Planning my family trust- major consideration.
For the purposes of assets protection and succession planning, high-net-worth individuals (HNWI) may use the vehicle of family trust for a long-term planning for his/her future generations for hundreds of years.
What factors should an HNWI think through when setting up a family trust?
Nationality
The nationality of an HNWI will affect whether her/ she has the freedom of disposition. In countries, such as China, which have the legal concept of community property between husband and wife, an express written consent of the spouse is required before transferring the community property to the trustee.
The nationality of the HNWI and his/her family members (being the beneficiaries) will also affect the tax implications, especially when they are residing in countries, such as China, USA, which impose worldwide tax. In such case, overseas tax advice is needed to be sought to understand the tax charging and reporting obligations, as well as whether the drafting of the trust deed needs to be amended in order minimize the tax exposure.
Degree of Control
As the legal title of the trust properties are transferred to trustee, the HNWI may have concerns whether he/she will still have some control over the trust assets. There are various ways for the HNWI to exercise certain control over the trustee without making the trust being void because of lack of intention to create the trust:-
- The HNWI may consider to use a reserved power trust, instead of a full discretionary trust, to reserve the distribution power and investment power. The HNWI can appoint a trust-worthy investment adviser at his/her own choice.
- The HNWI may set up the trust in some jurisdictions, like BVI and Cayman, which have enacted legislations to allow the HNWI to control the trust through participation in the control and management of asset holding companies.
- If the value of the trust management is sizeable enough, the HNWI can even set up a private trust company, and thus the trust assets are owned and managed by a private trust company actually owned by the HNWI himself/ herself.
- In order to supervise the action of trustee, the HNWI can appoint a protector. We can also provide some mechanisms in the trust deed regarding how to remove and replace a trustee.
Location and Type of Assets
The location and type of assets will affect whether the trust assets can be legally transferred to the trustee, and the risk acceptance level of the trustee.
In some countries where there are restrictions for a foreign company to directly hold the real estate and landed properties, it will not be legally possible for a trustee to hold the real estate and landed properties. Possible solution is to use a local company to hold the real estate and landed properties, and then the shares of such local company will be transferred to the hands of trustee.
Trustee is more willing to accept bankable and financial assets, such as bank accounts, cash, shares, insurance policies as trust assets as their risks are minimal. Trustee usually have reservations whether to accept risky operating businesses, antiques, art works because the risks of loss, damages, and maintenance are higher.
Running Cost
Finally, running cost of setting up a trust is also an important consideration. Trustee will charge an one-off set up fee, and on-going annual fees until the termination of the trust. However, the trustee is willing to provide free consultation to discuss the trust structure with the HNWI.
Please feel free to contact us at enquiry@hksunlawyers.com for further enquiries.
