Viewpoint | Read in one article-How to set up a legal and effective family trust in China

Published:

2021-12-29

Introduction As a complex legal and financial instrument with the characteristics of risk isolation, wealth management and inheritance, family trust has attracted more and more attention and favor of high net worth people in China in recent years. With the introduction of new capital management regulations, family trust business has gradually emerged in China in recent years, but high net worth clients still have a very vague understanding of domestic family trust, especially in recent years, the first domestic family trust preservation case in Hubei Province (2020 E 01 Zhibao No. 230) and the Lunan Pharmaceutical family equity trust dispute in Shandong Province, high net worth clients have greater doubts about setting up family trusts in the country. So how to prevent the family trust from being identified as a false trust (Sham Trust), so as to avoid the trust being broken down by the regulatory authorities, the judiciary or creditors, in the establishment of the family trust is particularly critical. From the perspective of law, this paper discusses how to set up a legal and effective family trust for high net worth clients in China, starting from the meaning of family trust, the establishment conditions, the establishment process and the role of lawyers in the establishment of family trust. Regulatory Definition of 1. Family Trust On August 17, 2018, the Trust Supervision and Management Department of the China Banking and Insurance Regulatory Commission issued the "Notice on Strengthening the Regulation of Trust Supervision during the Transition Period of Asset Management Business" (Trust Letter [2018] No. 37). This is the first time that my country has given a clear definition of "family trust" from a regulatory perspective. The document clearly states: "Family trust refers to the trust business in which the trust company accepts the entrustment of a single individual or family, takes the protection, inheritance and management of family wealth as the main trust purpose, and provides customized affairs management and financial services such as property planning, risk isolation, asset allocation, children's education, family governance, public welfare (charity) undertakings, etc. The main purpose of the trust is to preserve and increase the value of the trust property, and the trust business with the nature of special account financial management and asset management attributes is not a family trust." While actively encouraging trust companies to develop family trust business in China, the regulatory authorities have also released a signal to strengthen the supervision of family trusts, and made it clear: "The trust supervision offices of all banking regulatory bureaus shall, in accordance with the principle of" substance is more important than form ", strengthen the supervision of all kinds of trust businesses and innovative products, restore the essence of their businesses and risks, and apply one regulatory standard for similar businesses. The transaction management trust business should be treated differently, strictly control the legal compliance of the purpose of the trust, the source and use of the trust assets, strictly control the transaction management trust business that facilitates the regulatory arbitrage and violations of the law, and support the trust companies to carry out the transaction management trust business that meets the regulatory requirements and invests funds into the real economy." Statutory conditions for the establishment of 2. family trusts. (1) Legitimate purpose The "purpose of the trust" is a prerequisite for the establishment of the trust act. For example, the purpose of entrusting management to use assets, seek asset appreciation, isolate risk, and pass on wealth must be legal and possible, otherwise the establishment of the trust cannot be confirmed. The establishment of a family trust must have a legitimate trust purpose, the regulatory authorities have made it clear that the family trust is the protection, inheritance and management of family wealth as the main trust purpose, the transfer of assets, malicious evasion of debt, concealment of illegal income, money laundering, tax evasion and other illegal purposes are not protected by law. First of all, from the general law point of view, the establishment of a family trust is a civil legal act. According to the provisions of Article 143 of the Civil Code, three conditions shall be met for the validity of a civil legal act: 1. The perpetrator has the corresponding capacity for civil conduct; 2. The meaning is true; 3. It does not violate the mandatory provisions of laws and administrative regulations and does not violate public order and good customs. Secondly, from the perspective of special law, the Trust Law further stipulates that the trust must have a legitimate purpose. A trust with an "illegal purpose" can be roughly in the following four situations: first, the purpose of the trust violates relevant laws and administrative regulations, for example, for organizations or activities prohibited by laws and administrative regulations, such as terrorist organizations, cult organizations, anti-government organizations, and so on, financial support cannot be provided through the trust; second, the purpose of the trust harms the public interest; third, a trust is established specifically for the purpose of litigation or debt collection; fourth, the establishment of a trust harms the interests of its creditors. 