A family trust means that the trustee accepts the entrustment of an individual or family and manages the trust property according to the trust agreement. With the protection, inheritance and management of family wealth as the main trust purpose, it provides trust business with customized affairs management and financial services such as property planning, risk isolation, asset allocation, children’s education, family governance, and public welfare (charity) undertakings.
Family trusts mainly have the following characteristics:
1. Information confidentiality
The information on the parties, asset allocation, and beneficial shares of the family trust is strictly confidential and does not need to be disclosed to the public except in special circumstances. The confidentiality of family trust information can avoid family conflicts caused by property distribution issues on the one hand, and on the other hand, it can “hide” the property to avoid unnecessary trouble.
2. Asset isolation
Trust assets are independent. After the trust assets are established, they are separated from the property of the trustor, trustee and beneficiaries. They are an independent asset and cannot be used for debt repayment, liquidation and bankruptcy. Specifically, if the settlor goes bankrupt or a debt problem occurs, the beneficiary can continue to enjoy the trust property, and if the beneficiary has a debt problem, the creditor has no right to require the beneficiary to repay the debt with the trust assets. The characteristics of the isolation of trust assets can effectively avoid personal debt risks, family and marriage risks, subsequent will risks, and corporate equity risks.
3. Tax planning
Another major feature of family trusts is tax optimization. Using different tax systems in various countries, through tax planning, it is possible to achieve less payment, tax exemption, or tax deferral on trust property and income, which mainly involves inheritance tax, personal income tax, and capital gains tax. Trust property is independent from the trustor. When the property is included into a family trust, the trustor loses legal ownership of it. It means there will not be high inheritance taxes postmortem.
4. Family inheritance
For the controllers of the family business, they hope that the equity can be concentrated in the hands of the family members, and the family trust can maintain the stability of its equity structure, which is conducive to the inheritance of the family business. In addition, family trusts can flexibly set various terms according to actual conditions, including deadlines and income distribution conditions. For example, beneficiaries can distribute more income if they are admitted to a prestigious university, and if they are addicted to spending money, they will distribute less income. Through the constraints of these specific clauses, a dual inheritance of material and spiritual wealth can be realized.
At the present, Chinese family businesses are at the peak of cross-generational inheritance. As the most important tool for wealth inheritance, family trusts have attracted much attention. At the Fourth Session of the 13th CPPCC National Committee, Xiao Gang, a member of the CPPCC National Committee and former chairman of the China Securities Regulatory Commission, proposed that China should improve the trust system as soon as possible and promote family trusts. It is foreseeable that with the gradual improvement of domestic family trust services, family trusts are bound to usher in significant development.