An Overview Of The Recent Cases Regarding Enforcement Of Trust Assets In China

Trust activities are governed by the provisions of the Trust Law and other statutes in China. Per Articles 15, 16, and 29 of the Trust Law , a trust constitutes an arrangement where a settlor, on the basis of confidence reposed in the trustee, transfers property rights to be managed/disposed by the trustee in the trustee's name for beneficiaries' interests or specific purposes.

As in common with other jurisdictions, a fundamental and defining feature of trusts under Chinese laws is the independence of trust assets. During the trust term, trust assets remain independent from the personal property of settlors, trustees, and beneficiaries. Beneficiaries hold beneficial interests rather than ownership, and trust assets cannot be treated as property liable for settlor's, trustee's or beneficiaries' obligations.

Recently, a trilogy of three Chinese cases concerning the enforcement of family trust assets has drawn widespread attention, raising concerns on how secure these trusts really are. By looking closely at these three cases, this article explores the key issues they raise and what they mean for the future of trusts as an institution in China.

I. Introduction

1.  (2020) E 01 Zhi Yi No. 661 & 784

This case relates to a freezing order over the funds held under a trust.

A husband (Hu) used marital assets to establish a trust for a child born out of wedlock with his mistress (Zhang), where Zhang was settlor and the child beneficiary. The wife (Yang) successfully sued for unjust enrichment, securing a RMB 40 million restitution order. During the enforcement process, the court froze all of the trust funds, which Zhang perhaps unsurprisingly objected to.

In recognizing the independence of the trust assets, the court ruled that the case did not meet the legal threshold for compulsory enforcement against the trust funds, as none of the circumstances specified under Article 17 of the Trust Law were present (see below). The court reasoned, however, that the freezing order did not constitute compulsory enforcement in the strict sense, since it neither affected the substantive trust rights nor disrupted trust administration. On this basis, the court maintained the freezing measures.

2.  Case No. (2025) Lu 1502 Zhi Yi No. 84

This case relates to enforcement against trust assets following the settlor's conviction for engaging in illegal medical practice.

Lu was convicted of illegal medical practice and ordered to forfeit 15.33 million yuan in illicit gains. To enforce this confiscation order, the court froze a family trust Lu had established. In his defense, Lu sought to demonstrate that the majority of trust assets originated from legitimate sources, with only a minor portion traceable to illegal activities. The court rejected Lu's arguments based on the following reasoning: First, while a portion of the trust funds originated from wealth management proceeds, the principal sum invested in the wealth management products was itself suspected to involve or constitute illegal gains. Consequently, the proceeds derived from illegal gains should likewise be deemed unlawful. Second, lawful income and illegal proceeds had become commingled. As money is a fungible asset, it was impossible to distinguish the specific sources, making it difficult to determine which portions of the trust assets were legitimate and which were illicit. Third, the court clarified that the recovery of illegal proceeds may be pursued through two methods: "in-kind recovery" (recovering the original illicit assets) or "value-based recovery" (recovering equivalent value from lawful assets). If an effective judgment orders the continued recovery of illegal proceeds, but the whereabouts of such proceeds cannot be ascertained, such that in-kind recovery becomes objectively impractical, the enforcement may instead target the equivalent value from the subject's lawfully obtained property.

3.  Case No. (2023) Su 0602 Zhi No. 6286-1

This case relates to enforcement of a trust's funds following the settlor's conviction for bribery and contract fraud.

Defendant Cui was convicted of bribery and contract fraud, sentenced to 14 years, fined RMB 800,000, and ordered to disgorge RMB 70.12 million. The court seized RMB 5.48 million from Cui's bank accounts and RMB 41.43 million from the funds under a trust settled by Cui.

Without adjudicating upon and determining the validity of the trust in its decision, the court held that the trust assets were equivalent to personal "deposits" and were thus executable.

II. Our Analysis

1.  The Chinese Legal Framework of Trust

Under Chinese law, once a trust is properly established, the trust assets are segregated from the settlor's own assets and cannot be enforced against to satisfy the settlor's personal liabilities.

