The Top 8 Misconceptions About Family Trusts

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

We have briefly discussed what a family trust is before. Today, we will thoroughly analyze the eight common misconceptions about family trusts and tell you 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 explain 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 and for the inheritance of family wealth.

According to the relevant national regulations, "Family trust refers to the trust business in which a trust company accepts the entrustment of a single individual or a family, with the main trust purpose being the protection, inheritance, and management of family wealth, and provides customized affairs management and financial services such as property planning, risk isolation, asset allocation, children's education, family governance, and public (charitable) causes. The property amount or value of the 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."

Asset management products are products designed and issued by commercial banks and regular financial institutions, which invest the funds raised according to the terms of the product contract into relevant financial markets and purchase relevant financial products, and distribute the investment returns to investors according to the contract terms. (From Baidu Encyclopedia)

Domestic laws and regulations are not yet perfect, does establishing a family trust lack legal protection? No!

The launch of a new project is always accompanied by many doubts, and family trusts are no exception. Many clients have heard about family trusts through TV dramas, news, etc., and raised concerns when consulting us: Are the laws and regulations regarding family trusts perfect, and are there any guarantees?

In response, as early as 2001, our country 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 also clarified the definition of family trusts in the regulatory regulations in Document No. 37, contributing to the development of family trust business. With the promulgation and implementation of the "Civil Code," the relevant laws and regulations related to family trusts in our country have become very perfect, ensuring the needs of family trusts both in terms of legal systems and financial property systems.

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

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

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

Is family trust a tax avoidance tool?

This issue first needs to answer that trusts indeed have the function of tax planning, but taxes are not a tool for tax evasion; paying taxes in accordance with the law is the responsibility of every citizen of the People's Republic of China. However, because trust property is independent and does not belong to the category of inheritance, this property does not need to pay inheritance tax. But, in essence, a trust is a form of gift and also needs to pay relevant taxes.

However, a family trust is a long-term financial activity. Trust institutions will continuously adjust the timing and frequency of beneficiaries receiving the trust property benefits according to the specific circumstances of the trustor and changes in national policies, and help beneficiaries reduce tax rates within the scope of legality and reasonableness.

The comprehensive insurance has already been purchased, so there is no need for a family trust.

Previous customers have also asked us this question. Not all insurance policies have the function of asset isolation protection. The cash value and cash dividends of most insurance policies cannot offset the third-party debts of the insured. Moreover, most insurance policies provide a one-time payment upon claims, which cannot achieve the specific purpose of the principal in terms of family heritage.

The family trust can be set up according to the wishes of the trustee, even including unborn children as beneficiaries, and can arbitrarily set the method of property distribution, including distribution conditions, proportions, and frequencies, thereby achieving true wealth inheritance or other trust objectives.

It is enough to make a will; family trusts are too complex.

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

But the will often tends to cause family conflicts or even inheritance disputes after the deceased's death due to uneven distribution, and if the form of property in the will changes, if it is not updated in time, it may not be possible to inherit according to the will, and the wishes of the parties involved may not be implemented.

The confidentiality of family trusts is very high, with beneficiaries being unaware of each other, which can effectively prevent internal conflicts from arising due to unfair distribution. It also pays close attention to the wishes of the trustee, and in accordance with laws and regulations, adopts the most advantageous method to reasonably and effectively transmit the property.

Now everything is fine, there is no need to establish a family trust at all.

Some customers have also thought that they are currently in good health and their businesses are doing well, feeling that there is no need to consider the issue of wealth inheritance yet, and thinking that establishing a family trust is premature.

However, for high-net-worth individuals and some large families, risks are potential, and the most dangerous are those that are difficult to discover. Often, it is too late to seek solutions when special circumstances arise.

So it is necessary to prepare for rainy days in advance, establishing a family trust during the period of personal health and normal operation of the enterprise, so that in the event of an unexpected economic situation in the future, a risk isolation can be formed between the enterprise's property and the family's wealth.

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

Trust is merely a property management method where the trust institution is entrusted to manage and dispose of family property. Even if a family trust is established, except for some irrevocable clauses that cannot be changed, the trustee may still make changes to other clauses as agreed upon in the trust agreement.

Therefore, choosing a suitable family trust lawyer, carefully discussing each clause in the trust agreement, 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 during the term of the trust, the entrusted trust institution fails to perform the corresponding duties and obligations as agreed in the contract, the entrustor is fully entitled to replace the trust institution or to reach a consensus with the trustee to terminate the trust services.