The Top Eight Misconceptions About Family Trusts

As the scale of China's economy grows larger and larger, its influence in the international community also significantly increases. Our country's billionaires rank among the top in the global billionaires list, and the first generation of the wealthy is gradually entering the aging stage. How to achieve the inheritance of family wealth has become an urgent issue for Chinese enterprises.

We have previously briefly discussed what a family trust is. Today, we will delve into the eight common misconceptions about family trusts and explain why it is necessary to establish a family trust.

Family Trust ≠ Investment Product!

Many clients have confused family trusts with common investment products on the market. We must clarify this. The legal basis for family trusts is the "Trust Law of the People's Republic of China", which is a legal tool with the purpose of achieving asset isolation and protection, as well as the inheritance of family wealth.

According to relevant national regulations, "A family trust refers to the trust business provided by a trust company upon the entrustment of a single individual or a family, with the protection, inheritance, and management of family wealth as the main trust purpose. It provides customized affairs management and financial services such as property planning, risk isolation, asset allocation, children's education, family governance, and public welfare (charity) affairs. The property amount or value of a family trust shall not be less than 10 million yuan, and the beneficiaries include family members, including the entrustor, but the entrustor may not be the sole beneficiary."

Investment products are products designed and issued by commercial banks and regular financial institutions, which invest the funds raised according to the product contract in relevant financial markets and purchase relevant financial products, obtain investment returns, and distribute the products to investors according to the contract. (From百度百科)

Is the family trust an imperfect legal system without legal protection? No!

The launch of a new project always comes with many doubts, and family trusts are no exception. Many clients have heard about family trusts through TV dramas, news, and other sources and raised concerns about whether the legal system is perfect and whether there is protection when consulting us.

In this regard, as early as 2001, China promulgated the "Trust Law of the People's Republic of China", providing basic legal protection for family trusts. The China Banking and Insurance Regulatory Commission has also clarified the definition of family trusts in the regulatory regulations in Document No. 37, adding bricks and tiles to the development of family trust business. With the promulgation and implementation of the "Civil Code", China's relevant laws and regulations related to family trusts have become very perfect, whether it is the legal system or the financial property system, both of which can meet the needs of family trusts.

Is the family trust only a tool for the super-rich?

The Kennedy family, the Rockefeller family, Li Ka-shing... including Gao Xiaojin, who established a two billion family trust in the TV drama "The People's Will", are all famous super-rich individuals. This has led many people to have a misconception: only billionaires with billions of assets can establish family trusts.

Not at all. According to Document No. 37 of the China Banking and Insurance Regulatory Commission, a family trust can be established if the amount or property is not less than 10 million yuan. Therefore, in the rapidly developing China, many high-net-worth individuals actually meet the conditions for establishment and can completely choose to achieve asset isolation and protection of pre-marital property through family trusts.

Is the family trust a tax avoidance tool?

This question first answers that trusts indeed have the function of tax planning, but taxes are not tax avoidance tools; the responsibility of every citizen of the People's Republic of China is to pay taxes in accordance with the law. However, because trust property is independent and does not belong to the category of inheritance, this property does not need to pay inheritance tax. However, in essence, a trust is a gift, and relevant taxes also need to be paid.

However, family trusts are a long-term financial activity, and trust institutions will continuously adjust the time nodes and frequencies of beneficiaries receiving trust property interests according to the specific circumstances of the entrustor and changes in national policies, helping beneficiaries to reduce tax rates within the scope of legality and reasonableness.

If I have purchased comprehensive insurance, I do not need a family trust.

Some clients have also asked us this question before. Not all insurance products have the function of asset isolation and protection. Most insurance products cannot resist the third-party debts of the insured, and most insurance products provide one-time compensation during claims, which cannot achieve the specific purpose of inheritance as intended by the entrustor.

However, family trusts can set the beneficiaries according to the entrustor's wishes, even set unborn children as beneficiaries, and can arbitrarily set the property distribution methods, including distribution conditions, distribution ratios, and distribution frequencies, thereby achieving true wealth inheritance or other trust purposes.

It is enough to make a will, and the family trust is too complex.

Because the establishment of a will is relatively simple and convenient, and the cost is low, many clients think that setting up a will is enough, and there is no need to establish a family trust.

However, a will is often easy to cause family conflicts due to unequal distribution when it is made public, and even inheritance disputes may arise after the deceased inherits. Moreover, if the property form in the will changes, and it is not updated in time, it may not be possible to inherit according to the will, and the wishes of the parties cannot be implemented.

However, family trusts have a very high confidentiality, and the beneficiaries are not aware of each other, which can effectively avoid internal conflicts caused by unequal distribution and pay close attention to implementing the wishes of the entrustor in a manner that is in accordance with laws and regulations, taking the most advantageous way to reasonably and effectively transmit property.

Now everything is good, and there is no need to establish a family trust

Some clients have also thought that they currently have good health and their businesses are doing well, and they feel that there is no need to consider wealth inheritance issues, and that establishing a family trust is too early.

However, for high-net-worth individuals and some big families, risks are potential and difficult to detect, and it is often too late to seek solutions when special situations arise.

Therefore, it is necessary to prepare for the worst, establish a family trust when the individual is in good health and the business is operating normally, and form risk isolation between corporate property and family wealth in case of sudden economic conditions in the future.

Does establishing a family trust mean that the wealth is no longer in my name?

Trust is just a property management method where the trust institution is entrusted to manage and dispose of family property. Even if a family trust is established, the entrustor can still change other terms according to the agreement of the trust contract, except for some irrevocable clauses that cannot be changed.

Therefore, choosing a suitable family trust lawyer, carefully discussing each term in the trust contract, analyzing the pros and cons, and designing a professional and systematic family wealth and inheritance plan can effectively avoid legal risks and achieve wealth inheritance.

If the entrusted trust institution does not perform its corresponding duties and obligations as agreed in the contract during the existence of the trust, the entrustor can completely change the trust institution or negotiate with the trustee to terminate the trust services in agreement.