However, to prevent misuse for evading obligations or illegal purposes, the Trust Law imposes strict requirements on trust, including that:

l The trust must not harm state interests or public interests (Article 5).

l The trust must serve a lawful purpose (Article 6);

l The trust property must be clearly identifiable and lawfully owned by the settlor (Article 7);

l Registration of trust assets is mandatory where required by law (Article 10); and

l Assets prohibited from transfer cannot form part of the trust without regulatory approval (Article 14).

Article 11 of the Trust Law makes clear that a trust is void if it falls within one of the following scenarios:

l The trust purpose violates laws, administrative regulations, or harms public interests;

l The trust property cannot be clearly identified;

l The settlor establishes the trust with illegal property or property prohibited by the Trust Law from being used to establish a trust;

l The trust is established solely for the purpose of litigation or avoiding legitimate debt collection;

l The beneficiary or the class of beneficiaries cannot be determined;

l Other circumstances specified by laws or administrative regulations.

Article 12 of the Trust Law provides that if the establishment of a trust violates the interests of a creditor, the creditor can make an application to revoke the trust, so long as the creditor does so within one year from the date when the creditor knows or should have known the reason for revocation.

Article 17 of the Trust Law further provides that the trust property can be enforced against compulsorily in the following circumstances:

l The creditor had already procured the right to priority in receiving compensation from the trust property even before the trust was established, and the creditor exercises the right according to law;

l Debts are incurred from the trustee's handling of the trust affairs and the creditor requires the debts to be paid off;

l The taxes that accrued in relation to the trust property are due; and

l Other circumstances provided by law.

2.  Application in these cases

All three cases mentioned above involve the enforcement of trust assets, yet none. strictly speaking, fall within the circumstances permitting compulsory enforcement as outlined in Article 17 of the Trust Law. This has sparked widespread debate within the industry and raised concerns about the protection of trust assets' independence.

However, a closer examination of these cases reveals that each trust exhibited defects of varying severity. In the first case, the funds used to establish the trust were derived from an unauthorized disposal of marital joint assets. The second and third cases both involved trust funds originating from illegal gains. These circumstances conflict with the Trust Law's explicit requirements that trust assets must consist of the settlor's lawful property and that trusts must align with public interest.

3.  Lingering Problems

That said, the court rulings in these cases have left certain questions open for discussion.

First, does freezing trust assets violate the principle of trust asset independence? According to Article 95 of the Minutes of the National Courts' Civil and Commercial Trial Work Conference (commonly referred to as the "Nine People's Guidelines"), trust assets remain independent from the personal assets of the settlor, trustee, or beneficiary during the trust's existence. Therefore, unless the circumstances specified in Article 17 of the Trust Law are met, courts should not permit parties to apply for preservation measures against trust funds held in dedicated accounts by custodian banks or trust companies due to disputes involving the settlor, trustee, or beneficiary. As for beneficiaries, Article 47 of the Trust Law stipulates that if a beneficiary cannot repay debts which have fallen due, their beneficial interest in the trust may be used to settle those debts — but trust assets themselves cannot be directly enforced against.

Second, prior to enforcing against trust assets, if none of the conditions under Article 17 of the Trust Law apply, should courts proceed directly with enforcement, or should they first determine the validity of the trust before moving forward? Although the ultimate outcome may be the same, the decision to enforce against trust assets without first adjudicating upon the validity of the trust itself raises significant concerns. Not only does this approach fail to satisfy the parties' legitimate expectations of procedural fairness, but it also risks eroding market confidence in the trust — a consequence that could prove detrimental to the institution's sustainable development.

III. Conclusion

The three cases canvassed in this note have sparked renewed debate about how far trust protections should extend, while underscoring a fundamental rule: trusts cannot shield illegally acquired wealth. Only properly established and lawfully administered trusts qualify for legal protection.

The principle of trust asset independence constitutes the very foundation of trust operations. To safeguard the sustainable development of trusts and maintain market confidence in the legally protected nature of this institution, judicial practice must pay particular attention to balancing substantive justice with procedural justice. The pursuit of efficiency must not come at the expense of procedural due process.

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.