China: Practice Of Family Management In China And Some Reflections

Last Updated: 27 December 2017
Article by XU Haibo(Albert)

In recent years, family wealth management has received extensive attention in China. Hot issues related to inter-generational transition, public charity, cross-border investment, overseas listing, celebrity divorce, inheritance disputes and so forth are constantly triggering our reflections on family trust and family wealth management.

In practice, the questions most frequently raised to legal professionals are: "Is tax avoidance possible?", "How high will the revenue be?", "Can our money go abroad?", etc. Being simple and straightforward, they can nevertheless reflect the present status of the family wealth management industry in China. In other words, family wealth management in China (mainly for wealthy families, of course) in itself is still in the early stage of "learning to speak". When more profound issues are concerned, it is still in a circle.

Recently, China has successively brought in and released several policies related to family wealth management. The first policy is the Announcement on Issues concerning the Value-added Tax of Assets Management Products released by State Administration of Taxation (SAT) on June 30, 2017, which, in combination with the provisions of Document No.140 [2016] issued by SAT, makes clear stipulations about the value-added tax of assets management products (trust included), defines asset management product managers as taxpayers (paying tax according to simples of 3%) and fills the tax policy blank in the business trust field. The second policy is the Measures for the Administration of Trust Registration released by Chinese Banking Regulatory Commission (CBRC) on August 25, 2017, which provides detailed stipulations about the registration of trust products and beneficiary rights and other relevant issues. Although these stipulations are not direct stipulations about trust property registration, they will undoubtedly exert an important influence on the promotion of trust property registration system in China and facilitate more normalized development of business trust and family trust. The third policy is the Announcement on Guiding Opinions concerning further Directing and Regulating the Direction of Overseas Investment just released by the General Office of the State Council (Document No.74) in the field of overseas investment, which puts an "Incantation of the Golden Hoop" on the domestic investors of overseas  investment.

Indeed, these policies are at a relatively low level in terms of the legal effect, but they still exert a profound influence on the family wealth management industry, as will be gradually embodied. Described below are some observations and reflections about family wealth management.

First, to realize family wealth management in the real sense, the first step is to define the long- term purposes and goals of family wealth management. The purposes of family wealth management, based on both long-term and short- term considerations, are likely to be diversified. However, at its root, it should be a long-term behavior performed on the basis of the consideration and selection of long- term interests. Under a circumstance when it's difficult for money to go abroad, looking for shortcuts is to put the cart before the horse, just like trying to avoid tax when tax is high. A sound plan for family wealth management should be based on considerations and arrangements for inter-generational transition over the next 20 or 50 years or longer, instead of short-term "hide and seek" with the law or policies. Without preparing for danger in times of safety, it's difficult for short-term interest transactions and arrangements to escape the set pattern of "breaking the law" .The purposes and goals of family wealth management usually focus on the themes of corporate governance, inter-generational transition, tax planning, asset hedge, etc. The only way of realizing the planned long- term purposes   and goals is to design a rational family wealth management framework based on individual and family reality and industry status.

Second, underlying design is important. What is underlying design? It is a design that aims to make a proper structural arrangement for family assets. That is, the measures of isolation, restructuring and sectoring are taken to isolate high- risk assets allocations from low-risk ones, to isolate individual assets from corporate assets, to isolate financial assets from non-financial assets, to isolate between different investment sectors, etc. Isolation or classifications like these follow no regular tendency, but they all aim to gradually realize inter-generational transition and management and complete overall planning for family wealth management in the future. Restricted by the law, change of assets usually requires the fulfillment of a complicated procedure and delivery process; to realize asset management according to personal wishes through signing in an emergency, it's necessary to set up such an underlying design in advance. In this way, the established triggering mechanism can be employed to complete inter- generational arrangement and asset reallocation.

Third, it's also important to recruit a management team based on family members. An excellent family fund cannot, first and foremost, be separated from excellent strategic management, or from related professional counsels in the fields of law, finance, investment, public relations and so forth, or from an investment decision-making and consulting mechanism aiming at the strategic management of family wealth. This is not something you can copy from a template document.

Expertise, integrity and experience are very important for consultants of family wealth management, especially when an entrepreneur has trusted you with his or her core and private information and has taken an unquestionably great risk to assign some control power over family wealth to you. These problems are not to be solved based on case studies from textbooks; the solutions to these problems start with practice. When there are deficiencies in law, some creative arrangements are frequently needed. Some people may complain that it's difficult for money to go abroad now, and that the imperfect trust law in China is incapable of supporting the establishment of a valid trust. This opinion is, of course, very superficial.

Trust first originated in the UK, and, as an invention of a country embracing unwritten laws, it is the product of practice. Even in foreign jurisdictions where trust law is relatively mature, it does not mean that an illegally established trust can be protected there. Similarly, a family trust fund based on legitimate properties and with legitimate purposes can be established in China, and many practical problems can also be gradually solved.

Fourth, a scientific and rational assets management plan should be established according to the distribution and types of assets. No doubt, the endowments of entrepreneurs, besides strategic vision and executive force, also include a high sensitivity to cost, that is, spending wisely and avoiding bad bargains. The cross-border flows of assets are always under restrictions by political and economic factors. As far as China is concerned, contradiction is inevitable between the urban internationalization based on long- term trends and the currency control based on short-term national policy interests. However, when such contradiction is placed under the lens of long-term planning, there are still many window periods. Creating a domestic or overseas plan or a plan that combines both factors, considerations must be given according to specific scenarios. Although the trust system itself has a high flexibility, we still must emphasize that the planning and erection of family wealth management should attach great importance to the compliance issue, as an asset management plan violating the law or policies has in itself deviated from the original intention of family wealth management. Thus, only long- term, legitimate and robust asset management and inheritance conform to the fundamental interests of a family.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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