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Recent legal amendments including stricter taxation measures point to a clear need for sound planning strategies to preserve wealth

In recent years, China¡¯s economy has transitioned from rapid growth to a focus on high-quality development, with sustained increases in national wealth fuelling swift expansion of the private wealth market. The total investable assets of Chinese high net-worth individuals (HNWIs) reached RMB278 trillion (USD39 trillion) in 2022, and are expected to surpass RMB300 trillion this year.

The number of HNWIs reached 3.16 million by 2022, with a compound annual growth rate of 10% to 15% from 2018 to 2022. Considering the change of the legal climate and the increasingly stringent tax environment, there is an urgent need for comprehensive wealth planning strategies for HNWIs to protect and preserve their existing assets.

Research by McKinsey shows that more than 85% of China¡¯s 47 million private enterprises are family enterprises. Most of them are now either in or approaching a critical phase of intergenerational wealth succession, and more than 60% of them could disappear during the succession process. In this context, family wealth succession and corporate governance have become increasingly important among HNWIs in China.

Common planning tools

Intergenerational wealth succession cannot be accomplished with a single tool. It typically requires a combination of different wealth planning and succession instruments. This article compares various wealth succession tools in China, outlining their advantages and limitations.

Among these tools, family trusts and insurance policies are currently the most popular among HNWIs. Family trusts are favoured for their privacy protection, risk protection, and ability to meet long-term wealth succession and tax planning goals. Insurance policies, on the other hand, are valued for their liquidity, potential high interest rates and privacy protection.

Other tools, such as intestate succession, inter vivos (between the living) gifts, and wills each have their unique advantages and special considerations. Intestate succession is straightforward but can involve complex probation procedures, necessitating timely professional assistance. Lifetime gifts can reflect the donor¡¯s wishes, but a legally binding agreement with the recipient might be necessary.

While wills clearly define the scope of inheritance and the heirs, they must meet specific legal formalities to be effective. Family offices can provide customised services for ultra-high net worth families, but are costly due to extensive professional services required. Charitable foundations and charitable trusts allow HNWIs to give back to society and offer some tax planning benefits, but require thorough communication with the foundation or trustee to realise these purposes.

Positive impacts

In 2023, the National Financial Regulatory Administration, issued a notice that aims to support the transformation and development of the trust industry.

The notice features two key highlights. First, it clarifies the classification for different types of trusts, dividing them into three categories with a total of 25 subtypes. It also encourages trust companies to ¡°actively explore¡± the development of asset service trusts, and sets a lower or no minimum threshold for family service trusts, other personal wealth management trusts, insurance trusts, special purpose trusts or testamentary trusts. This broader inclusivity will enhance the accessibility of trust services and is expected to generate new demand from non-HNWIs to utilise trusts for their specific needs.

Second, it elevates the standards for trustee performance and legal compliance, promoting compliant development of the sector. Trustees are required to ¡°act with honesty, integrity and diligence¡±, and are strictly prohibited from engaging in channel business and fund pooling activities in any form.

Furthermore, the notice requires the administration to collaborate with trustees to enhance financial consumer education, guiding consumers to accurately grasp the fundamental nature of trust relationships and the inherent risks associated with trust products.

In July 2024, the newly revised Company Law came into force, bringing new opportunities and challenges to China¡¯s modern corp-orate governance system and private wealth management industry.

The new Company Law offers family enterprises various options for corporate structures. For companies limited by shares, the latest ¡°shares category¡± system allows for ¡°same shares, different rights¡± in four dimensions: dividends; voting rights; share transfer; and company liquidation, meeting the needs of different groups such as investors, company executives, actual controllers and employees.

For limited liability companies, while the ¡°shares category¡± system does not directly apply, similar goals can be achieved through carefully drafted company articles, combined with equity agreements and other documents.

For family offices, the new Company Law offers significant development opportunities. The shift in corporate governance from a shareholder-centric model to a focus on boards of directors, along with heightened duties of loyalty and care for directors and the expansion of directors¡¯ joint liability, is likely to encourage family businesses to further separate ownership from management, or delegate management responsibilities to professional family offices.

Zhong Lun Law Firm
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Beijing 100020 China
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