In recent years, with the rapid growth of high-net-worth individuals in China (“HNWIs”) and the distribution of their assets all over the world, the use of trusts by HNWIs, to manage their global wealth, has increasingly gained in popularity. Most major global economies, including China's and the world’s leading tax havens, have statutorily enacted special function trusts that permit a trust owner to transfer property without tax consequences.
Following such a transfer by a settlor (the property owner) of property to the trustee (the trust manager), the settlor is generally no longer considered the owner of the trust property. The trustee, however, must subsequently follow the instructions of the settlor, and the trust itself, in terms of managing and distributing the trust property. Then, upon the occurrence of certain events, such as sudden death of the settlor, the filing of claims by settlor's creditors, or the mandatory division of property due to divorce, dissolution, or bankruptcy, the property in the trust will legally be treated separately from the other assets of the settlor. Accordingly, such property will be protected from any subsequent encumbrance or enforcement action that normally is derived from any or all of the aforementioned events.
A special purpose trust often used by HNWIs is a family trust, which is a form of trust where the property owner (the settlor) uses the trust to separate the ownership of the trust property from the profit that is expected to be derived from such trust property. The settlor will typically authorize a third-party to manage and distribute the trust income for the benefit of the settlor's family members. This separation of ownership, between the trust property and the profits derived from such property, is an advantageous feature that is frequently employed by individuals and/or families, from all over the world, in order to achieve tax efficiency on various levels.
On the other hand, due to the special structure of a family trust, the various tax issues surrounding the trust can be quite complicated and a family trust must be established under the proper guidance of a competent attorney. For example, there may be issues surrounding the different locations of various trust property and the different locations of the trust beneficiaries. When relevant property or relevant parties are located in different jurisdictions, and such jurisdictions have competing laws surrounding the interpretation of taxable profits or beneficiaries, then complex planning problems will likely arise. Without proper planning, a settlor attempting to employ a family trust for tax efficiency often ends up finding himself or herself ensnared in a complex situation involving the laws of several jurisdictions. Such considerations also include the nationality and tax status of the settlor, the trustee, and the beneficiaries, as well as various laws surrounding the trust property, the type of trust, and the terms regulating the investment, management, and profit distribution of the trust property.