Original title: WEALTH Wealth Management Interview with Dacheng Lawyer: "Law + Finance" is a key combination in the wave of Chinese inheritance
*The following article is from WEALTH Wealth Management.
Wang Xu Consultant
Director of the Global Asset Security Law Center of the Dentons Financial Industry Council
As a veteran with extensive experience in the fields of law and taxation, cross-border and wealth management, Mr. Wang Xu, director of the Global Asset Security Law Center of the Financial Industry Committee of Dentons, pointed out that the first wave of succession of China's private enterprises is coming, the demand of high-net-worth individuals is becoming increasingly internationalized, and the domestic wealth management market is becoming more and more standardized, and it is very important to play a good "legal + financial" combination for asset protection and inheritance planning. In addition, cross-border will also become the focus of wealth management and family inheritance in the next stage, and the cross-border wealth management and legal and tax service capabilities of practitioners will become the key elements for them to stand out.
Q:
As China's generation of private entrepreneurs gradually enters retirement age, business succession has become a real problem they have to face. As the core link, equity inheritance is not only related to the future development of the enterprise, but also involves the harmony and stability between family members. In this process, the entrepreneur or family leader needs to pay special attention to the smooth transition of control of the enterprise and avoid the turmoil caused by the power struggle. So, what should families take precautions for?
A:
A generation of entrepreneurs can mainly plan the succession from three aspects: "power concentration", "inheritance arrangement" and "benefit distribution".
First of all, the concentration and decentralization of power is a delicate and complex balancing act. Too much centralization can lead to arbitrary decision-making, while too much decentralization can lead to disputes within the family and confusion in business management.
Due to the concentration of ownership in the early stage of private enterprises and family enterprises, the arbitrariness of decision-making ensures their success to a certain extent. However, with the passage of time and changes in the external environment, the personal experience of business owners may not be able to meet the needs of enterprise modernization, so it is necessary to ensure that a wide range of opinions are heard when making decisions. For family businesses, an equal distribution of decision-making power will lead to decentralization, inefficiency, and the inability to respond quickly to market changes, resulting in missed business opportunities. Therefore, on the one hand, enterprises should introduce professional talents and learn from various experiences; On the other hand, when the family power is transferred, it is also necessary to determine the family successor, and the family successor should centrally manage the family business, so that he can fully listen to the advice of other family members and external parties to complete the decision-making smoothly.
In order to screen family successors, improve operational efficiency, and ensure accurate decision-making, a generation of entrepreneurs can also allocate management rights to family members who have the ability and expertise and are suitable for the position through the internal rotation mechanism, and screen successors and heads of specific business sectors through reasonable allocation of key positions. In addition, through job rotation, future successors can also gain practical experience in different departments and positions, which not only helps them to fully understand the operation of the enterprise, but also develops their ability to control the overall situation of the enterprise in practice.
Second, private companies should plan for succession in advance, rather than waiting until the helmsman retires or when an accident arises.
With the development of China's wealth management market and the gradual popularization of investor education, domestic business owners are no strangers to the concept of "family trust". As a legal tool, family trusts can effectively achieve risk isolation and asset management of wealth. Through the equity family trust structure, the business owner can reasonably distribute the control and income rights of the enterprise, ensure the stability of the enterprise in the process of inheritance, and prevent and control risks such as family property disputes, dispersion of control, and property division caused by children's marriage.
Of course, family trusts should be customized according to the specific needs and goals of the family, including determining the type of trust, the composition of trust assets, the selection of beneficiaries, and the rules of trust management. At the same time, succession arrangements should be made within a legal framework, so businesses and business owners need to work closely with legal counsel to develop a legal and enforceable succession plan.
Third, private enterprises should establish a transparent benefit distribution mechanism, which is evaluated according to the role and contribution of each family member in the enterprise.
This includes not only family members who are directly involved in running the business, but also those who provide support and resources behind the scenes. Through an unbiased evaluation, it is possible to ensure that each family member receives benefits that match their contributions. For example, the successor enjoys control of the business, but the family members distribute the assets relatively fairly. For example, in the multiple equity family trusts we have led the establishment, a generation of entrepreneurs has used the flexibility of the trust mechanism to firmly lock in control to a family successor, but lock the profits of the enterprise in the trust and distribute them equally among the family members. Through this mechanism, the long-term concentration of control and the long-term sharing of corporate interests have been successfully achieved. Of course, a generation of entrepreneurs can also consider adopting a diversified asset distribution method, for example, if the interests of the enterprise are allocated to a certain child more, you can set up a capital trust, insurance trust, and increase cash support for other children to achieve a relative balance in the distribution of interests.