2. Legal property Trust belongs to a property management system, with trust property as the center, if there is no trust property, the family trust will lose the value of existence. This requires that the settlor must have certain and legal property to establish the trust. (1) Determined property. The certainty of trust property should include three aspects of certainty, one is the certainty of the existence of trust property, the other is the certainty of the scope of trust property, and the third is the certainty of the ownership of trust property. The certainty of these three aspects first requires that the settlor cannot use property that does not exist or no longer exists as trust property; secondly, the property that requires the settlor to establish the trust has a clear and definite scope, which can be clearly distinguished from the settlor's other property; Thirdly, there is no dispute over the property ownership that requires the settlor to establish the trust. As for the type of property, the Trust Law and the regulatory authorities do not make clear restrictions, cash assets, movable property, real estate, equity/shares, stocks, funds, etc. However, at present, China's trust property registration system is not complete, in reality, for real property rights, aircraft, ships and aircraft and other special movable property, intellectual property rights and other property that need to change the registration of property rights, local registration authorities and tax authorities have different standards. Therefore, the availability of registration and tax costs are the main factors for customers to consider whether to include the corresponding assets. During the two sessions this year, Xiao Gang, a member of the National Committee of the Chinese People's Political Consultative Conference and former chairman of the China Securities Regulatory Commission, pointed out that private entrepreneurs will face major challenges in large-scale intergenerational inheritance in the next 10 to 20 years. The protection and inheritance of the wealth of private entrepreneurs not only involves the sustainable development of private enterprises themselves, but also involves a series of important issues such as economic growth, employment expansion, private investment, and the role of the third distribution to promote common prosperity. There is an urgent need to take precautions and strengthen Top-level design. However, the non-transactional transfer system of trust property is missing. Due to the vague provisions of the trust law itself, in practice, it is impossible to handle the non-transaction transfer of trust property directly according to the trust documents, which seriously restricts the establishment of non-capital family trusts and weakens the core function of private enterprises to use family trusts to realize the inheritance of equity property. Therefore, he suggested that the trust system should be improved in four aspects, such as amending the trust law, establishing the infrastructure supporting the family trust, introducing the judicial interpretation of the trust law and strengthening the supervision, so as to promote the implementation of the family trust. ② Legally held and allowed to circulate. According to the provisions of China's Trust Law, the property for the establishment of a family trust must be the property legally held by the principal and cannot be property that is restricted in circulation without approval. If the trustor establishes a trust with illegal property, the trust is invalid. For example, property acquired by illegal means such as theft, embezzlement or robbery, as well as property restricted in circulation without authorization, cannot be used as property for the establishment of a trust. ③ Legal tax payment. In the process of setting up a family trust, due diligence is required on the trust property of the settlor. For example, for cash assets, the settlor must issue income certificates, other certificates of obtaining the cash assets and tax payment certificates. Therefore, when setting up a family trust, it must be ensured that every asset injected into the family trust is the private undisputed property of the settlor that is legal, compliant and tax-paid. ④ Requirements for asset size. In our country, there is an asset size requirement for the establishment of a family trust, which requires that the amount or value of the family trust property be not less than $10 million. This requirement also makes family trusts mainly a way of "wealth security" and "asset inheritance" for high net worth clients. The setting of the asset size threshold is one of the main features that distinguish family trusts from other transactional trusts. 3. Subject requirements ① Principal: In China, the principal who establishes a trust must currently be a natural person with full civil capacity. In the case of a family trust, the settlor may be a single individual or family, and a single individual is a natural person with full civil capacity. The concept of the family, on the other hand, refers to the members of the family living together, in accordance with the general criteria for the concept of "family" in the Civil Code. As for "family members", my country's "Civil Code" also explains this, clarifying that spouses, parents, children and other close relatives living together are family members. It follows that in our establishment of a family trust, the settlor can be a natural person with full civil capacity or a family, I .e. a family of spouses, parents, children and other close relatives living together as the settlor. However, in order to clarify the property ownership relationship, the situation of taking the family as the principal needs more complex asset investigation and design the corresponding trust terms, so as to avoid the legal risk of trust property in the process of establishment, management and liquidation. ② Trustee: Trust Company. In China, a trust company is a financial institution established in accordance with the the People's Republic of China Company Law and the Measures for the Administration of Trust Companies, which is mainly engaged in trust business. For family trusts, the trust company can act as a trustee, accept the entrustment of a single individual or family, with the protection, inheritance and management of family wealth as the main purpose of the trust, to provide the trustee with customized transaction management and financial services trust business. ③ Beneficiary: The beneficiary is the person who can enjoy the benefit of the trust in the trust. The settlor may be the beneficiary or the sole beneficiary of the same trust. For family trusts, beneficiaries should include family members, I .e. spouses, parents, children and other close relatives living together. 