In recent years, pan-asset management has become a hot topic in society. Trust companies, fund management companies, insurance asset management companies, securities companies, futures companies, and private equity funds have all carried out asset management operations in different ways under different regulatory frameworks. The advent of the pan-asset management era has enabled the special asset management plans and insurance funds of the fund company to be linkedto trust products, which has enabled the trust industry to flourish, and thescale of asset management to grow.
On the other hand, most of the trusts under asset management are business trusts, which allows market participants to recognize trusts to some extent, but this cognition is only limited to business trusts. With the promulgation of the new policy on asset management and the tightening of supervision, it has been difficult to continue the channel business that was represented by cooperation between trusts and banking in the past. When seeking innovation and transformation, all wealth management institutions have returned to thinking about the origin of trusts and have focused their attention on the family trust.
At this stage, the family trust is still regarded as an investment tool for the wealthy classes. The investment and allocation of trust funds still focuses on the links between the preservation of value,and value appreciation. With respect to the role of trusts in inheritance planning, the existing family trust business prefers to emphasize the isolation of debt risks and flexible beneficiary planning. Existing family trusts’ primary property is still a financial investment product. Their nature is more akin to a form of trust-keeping and value-added trust financing. The advantages and functions of the trust itself often remain at the level of mediacoverage and publicity, but in the structural design and documentation, there is still a big gap betweenfamily trusts in the real sense.
As far as participants are concerned, the family trust business is not exclusive to trust companies. Private banks, insurance companies and tripartite wealth organizations have also tested the family trust area. Since Ping An Trust took the lead in establishing the first single-family trust in Shenzhen, several trust companies have established family offices one after another, and Prudential Life and CITIC Trust have also jointly launched the first insurance premium trust in China. As high-net-worth customers are becoming familiar with the concept of trusts and are willing to havea try, whether the knowledge and experience of the family trust-related practitioners in the territory and the related domestic legal environment can support the flourishing development of the family trust will become a new challenge for us. This article attempts to explore the limitations and opportunities of family trust development in the mainland in connection with the following aspects.
The multi-dimensional considerations of establishing a family trust
The family trust has many functions. The so-called sustainable family business is the ultimatelong-term goal. In order for it to realize these functions, inter-generational inheritance and tax planning are essential considerations during establishment, in addition to considering asset-hedging corporate governance. When establishing a family trust structure, only the time dimension can be extended to decades or even longer, and the inheritance pattern will be enlarged beyond tax and debt avoidance before the inheritance effect of family trust can be truly realized. In addition, the experienced trustee should also privately customize a family trust scheme to meet the client’s wishes for inheritance, in accordance with the actual situation and claims of the trustee. Such a scheme should be designed by taking into account the long-term response to the impact of the separation of personal assets from the assets of the family business, the separation of financial assets from non-financial assets, as well as isolation from bankruptcy, asset secrecy and privacy, the risk of family members’ marital changes on asset segmentation, family members’ lack of filial piety, wastefulness, and other problems.
At present, the solution-providers that are close to family trusts are private banks and insurance companies, which are relatively common in the mainland market. In the case of insurance companies, most life insurance companies still struggle to develop and publicize the inheritance and asset isolation functions of insurance itself, but many of them mislead the market and misread laws and regulations.A few life insurance companies at the forefront of innovation have launched an insurance trust business. By first underwriting insurance contracts,the insurer establishes the insurance trust, and formulates more flexible distribution plans in terms of time, beneficiary scope and conditions – using the premiums of the insurance contract as the trust property, which enables the trust to allocate part of its functionality to the will.
Meanwhile, there has also been an exaggeration of the functions of insurance trusts in the market, especially in the area of asset-hedging and isolation. In order to better satisfy the need for asset segregation, the insurance company has further innovated and promoted the integration of the insurance business and the family trust structure, and launched a business in which the trust company acts as a policy-holder. This model is marked by the basic structure of asset segregation, but whether it can really stand the test of lawsuits depends upon the specific design of the parties in the trust structure, the nature of the trust itself, and the arrangement of various rights and obligations, rather than using the label of “trust” to avoid debt and prevent bankruptcy. This is a job that mainland practitioners need to further improve.