In addition, in terms of benefit distribution, the head of the family needs to pay attention to balancing the long-term and short-term interests of the growth of the family enterprise, as well as the individual needs of family members, so as to maintain the stability and harmony of the family relationship.
All in all, private enterprises and the families behind them need to comprehensively apply "legal + financial" means such as equity family trusts, capital trusts and insurance trusts, family rotation mechanisms, and the establishment of articles of association to reduce the risk of family wealth inheritance caused by problems such as power dispersion, complex inheritance procedures, family marriage changes, and uneven distribution of interests through a reasonable family governance structure.
Q:
With extensive experience in onshore and offshore trust structuring, what factors should clients consider (or what compliance concerns) should be considered when choosing between the two in the current regulatory context?
A:
First of all, many clients believe that the functions of domestic and foreign trusts are quite different, and they choose from the perspective of function. In fact, both domestic and offshore trusts have the same functions of asset protection, wealth management and inheritance, inheritance risk avoidance, marital risk isolation, privacy information protection, and prevention of sudden and unexpected risks. In other words, there is actually no significant difference between domestic trusts and offshore trusts in terms of function, and these contents are also mentioned in my monograph "Theory and Practice of Offshore Trusts". In my opinion, when choosing an onshore trust or an offshore trust, the following factors need to be considered:
Exchange control factors
The mainland has a clear and specific foreign exchange control policy, and the establishment of an offshore trust cannot break through the foreign exchange control to achieve the flow of domestic and foreign assets. In the context of foreign exchange control, domestic clients in China should choose a trust structure according to the location of their assets, and in principle, domestic assets should be placed in domestic trusts, and overseas assets should be placed in offshore trusts. If a client wants to achieve the allocation of domestic and foreign assets, it needs professionals to first build a cross-border structure for the enterprise, first create domestic and overseas assets through the cross-border structure, and then set up domestic and offshore trusts for domestic and overseas assets respectively.
Cross-border tax considerations
For the trust tax planning function that some clients are concerned about, it should be made clear that domestic and foreign trusts only have some reasonable tax planning space, but they cannot and should not become a tool for tax evasion. Clients should fully understand the functional boundaries of family trusts, especially offshore trusts, and the establishment of offshore trusts cannot avoid overseas tax payment obligations, and can only be applied to tax governance and planning within the scope of legal compliance. In the era of CRS tax-related information exchange and international tax cooperation, once the use of offshore trusts crosses the border, it may face double penalties at home and abroad.
Domestic legal and tax considerations
None of the relevant entities (settlor, trustee, beneficiary, protector) of an offshore trust is subject to the jurisdiction of China's domestic laws and regulations, and may be required to comply with domestic laws and tax rules.
In addition, based on our observations and research on regulatory policies and development trends in recent years, China may learn from other countries and regions in the future and introduce exclusive laws and tax rules for offshore trusts, and high-net-worth individuals should pay attention to changes in laws, tax rules and policies in relevant fields.
Q:
What are the challenges and strategies for managing cross-border trusts for families with beneficiaries in multiple jurisdictions?
A:
The first challenge is the need to deal with complex rules that cross legal jurisdictions and tax jurisdictions.
If the trust is established in China, the trust assets are in China, the trustee is a trust company in China, the beneficiary is a foreign person (holding the nationality of a country or obtaining overseas permanent residence status) and the beneficiary involves multiple jurisdictions, the trust is usually referred to as a foreign beneficiary trust. At this time, it is necessary to consider whether the place of nationality and tax domicile of the beneficiary has special laws and tax rules for offshore trusts, and at the same time it is necessary to pay attention to the updates and changes of the corresponding rules, which is most obvious in the context of US beneficiaries and British beneficiaries.
Another challenge is the need to deal with cross-border assets. For example, there are special foreign exchange control regulations for cross-border transfer of assets in China, and how to realize cross-border assets after the trust assets are distributed to the beneficiary needs to be designed separately.
In the face of the above challenges, my experience in dealing with business in the past is that you can design an overall strategy and then implement it step by step, which needs to focus on the following three things:
If you want to open up the domestic and foreign trust structures, you can link them through ODI/FDI/red-chip structures under the premise of complying with foreign exchange control.
