Sunday, 23 June 2024

Financial institutions’ capabilities for highly sought-after family trust services to be tested

5 min read

Family trust is a wealth management tool typically created by wealthy families, aimed at protecting and passing on family wealth. As a financial service for family asset planning, the origin of family trusts can be traced back to the UK and the US. Since the 1980s, with the increase in the number of high-net-worth families worldwide, family trusts have gradually become an important wealth management tool.

Trusts gain popularity among high-net-worth individuals for inheritance planning

In recent years, with the rapid development of the Chinese economy and the aging of the first generation of wealth creators, more and more wealthy families have started to pay attention to wealth management and succession planning. The 2021 China Private Wealth Report jointly released by China Merchants Bank and Bain & Company shows that the proportion of high-net-worth individuals surveyed who are preparing for or have already started relevant arrangements for wealth inheritance has risen from 53% in 2019 to 65% in 2021.

In addition, with the frequent news coverage of family trusts established by Zhang Lan, the founder of South Beauty, Zuo Hui, the founder of Ke Holdings Inc, Zhang Xin and Pan Shiyi, the founders of SOHO China, and Zhang Yin, the founder of Nine Dragons Paper, family trusts have become an increasingly preferred choice for entrepreneurs to effectively pass on their family wealth due to their risk isolation, family governance, and charitable functions.

  1. Asset segregation: asset segregation is the most important step in inheritance protection. Family trusts have legal independence, and the assets in the trust are completely isolated from the other assets or liabilities of the settlor. Unless the settlor maliciously incurred debts before setting up the trust, even if the settlor faces bankruptcy and liquidation due to business issues, the trust assets will still be protected and will not be included in the liquidation range, effectively achieving asset segregation protection.
  2. Family inheritance: family trusts have clear provisions for beneficiaries and scope, and the distribution of assets is handled by professional trustees. Even if the settlor's marriage or family relationships change, it will not affect the complete inheritance of the wealth. For entrepreneur clients, by placing equity in the trust, the settlor can achieve effective separation of ownership, management, and benefit rights of the business, and make differentiated arrangements for the willingness and ability of the next generation to take over, while avoiding dilution of family equity and eventual loss of control of the enterprise during the inheritance process.
  3. Wealth preservation: trust assets can be widely allocated in the global market, thus achieving long-term stable preservation and appreciation of trust assets. In addition, in some overseas markets, transferring equity and real estate to a family trust before the settlor's death can also achieve the function of reasonable tax planning.
  4. Personalised inheritance: family trusts can flexibly set various clauses according to the settlor's requirements, such as the setting of the term, the method of asset allocation, and the disposition of assets in case of emergencies, and can be adjusted during the trust term as agreed in advance, making family trusts better able to meet personalized inheritance needs.

Competing institutional professional and innovative capabilities in family trust services: a new stage

Chinese family trust has been rapidly developing since its inception in 2012, with a growth trend over the past decade. According to data from China Trust Registration Corporation, the scale of family trust was less than RMB 500 million in 2013. As of September 2022, the scale of family trust has reached about RMB 470 billion, an increase of about 34% from the end of 2021, and there are about 24,000 surviving family trusts.

At the same time, the trust industry in China is facing a major reshuffle. According to data released by China Trustee Association, in 2022, trust business revenue decreased by 30.6% year-on-year and total profits decreased by 39.8% year-on-year, the largest drop in nearly a decade.

In addition, with the release of the notice on regulating the classification of trust business of trust companies by the China Banking and Insurance RegulatoryCommission (CBIRC) in 2023, wealth management of trust companies will shift from traditional product sales to trust-originated businesses, such as family trusts and insurance premium trusts. Wealth management services trusts, including family trusts, household trusts, insurance premium trusts, special needs trusts, testamentary trusts, other personal wealth management trusts, and wealth management trusts for legal and non-legal entities, will become important directions for the transformation and development of trust companies.

Against this backdrop, there will be increasing industry differentiation in the future development of the trust industry in China, showing a "Matthew Effect" where the strong become stronger. Trust companies with larger management asset scale, professional talent teams, product development and innovation capabilities, and business coordination capabilities will quickly enhance their core competitiveness and continue to consolidate their industry position.

Building professional capabilities for family trusts requires long-term investment and persistence.

CCB Trust, as a leader in China's family trust business, has been deeply involved in the family trust business since it landed its first family trust business a decade ago. It has built a comprehensive service system centred on customers, and currently has five standardized family trust products and five customised family trust products that are fully functional, well-serviced, and operationally mature. Among them, stock family trust, equity family trust, and foreign beneficiary family trust services are tailored to customers' personalized needs for inheritance, tax planning, and asset diversification.

CCB Trust has also completed the transition from a single product supplier to a comprehensive solution provider for family wealth, ahead of the industry. With a focus on family member training and the investment and financing needs of family enterprises, CCB Trust has created a complementary service system for family and business, including family funds, family investment banks, and family credit, incorporating its investment banking and asset management into its wealth management business.

With its long-termism and professionalism embedded in day-to-day operation, CCB Trust's family trust services have been widely sought after in the market, serving over 3,000 family trust clients with a total scale of over 100 billion yuan, maintaining its industry-leading position.

New regulation in trust business poses fresh challenges for innovation and professionalism in trust companies.

In 2023, the new regulation on trust classification marks a new decade for family trusts. As an important business that returns to the origin of wealth management, family trusts rank first among the 25 new business varieties in the new classification table.

However, the transformation of returning to the origin of wealth management is not easy. As Peter Drucker said in his book Management Challenges for the 21st  Century, “One cannot manage change. One can only be ahead of it.” After ten years of rapid development, family trusts need new innovation and explorations in meeting customers' diversified needs in intergenerational inheritance, wealth distribution, and risk isolation, which requires higher product research and development capabilities and professional talent.

CCB Trust's family wealth management business was the first to establish professional tax and asset allocation capabilities. Customised solutions were developed to meet different inheritance needs, such as equity (stock) trusts and trusts for foreign beneficiaries. Based on the family trust business line, CCB Trust has developed a comprehensive family office service solution, including family funds, family investment banks, wealth planning, and family enterprise governance, fully meeting entrepreneurs' needs in corporate investment and financing, second-generation education and training, and corporate mergers and acquisitions.

CCB Trust's innovation is also reflected in the launch of the first inclusive family trust in China in 2021, "Ai Yu Trust." With a starting point of RMB 400,000, the trust allows customers to enjoy family trust services starting from RMB 10 million, which has lowered the service threshold for the industry and tapped into a huge blue ocean market. The goal is to help wealthy families plan for their wealth through trust-specific wealth management and inheritance services.

As family trust services enter a new stage of competition in institutional professional and innovative capabilities, CCB Trust will continue to be a leader in innovation and a comprehensive wealth management service provider for the new era, taking the responsibility of serving the private sector entrepreneurs and people's better lives. CCB Trust will continue to innovate family trust and family office service solutions, continuously improve legal, tax, asset allocation, family and corporate governance, and other professional capabilities, and strive to create a high-quality, trust-specific, and one-stop family wealth management service system that meets customers' expectations.

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