Growth of China Family Trust
With the rapid maturity of private wealth management demand in China, family trusts in China broke away from custodian model for collective investment and officially became the pillar of family inheritance structure in 2014. At the same time, the topic of wealth inheritance has entered the public context, all of sudden all practitioners are talking about succession and legacy planning. After ten years of practice, the application coverage of Chinese family trust has become broader and the customer consciousness has become mature, but there is a blindspot which has been seriously ignored, that is the planning for Chinese family with international members without leaving China trust out.
Great Wall Stands, Fantasy Falls
Cross border is always full of uncertainty, especially connected with a jurisdiction like China, fenced all sides like a great networks of fire wall of course including financial and legal ownership. There used to be many naive thinkings on cross border wealth management planning regarding setting up a family trust for Chinese families, at least includes following scenarios which still do not work today:
- An international family trust using a China chartered trustee
- Fund an international family trust with China listed company shares.
- An international family trust hold a residence property in China
- Break the foreign exchange rule to wire transfer large sum of cash out of China because you have set up a international trust
- Using a China chartered trustee to create a family trust to hold wealth globally.
- A China trust with a international trust as the beneficiary.
I even can list even more fantasies trying to break the wall to provide an easy way for Chinese families, but all those surely will fail due to the China fire wall.
Unmet Needs and Chances
Over optimism often leads to pessimism, so far, most of practitioners believe in a dichotomy when talking about Chinese cross boarder wealth planning, i.e.: Let China trust hold China assets, and let international trust hold international assets. But this is too ideal, there are always some scenarios you still need to carefully did a canal like the Suez to save client to go around the global to achieve certain goals, such as follows:
- Assets are located in China and can not be moved out of China, but Children are located in U.S. or other countries;
- Assets are located in third jurisdiction, such as Singapore, there is no estate planning in place for either China parents and U.S. children.
- Real estates properties of China in children’s name who are U.S. tax residents, but children has not filed those assets with IRS.
- Chinese entrepreneurs who wants to create succession plan for their children currently study or live in U.S..
- Chinese entrepreneurs located in U.S. who wants to move the fund into mainland China to benefit both parents and children.
There could much more situations which need to planned both “cross-borderly” and “cross-generationly”, especially between China and U.S., there are many professionals either help Chinese clients on international structuring or China locally, but including China trust as a major vehicle to plan for those challenging situations has been greatly neglected, here I like to list a few benefits a China trust can give:
Clear Benefits
Build a China trust qualified as a U.S. FGT or FNGT to gain following benefits:
- Saving potential U.S. income tax;
- No cross-border probate process, help Chinese parents transfer family wealth to U.S. beneficiaries smoothly;
- Titling assets in the name of trust, instead of U.S. beneficiaries to save U.S. estate tax;
- Using a China trust to hold a Chinese private company to save 20% dividend tax;
- China may elect estate and gift tax recently, to create a trust to avoid estate and gift tax;
- Provide protection on the assets funded in the trust against creditors.
Working with Threshings
Experts at Threshings Pte. Ltd. can help you or your clients to design a comprehensive structure to manage Chinese family wealth cross-borderly and cross-generationly, feel free to reach us for further discussions.
Michael Liu President
Michael@threshings.com
TEP full member
CEP – Certified estate planner (U.S.)