In the expansion of the family trust business, private banks and tripartite wealth companies –in addition to their volumes, products, customer bases and the fact that their insurance differs from those of insurance companies – are, in essence, the allocation of trust + major types of financial assets (insurance, fixed income, equity, non-standard examples, etc., ), and there is no real difference. All their efforts and energy are still spent on products and clients rather than on trust structure.
Obstacles to the prosperous development of the family trust business in mainland China
1. Conceptual obstacles
“Transferring the leadership from fathers to sons” has been rooted in the minds of Chinese people since ancient times, but in the trust model, the way in which property ownership needs to be transferred to the trustee is not in line with the country’s perception of family wealth control. Figuring out how to find a trusted trustee and how to deal with sensitivities related tothe divestment of property rights have become conceptual barriers that hold back the development of family trusts.
In addition, publicity surrounding tax avoidance and debt avoidance has greatly catered to the needs of the market, improving the reputation of trusts and allowing the family trust system to develop out of misinterpretations. Family trusts should be used legally and compliantly in the field of inheritance, and cannot be used as a tool to impair the interests of creditors. If we cannot expect effectiveness from family trusts on the premise of legal compliance, it is difficult to combat the impact of time variables, spatial variables, policy variables and human weaknesses from the institutional perspective.
2. Legal Obstacles: The Conflict Between“Double-Level Ownership”in Trust Law and “One-for-One” Property LawRights
The family trust originated from the decline of feudal society in the Middle Ages inBritain. In the Anglo-American legal system, trusts can divide the ownership of a property into the trustee’s ownership and the beneficiary’s ownership, thus forming dual ownership rights within the trust property. Within the civil law system, property rights follow the principle of one property and one right. After the trust property is transferred into the trustee's name, it forms the correct combination from the trustee’s ownership of the trust property and the beneficiary’s claims. Therefore, for beneficiaries under the civil law system, if they are betrayed by the trustee, they can only make claims from the trustee, which increases the complexity and difficulty of their rightsto relief, and also causes the family trust to face more legal difficulties in the civil law system.
3. Practical problems
The obstacles in this dimension do not resemble the legal impediments mentioned above. They are mainly difficulties brought about by the trust registration system, and the turnover taxation of the property that can be implanted into trusts. There are many misunderstandings in the market regarding the tenth article of the “Trust Law.” (When establishing a trust, if relevant laws and administrative regulations require registration procedures in terms of trust property, trust registrations shall be handled by law. Anyone who fails to go through the registration formalities prescribed in the preceding paragraph shall go through the formalities as required.If there is no replacement, the trust will not have any effect.)
The author believes that, first of all, it is necessary to distinguish the registration of civil trusts from business trusts; secondly, to distinguish whether the registration is for the property to be transferred or the trust to be established, and to distinguish between the effectiveness of publicity and media coverage and the effectiveness of an actual change in rights, and also to distinguish whether the trust is established and whether the trust becomes effective.
The type of property that can be implanted into a trust is even more of a technical and temporal issue. Of course, it also depends on the mainland's future ideas about governance and legislative tendencies (involving real estate, for instance) and it solves the problem of the taxation of related properties transferred to trusts. There would be relatively too many complications for the rest.
Attempts to Innovatewithin the Mainland Family Trust Business
When discussing the flourishing development of family trusts in the mainland, there is much exploration that the participants of the wealth management market can do besides having expectations for the improvement of legislation and the tax burden of the civil trust. One which is most worth looking forward to would be the trustee's efforts and attempts: is it necessary to hire or appoint the currently licensed sixty-eight trust companies as trustees for the establishment of the mainland family trust? Can individual clients entrust professional agencies such as law firms and accounting firms as trustees? In addition to providing professional investment and wealth management and risk management advice, are the tripartite wealth companies able to set up a contracted trustee company to assume the role of trustee for a private trust or a transactional trust?
The advent of the wealth-guarding and inheritance era in mainland China has provided an unprecedentedly fertile opportunity for the family trust to flourish, andmainland practitioners may even consider arole-change, rather than helping their customers to become overseas vendors and assistants. It may be better to follow thebelief that “foreign stones may serve to polish domestic jade”in trying to establish and innovate the mainland family trust business.
(Li Xiaoxuan also contributed to this article)