Three major types of family trusts: each has its own advantages. How to choose the best solution?

Family trusts serve a variety of purposes.

For entrepreneurs, it is a safety belt, hedging risks, isolating debts, and preventing the family from being affected;

For marriage, it is a safe that protects wealth, divides it rationally, and avoids the risk of divorce;

For children, it is a golden seed that can pass on wealth, prevent family ruin, and protect future generations;

…

In order to meet various needs, family trusts have evolved into many different types over the years.

For example, revocable trust, irrevocable trust, onshore trust, offshore trust, capital trust, equity trust, real estate trust, etc.

Among them, there are three most common ones in China: capital family trusts, insurance trusts, and offshore family trusts.

They each have advantages and disadvantages.

Funding Family Trust

This is the most common type of family trust, in which cash is directly entrusted to a trust institution as the original trust property, and the trust institution invests and manages the funds.

Case

The boss of a certain company hopes to leave 50 million in cash to his children, but is afraid that the children will squander it. So he used 50 million to set up a trust with a term of 50 years. Starting from the age of 30, the child can receive 1 million in living expenses every year, and incentive terms are set: every time the child achieves an achievement, he will be rewarded.

Advantages

The advantage of a capital family trust is its flexibility. In the trust establishment stage, when the trustor hands over funds to the trust institution, no additional trust registration is required; in the fund management stage, the trust institution can give full play to its management capabilities to maintain and increase the value of wealth; in the fund distribution stage, the trust institution will strictly follow The trust funds and their income will be distributed according to the wishes of the trustor.

Disadvantages

Its disadvantage is that the requirements for trust institutions are particularly high. Not just managing wealth, but investing effectively. Integrity level, management ability and investment ability are all indispensable. At the same time, when establishing a trust, it is necessary to ensure that the source of trust funds is legal and the purpose of establishing the trust is legal.

Case

Zhang, a female, had an extramarital relationship with Hu, a male (pseudonym), and gave birth to an illegitimate son, Zhang Xiaoxiao (pseudonym), in February 2014. In January 2016, Hu provided 30.8 million yuan in funds, and Zhang acted as the trustee to establish a wealth inheritance trust. Since January 2018, the trust has paid Zhang Xiaoxiao 60,000 yuan every month. In October 2019, Hu’s wife, Yang, sued Zhang’s daughter for unjust enrichment. According to the execution documents disclosed by the court, Zhang needs to return approximately 40 million yuan to Yang, and the trust assets have also been frozen.

insurance trust

This type is placing a life insurance policy into a trust. After purchasing insurance, set the beneficiary of the policy as a trust institution. When the insurance expires or a risk occurs, the insurance money automatically becomes a trust asset, which is operated by the trust institution and the property is distributed to the trust beneficiaries.

Case

Ms. Li purchased a whole life insurance policy. The insured was herself and the beneficiary was her son. Because the insured amount was large, she was worried that her son would not be able to manage it properly after receiving so much money. So under the advice of a wealth consultant, an insurance trust was set up based on whole life insurance. Change the beneficiary of the insurance to a trust and designate the beneficiary of the trust as her son. According to the terms of the trust, the son can receive a living allowance every year after he reaches adulthood, and can also receive corresponding distribution of benefits when he gets married, has children, or buys a house.

Advantages

The biggest advantage of insurance trusts is the leverage attribute. The threshold for a family trust is relatively high, with a basic requirement of tens of millions of RMB. The insurance trust can use the leverage attribute of insurance products to exchange low premiums for high insurance amounts, and then use the high insurance amounts to reach the threshold for trust establishment.

Case

Take the insurance trust jointly launched by an insurance company and a trust company as an example. If you pay 330,000 yuan per year and pay continuously for 10 years, you can get 8 million yuan in protection. That is to use 330,000 cash to leverage 8 million. Once a risk occurs, the 8 million can be placed in an insurance trust and managed according to pre-set trust terms.

Another advantage of insurance trusts is double protection. The trust itself has the functions of debt avoidance, tax avoidance and wealth inheritance, and insurance has similar functions. Insurance generally has formatted clauses, which are simple and direct; while trusts have customized clauses to meet individual needs. The combination of the two resonates and complements each other and can work better.

Offshore family trust

This type of trust is established overseas, the custodian is usually an overseas institution, and the trust assets are usually overseas assets.

Advantages

The advantages of offshore family trusts are greater privacy and more effective tax planning. Many offshore jurisdictions offer attractive tax incentives and exemptions to avoid various taxes, including inheritance tax.

Case

Ji Haipeng, chairman of Longguang Real Estate, passed on wealth worth tens of billions to his daughter Ji Kaiting by opening a new company in the British Cayman Islands, setting up a family trust, and using multi-layered shareholding methods. As a result, Ji Kaiting appeared on the Hurun Rich List and became the "richest woman born in the 1990s". At the same time, his father Ji Haipeng still retains management rights and continues to be at the helm of Longguang Real Estate.

Disadvantages

The disadvantage of offshore family trusts is that they are more costly, involving more attorney fees, accounting fees and various service fees. At the same time, since the laws and taxes of each country are different, you need to pay attention to the local laws and political and economic stability.

Case

Zhang Lan, founder of South Beauty, established an offshore trust on June 3, 2014. In November 2022, the Singapore High Court determined that Zhang Lan's control over the trust was too high and the trust was broken down. That is to say, Zhang Lan is the actual owner of the bank account assets where the trust is located, and also agreed to the application of the creditor CVC to appoint a receiver.

Summarize

The above three common family trusts each have their own advantages and disadvantages. If you have a large amount of cash that needs to be hedged and passed on, and you need to find a reliable asset manager, you can choose a capital family trust. If the amount of funds does not reach the threshold for setting up a trust, but you want to enjoy the customized services of the trust, you can choose an insurance trust. If the amount of assets is particularly large, freedom and privacy are more important, and there is a higher need for tax avoidance, you may consider an offshore family trust.

Disclaimer: The content of this article is for reference only and does not constitute investment advice or an invitation, solicitation or recommendation for any investment product. Readers are advised to make their own judgment and seek professional advice.

The content of this article is purely the author's personal opinion and does not represent the position of 852FIN.

852FIN reminds readers that the content contained in this article mainly comes from online public information and does not constitute any professional advice. Readers should seek professional advice if they have specific questions about the establishment and management of trusts.

852FIN and the author of this article are not responsible for any loss or damage caused by the information contained or omitted in the article.