatory Commission lack detailed stipulations on the practice of trust, especially family trust. In addition, Article 10 of the Trust Law provides that “To the extent required by relevant laws and administrative regulations, Trust property shall be registered according to law at the time of establishment of the Trust.” However, the registration and the non-transactional taxing systems of trusts are not established in China. As a result, in practice, it is difficult to realise the functions of trusts, such as property independence, isolation of bankruptcy and tax planning, which has further restricted the development of family trusts in China.

However, by looking at the HNWIs who have already established family trusts, some who had problems in marriage managed to secure their fortune and stabilise their company through the family trusts; and some who were involved in inheritance events were aided by family trusts as they strengthened the relationship of relatives by arranging a more acceptable distribution of property. Furthermore, it is believed that inheritance tax may be imposed in the future, therefore more and more HNWIs in China are beginning to pay attention to family trusts. According to the 2013 China Private Wealth Report, which was jointly issued by CMBC and Bain & Company, approximately a third of HNWIs and nearly half of ultra-HNWIs are considering family trusts. These individuals mainly reside in coastal, first-tier and second-tier cities. Many entrepreneurs in Guangdong, the foremost location of Chinese economic reform and where lots of HNWIs reside, tried to use family trusts as a way of managing a family fortune.

For instance, in September 2012, Ping An Trust established the first family trust plan in China for an entrepreneur in Shenzhen. This kicked off the development and spread of family trusts in China. The property of this plan is Rmb50 million and the term is 50 years and will be jointly managed by the HNWI and Ping An Trust. By designating his inheritors as the beneficiaries of the family trust plan, the individual is able to instruct on realising the inheritance and executing the plan of interest distribution. The two parties may, subject to specific circumstances, adjust the plan within the given term. On July 11 2013, CMBC in Shenzhen established the first family trust plan established by a domestic private bank. This plan is a single funds trust, with an entry requirement of 50 million and a term between 30 and 50 years. CMBC acts as the financial consultant and custodian for the plan, which is irrevocable.

The legal problems associated with family trusts are fairly complex. While designing the trust products, issues such as the legality of trust property, purpose and effectiveness must be considered and resolved. Many trust companies and banks have cooperated with law firms in researching and developing family trusts. Funds and financial properties are the main types accepted by family trusts, but equity and real estate form the majority of the properties owned by local HNWIs. It is therefore important to understand how to absorb equity and real estate into family trusts to fully realise the goals of HNWIs. The development and improvement of the legal regime surrounding trusts are much needed in practice, but, all in all, family trusts are growing rapidly and exhibit much potential in China.