4, family trust establishment form requirements. In our country, the establishment of a family trust should be in writing and completed by the formation of a trust contract. In the written document for the establishment of a family trust, the following shall be stated: (I) fiduciary purposes; The name or title and domicile of the (II) trustor or trustee; (III) beneficiary or range of beneficiaries; (IV) the scope, type and condition of the trust property; The form and method by which the (V) beneficiary obtains the benefit of the trust. 3. establishment process The process of establishing a family trust is generally implemented gradually in accordance with the steps of intention communication, background investigation, property due diligence, scheme design and communication, trust company project application and approval, filing with the regulatory authorities, project establishment, and investment allocation. However, the channels for high-net-worth individuals to set up family trusts are different. In addition to eventually landing in trust companies, many high-net-worth clients initiate the establishment of family trusts through private banks, insurance companies, securities companies, wealth management companies, family offices and other institutions. Therefore, the establishment process is slightly different. The role of 4. lawyers in the establishment of family trusts. At present, China's family trust business has been more and more high net worth people's attention, but the family trust in our country is still in the early stage of development. Whether a specific family trust can eventually play the role of risk isolation and wealth inheritance after its establishment still needs time to verify. Family trust, as the top-level design of all the wealth under the name of high net worth clients, integrates the protection, management and inheritance of all kinds of property, and integrates the comprehensive knowledge of law, taxation, insurance, investment, corporate structure, foundation, charity, wealth management and asset management, and is generally known as the service at the top of the wealth management business pyramid. Family trusts are mostly personalized service products with many design risk points. It is difficult for general financial practitioners to fully control the relevant legal risks. In the whole family trust design, strong comprehensive legal knowledge and litigation risk control ability are required. In order to control risks and costs, whether it is a private bank, insurance company, trust company, securities company or wealth management company, it is more inclined to let customers use standardized establishment methods, but this kind of service is difficult to meet the personalized needs of customers. Lawyers, as professionals with professional legal knowledge and legal policy acumen, play a very important role in the family trust business, and can assist high net worth people with their professional knowledge reserves to achieve the fundamental purpose of risk isolation and wealth inheritance. So as a lawyer, in practice should be how to assist high net worth clients, to achieve the establishment of family trust? First of all, for the principal who has the intention to establish a family trust, we can conduct a preliminary communication to understand the establishment needs and assets of the principal, and make a preliminary assessment of whether the conditions for the establishment of a family trust are met. Secondly, a confidentiality agreement should be signed with the settlor who has the conditions and intention to establish a family trust after initial communication, regardless of whether the final family trust is successfully established, priority should be given to ensuring the security and secrecy of the settlor and property information. Third, conduct due diligence on the trustee's trust property. Focusing on the identity of the family trust principal and beneficiary, the ownership and status of the trust property, and the principal's debts, the legality of the trust property shall be carefully examined in accordance with the principle of prudence stipulated by relevant laws to ensure the validity of the establishment of the trust property. Fourth, the formation of a preliminary family trust program. According to the wishes of the principal and the relevant materials obtained through the preliminary due diligence, a preliminary trust plan is formed. Fifth, the selection of cooperation agencies. The client needs to carefully choose the trustee, that is, the trust company. The professionalism and reliability of the trust company are very important. Choosing a trustworthy trust company is the key to the safety of trust assets. At the same time, it is also necessary to consider the trust company and the other required for the establishment of a family trust. The fees of the intermediary agency and the client's affordability, law firms and lawyers have rich intermediary agency resources, can be used as leaders to connect with the client, ultimately, assist the settlor in determining the selection of trust companies and other intermediaries. Sixth, determine the formal program. After the selection of the intermediary, the law firm and the trust company jointly determine a formal family trust plan for the relevant materials collected in the previous period. Seventh, the drafting of trust documents. A family trust is a set of legal contracts that agree on the rights and obligations of multiple stakeholders, such as the principal, trustee, beneficiary and protector, to the entrusted assets. The relationship between these stakeholders will change greatly over time, and this dynamic may cause new conflicts of interest. Therefore, under the premise of combining the current situation, in order to safeguard the interests of the client, it is an essential job for lawyers to draft and revise the relevant documents in the family trust business. Eighth, the plan is implemented on the ground. The family trust scheme must land in order to finally achieve the purpose of establishment. The transfer of the principal's trust property and the supervision of whether the trustee establishes a separate account is the core and key of the entire family trust. In this process, the lawyer may assist the principal in transferring the trust property, such as funds, to a separate account under the trustee's control in accordance with the trust contract to ensure the final implementation of the trust program.

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