Secondly, it is necessary to pay full attention to the tax rules of the tax resident country (China + overseas), such as the design of the FGT of the US beneficiary trust, the design of the Canadian beneficiary (Granny Trust), etc.
At the same time, the family charter + cross-border family office scheme can be adopted to determine the principles and core institutions for the management of cross-border assets, and lead the domestic and foreign trust structures through the top-level structure.
Q:
In addition to improving the governance of enterprises and family businesses, more and more high-net-worth individuals and entrepreneurs are also paying great attention to philanthropy. How do you typically assist families with charitable aspirations in dealing with such needs? For example, what is the particularity of the equity structure and equity donation of the Wanxiang system, and what is the enlightenment for family wealth management?
A:
The first is to systematically build family charity, generally speaking, the principle of charity can be established through the family charter, and the implementation platform can be built with charitable trusts.
The Family Charter is the cornerstone of the systematic construction of family philanthropy, which specifies in detail the principles, goals and values of the family's participation in charitable activities. The family charter can clarify the direction of family philanthropy, establish the decision-making mechanism and the rules for the participation of family members. It is also possible to stipulate that family members of a specific age group must participate in charity, and set up a corresponding incentive mechanism, such as stipulating in the trust that family members participating in charity can increase the amount or number of times the trust benefits are distributed, so as to motivate family members to actively participate in charity.
Compared with the traditional charitable foundation model, the charitable trust platform has the characteristics of low threshold, flexible management, no restriction on the number of family members participating in the platform, and flexible use of funds, making it a charitable tool suitable for most entrepreneurs.
The particularity of the well-known Lu Guanqiu Sannong Fuzhi Foundation Charitable Trust lies in the type of assets it donates, that is, a large proportion of shares of listed companies. This breaks through the traditional cash-based model of donations, and demonstrates the feasibility and innovation of listed company shares as charitable asset donations. The case also enlightens us that the shares of listed companies can not only be loaded into trusts in large proportions, but also donated as charitable assets, which is a new way to realize wealth management and social responsibility, which helps to realize the social value of wealth while inheriting wealth.
Q:
China's private and family wealth management market is still in the growth stage, for example, family offices have grown from scratch and are in urgent need of industry standards and benchmarks. From your perspective, do you have any specific impact on the development of private and family wealth management and customer service due to the legal compliance policies that have been introduced or will be introduced in China?
A:
I believe that with the important changes and continuous improvement of the rules of the wealth management industry, relevant tax rules and legal rules, the private and family wealth management market will usher in a more standardized model and more professional services.
At the level of industry norms, we have seen the rapid development of industries such as family offices, private banks, and independent insurance agents, and industry associations and government departments are also formulating more detailed normative documents to standardize industry behavior and improve service quality. This will mean that the industry's compliance policies will become more and more stringent, and the threshold for employment will continue to increase, which in turn will promote the professionalization and standardization of the entire industry. At the same time, clients can also obtain more professional and reliable wealth management services. In addition, under the improvement and guidance of industry rules, wealth management practitioners will continue to explore and innovate relevant business models to adapt to market changes and customer needs. This will drive the wealth management market towards a more diversified and personalized direction, providing customers with more diverse choices.
At the level of tax rules, tax issues such as inheritance tax, gift tax and trust tax-related rules have gradually become hot topics in society, and are expected to become the focus of national policy research. With the improvement of tax-related rules and the strengthening of tax audits, high-net-worth individuals also need to pay more attention to tax compliance issues. Therefore, professional private wealth management services will focus more on providing customers with tax compliance services, helping customers to reasonably plan taxes, avoid tax risks, and ensure the legal inheritance of wealth.
In terms of legal rules, with the continuous improvement of laws and regulations such as the Company Law of the People's Republic of China, business owners will also pay more attention to the compliance governance of enterprises and the sorting out of family governance structures. Therefore, in wealth management services, the routine and standardized legal risk examination business may usher in a relatively large space for development.
Q:
In your opinion, how does the cooperation between law firms and financial institutions affect the effectiveness of overall planning in private and family wealth succession planning? (Or you can share a case study of the results of the successful integration of "law + finance" services, and the key lessons learned)
A:
The success of wealth inheritance cannot be relied solely on the legal and tax services of legal institutions, nor can it rely solely on financial products. In order to fully meet the needs of customers, it is necessary to adopt a comprehensive legal + financial solution.
