1. Establishing a “firewall” between a family and an enterprise to ensure the better standard of living for families

As a kind of risk isolation tool, Family Trust can provide a protective barrier that can safeguard family wealth from various risks.

When setting up a Trust in stable operation of business, family financial assets can be placed in the Trust, which can be independent of enterprises’ own assets, so as to effectively prevent from family assets from risks of enforcement due to their debt problems.

2. Avoid equity dispersion caused by marriage, inheritance and debt risks

Without setting up a Family Trust, equity is prone to be divided due to divorce, death or debt risks, which may lead to the decentralization or even loss of corporate control, thus resulting in chaos and turbulence in business operations.

Upon placing it into a Family Trust, equity can be transferred into the name of trustee, and then SPV (Special Purpose Vehicle) is structured effectively to ensure smooth operations and decision-making rights of enterprise leaders, so as to secure sustainability of family businesses and inheritance across generations.

3. Cross-border asset distribution and tax planning

When a Family Trust is set up during the grantor’s lifetime, the Trust property doesn’t belong to the grantor’s personal property due to its judicial independence. Upon the death of the grantor, property held in the Trust is usually not subject to the estate probate process and therefore is not subject to estate tax. Frederick Christ Trump, Donald Trump’s father, leveraged this features of Trust to avoid nearly USD500 million in estate taxes by setting up a GRAT Trust (Grantor-Retained Annuity Trust).

4. Tax planning on distribution of dividends and bonus share

According to the relevant laws of Chinese Mainland, when a limited partnership distributes dividends to a Family Trust. As a kind of legal structure, Family Trust does not belong to enterprise legal entity nor other organisations. Therefore, the dividends obtained from the limited partnership enterprise are not required to be declared nor subject to income tax.

When the Family Trust distributes benefits to the beneficiaries, until now, the Chinese Mainland has not issued specific tax regulations on the incomes from Trusts. Currently, they are not subject to taxation, thereby achieving tax efficiency.

5. Withoutsuitable successors, long-term planning for family wealth is much needed

If entrepreneurs settle these financial assets into a Family Trust, these assets can not only ensure that family members maintain a decent life, but also can embed a ‘milestone’ behavioural guidance mechanism in the Trust benefit arrangements, while offering necessary financial support in terms of school enrolment, graduation, employment, marriage, childbearing, and startup. This approach can motivate and inspire family members to succeed.

As the Chinese saying goes, “preparedness ensures success, while unpreparedness lends to failure”. Family Trust is like a complex wealth project that requires careful planning, in which a solid one will be built for passing down through multiple generations after a dilapidated building is dismantled. This requires a joint effort that involves chief designers, architects, and property managers working together. Given that, high-net-worth individuals and ultra-high-net-worth individuals should make planning for setting up Trust as early as possible.