Why Should We Set Up a 'Family Trust'?

Trust, as a new wealth management and inheritance system integrating legal and financial institutions, has characteristics such as stability, security, integration, and flexibility. It originally originated from the common law system of the UK and the US as a method to circumvent the negative property transfer system of common law, mainly in the form of inter vivos trusts and testamentary trusts.

In our country, the legal basis for family trusts is the "Trust Law of the People's Republic of China," which is a genuine legal tool. With the globalization of the world and the development of the economy, there are increasingly more large families and high-net-worth individuals in our country. For such individuals, the inheritance of the family and the longevity of the family business are the most widespread aspirations. Therefore, family trusts have become their first choice for wealth inheritance.

What is a family trust?

Family trust is a form of property management method where a trust institution, acting on behalf of an individual or family, manages and disposes of family assets to achieve the wealth planning and inheritance goals of the wealthy. In a family trust, the ownership and income rights of the assets are separated. Once the wealthy entrust their assets to a trust company, the ownership of those assets no longer belongs to them personally, but the corresponding income is still collected and distributed according to their wishes. If the wealthy divorce, inherit property, die unexpectedly, or are pursued by creditors, this money will remain independent and unaffected. (Source: Baidu Encyclopedia.)

Why establish a family trust?

The general problems encountered by family businesses in development can be summarized into the following three situations:

(1) Against the backdrop of the ever-changing market economy, family businesses fail to adequately assess market mechanisms, and can only handle equity or other economic interests through means such as selling off in inheritance, leading to wealth reduction and the loss of value-added space.

(2) If the second or third generation successors have no intention or lack the ability to take over, it leads to the family's wealth being inherited by no one, and all the efforts and dedication are wasted.

(3) Due to sudden circumstances, there is an urgent need to pass on the family business, but the successor is still too young to take over the business immediately.

At this time, family trust products can distribute family assets according to the wishes of the trustee. Rational use of family trusts can lock in family wealth, stabilize the equity structure. Flexible profit distribution and flexible combination investment management methods can effectively prevent the decline of family businesses, stabilize the structure of family businesses, and ensure that family businesses continue their ancestors' legacy and thrive for generations.

Choosing an appropriate trust structure can avoid risks such as forced seizure of family wealth under the principles stipulated by law, and a well-designed family trust can reduce inheritance tax rates to a certain extent, aiming to pass on family wealth as much as possible.

In addition, compared to signing a pre-nuptial agreement, setting up a pre-nuptial trust does not require the signature of the future spouse, nor does it need the other party to be aware of it, and it does not need to list assets like a pre-nuptial agreement. This can better prevent the mingling of personal property before marriage with joint property after marriage, protecting the property privacy of the parties involved without harming the couple's feelings.

What should be paid attention to when establishing a family trust?

As mentioned earlier, a trust is a legal tool. Family trusts involve the inheritance and protection of the entire family's wealth, and the Trust Law relied upon by family trusts is inextricably linked to other laws and regulations. Therefore, it is necessary to discuss with professional lawyers in detail before establishing a family trust, understand the advantages, disadvantages, and disputes involved, and confirm each term in the agreement before choosing trust services.

At the same time, family trust is not only the inheritance of family wealth, but also a diversified and multifunctional service system based on family needs. How to combine the legal system with financial tools, how to choose the most suitable trust structure for oneself, and how to connect the real wealth with the intangible trust structure, this requires designing a professional and systematic family wealth and management plan.