For example, we have worked with financial institutions to jointly carry out the project of "Comprehensive Physical Examination and Governance of Legal and Taxation of Entrepreneurs". Through the legal and tax physical examination project, we can first help customers comprehensively sort out the legal and tax problems existing in enterprises and family businesses, but the solution of some problems requires an integrated solution of law + finance. For example, in order to solve the problems of family business inheritance, marital risk prevention and family enterprise segregation, the funds, insurance funds and equity family trust services provided by banks, trust companies and insurance companies are very important. In the report "Analysis and Solutions of Legal and Tax Risks for Entrepreneurs", we will explain in detail the important role of legal documents, family trusts and equity trusts in solving clients' legal and tax problems from a legal and tax perspective, combined with relevant regulations, practical cases and theoretical basis.
In other words, finding problems through legal and tax physical examination and solving them with a combination of legal tools + financial tools can not only objectively sort out the entrepreneurial risks faced by customers, but also realize effective risk management and wealth preservation and appreciation.
Q:
Next, what are your new views or trend predictions on the development of wealth management and family inheritance industry in mainland China? For wealth management practitioners, what do you think they should focus on?
A:
The development of the wealth management and family inheritance industry in mainland China may have the following trends, that is, the globalization of customer awareness and demand, the internationalization of industry rules and legal and tax schemes, and the high frequency of cross-border wealth management and inheritance.
Globalization of customer awareness and needs
In recent years, with the development of the domestic private economy and the expansion of business horizons, clients' cognition and demand for wealth management are also expanding, and they are no longer limited to a single market or country, but seeking business and investment opportunities on a global scale. This requires wealth management practitioners to not only understand the local market, but also have an international perspective.
The industry rules and legal and tax solutions that accompany the needs of customers will also show a trend of internationalization
On the one hand, domestic compliance standards will continue to improve, and on the other hand, the scope of knowledge of practitioners will continue to expand, and practitioners will not only need to be familiar with the laws and regulations, tax policies and industry best practices of different countries, but also need to understand and apply these rules to provide compliant and efficient wealth management services while avoiding potential risks in cross-border wealth management.
Internationalization of family members and family assets
In recent years, the phenomenon of descendants of high-net-worth families studying abroad and operating overseas has become more and more frequent, coupled with the increasing awareness of global operation and investment of high-net-worth individuals, China's high-net-worth individuals will show the characteristics of family members and the internationalization of family assets. Therefore, cross-border wealth management and inheritance may become the focus of wealth management and family inheritance in the next stage.
It will also be important for practitioners to use corporate and family governance tools reasonably and legally, understand the complexity of cross-border wealth management and family inheritance, establish and maintain a cross-border service network, work collaboratively with international partners, and improve their professional capabilities in cross-border wealth management and multi-jurisdictional legal and tax services.
About Mr. Wang Xu
Director of STEP International Trust and Estate Planning Society in China and leader of the Northern Region
Co-Dean of Sanyuan Society, Chief Expert Advisor
211/985 invited lecturer of law and taxation in universities, head offices of many banks, and headquarters of financial institutions
National Full Scholarship for Postgraduate Students: Trust Law (First Class Honours)
University of Science and Technology Beijing (211/Double First-Class) Master's Tutor / Lecturer of Cross-border Law and Taxation Course
Member of the Editorial Board of the Legal Observation of Listed Companies of the China Association of Public Companies
He is an invited contributor to the national core journal "Financial Expo Fortune", which is in charge of the central bank
Invited expert commentator by a number of mainstream media
He has published the first non-translated book on offshore trust law and practice in China, "Theory and Practice of Offshore Trust"
【Honors】
Asia Pacific Wealth Forum 2023: Best Legal and Tax Service Team for High Net Worth Individuals in Chinese Mainland
From 2021 to 2023, he was consecutively listed in the Top 50 Chief Wealth Advisors in China by Wealth APAC Asia-Pacific Wealth Forum
For 2 consecutive years, it has won the honor of TIPTOP Top Advisor of Asia-Pacific Wealth Family Trust
The Legal 500 2024 Greater China Ranked Highly Recommended Lawyer in the Private Wealth Category
China Business Law Journal, China Business Law Journal 2023
Listed on the list of elite lawyers in Chinese mainland by LexisNexis
2023 Global Business Magazine GBM Asia Pacific Tax Advisor of the Year