Despite the slowdown in the Chinese economy and continued volatility in its share market, private wealth continues to be generated at unprecedented rates. However, if history teaches us nothing else it is that that such prosperity will not continue indefinitely and the next financial crisis is just around the corner.
That being the case, and given the globalisation of Chinese families and businesses, now is the perfect time for Chinese nationals who have, or are in the process of accumulating, wealth (“HNWIs”), to consult their professional advisors about an international wealth management plan. That is, a plan tailored to the individual’s present and future personal, family and business needs including a structure to hold, invest, manage and protect wealth located outside of his/her home jurisdiction.
Nowhere is the need for wealth management planning more prevalent than in China where the number of HNWIs continues to grow with those individuals showing a desire to invest, study and explore opportunities outside of China.
Use of a Trust
For centuries trusts have proved to be the ideal wealth management vehicle and therefore the key component in a wealth management plan. The trust is a creation of English common law and used for a variety of planning purposes, most notably:
- Succession - the desire to have one’s assets pass to the next generation in accordance with specific wishes;
- Wealth protection - to protect assets from those who by force, legislation or litigation may try to take them away;
- Avoidance of probate – remove the need for probate on death by removing assets from the estate now;
- Tax - the effective legitimate minimization of tax charges on the transfer or sale of assets and the income they may generate;
- Pre-migration – to structure assets and affairs in a fiscally efficient manner before becoming resident in another country;
- Confidentiality – to allow the HNWI and his/her family to benefit from their assets and conduct their business without unnecessary disclosure of personal information.
Through a carefully constructed trust the Chinese HNWI can determine how and when a beneficiary will receive assets settled onto the trust, protect assets from uncertain political and economic climates, and avoid forced heirship rights and structure businesses to ensure effective management and corporate succession. The trust is the ultimate asset owning vehicle in the plan. It can hold, directly or indirectly, all types of assets; moveable and immovable, bankable and non-bankable - ranging from investment portfolios to real estate to shares in private holding, investment and trading companies to luxury assets such as yachts, planes and works of art. The structure implemented can also provide the HNWI with varying and appropriate degrees of control over the investment and management of trust assets without compromising the validity of the trust or the benefits it offers.
Choosing a Trustee
The first and most important decision to be made when establishing the trust structure to form the basis of the international wealth management plan, is choosing the trustee to manage and administer the trust and its assets. Creating a trust requires ultimate legal ownership of the HNWI’s assets to be with the trustee. The HNWI must therefore be very confident as to the trustee’s experience, substance, professional reputation, and the quality of the professionals it employs. The trustee should be based in a sovereign jurisdiction where the HNWI is not resident.
The jurisdiction will need robust legislation designed to enhance the benefits provided by a trust and protect the individual’s assets and rights, together with a legal system experienced in dealing with trust matters and a reputation for respecting the rule of law. Last and by no means least, the HNWI should want his/her trustee to be regulated by an independent authority that will monitor the trustee’s activities and accept and investigate any complaints made against the trustee by the HNWI or trust beneficiaries. As establishing a trust will require the HNWI to transfer ultimate legal ownership of his/her assets often to a professional corporate trustee in a foreign jurisdiction with whom he/she personally may not be familiar, effective regulation is essential for peace of mind.
Chinese HNWIs will have a number of options when selecting the right trustee and jurisdiction in which to have their trusts established, managed and administered. As the trust is derived from English common law it may not be a familiar concept to those in China, but that unfamiliarity should not be a deterrent to using a trust given the benefits it can provide and the professional advice and management available.
The Cook Islands Option
When judged against the criteria set out above for choosing a trust jurisdiction and trustee, the Cook Islands would appear to be an excellent option.
The Cook Islands, located in the South Pacific northeast of New Zealand and south of Hawaii, is a mature international finance centre having been in existence for over 30 years. The cornerstone of the Cook Islands international financial services industry is the International Trust established pursuant to the International Trusts Act 1984, as amended (“ITA”). It has made the Cook Islands an industry leader in the preservation of wealth and the trust jurisdiction of choice for foreign HNWIs and their families by providing law better suited to the needs of people in today’s society. Features of the ITA include:
- Trustees must act in accordance with a statutory duty of care being that of a prudent person engaged as a professional trustee managing the affairs of others;
- A trustee has the power to make any lawful investment;
- A trustee may delegate the exercise of all powers and discretions excluding dispositive powers;
- The settlor can retain elements of control over the trust and its assets;
- Certainty is given to the rights of those who might claim against trust assets by reference to specific dates and events;
- Trusts can be dynastic with no fixed termination date;
- Forced heirship rules in foreign jurisdictions shall not affect the validity of a trust or transfers on to trusts.
- Foreign judgements will not be recognised or enforced if inconsistent with Cook Islands law.
In addition to the ITA, Cook Islands legislation provides other structures for holding, investment and protection of assets that may be integrated with an International Trust to produce or form part of an international wealth management plan. Those structures include international companies (International Companies Act 1981-82, as amended), limited liability companies (Limited Liability Companies Act 2008, as amended) and foundations (Foundations Act 2012, as amended).
Effective tax planning may be possible through the use of a Cook Islands International Trust and will be dependent on where the settlor and beneficiaries are tax resident and assets are located. It is important that a Chinese HNWI obtains Chinese tax advice before establishing a trust and, if he/she or members of his/her family intend to emigrate, in such jurisdictions to where they intend to move prior to arriving. The Cook Islands’ tax laws are designed so that it is possible to incur no tax charges in addition to what the Chinese HNWI would otherwise be charged.
Cook Islands courts are experienced in hearing and deciding upon cases involving trust law and trust issues and have a reputation for respecting the rule of law. The Cook Islands’ High Court judges are experienced New Zealand judges who apply Cook Islands law.
Professional Service Providers
The trustee companies licenced to provide trustee and corporate services in the Cook Islands contain a depth of relevant knowledge, experience and expertise to rival any jurisdiction in the world. Most of these companies have existed since, and contain professionals who were involved in, the formative years of the Cook Islands as an international finance centre. They have experience in dealing with Asian and particularly Chinese clients and some are part of organisations with an Asian presence.
Trust Companies in the Cook Islands are licensed to carry on “trust company business”, as that term is defined in the Trust Companies Act 2014 (“TCA”). They are regulated by the Financial Supervisory Commission (“FSC”) in accordance with the provisions of the TCA, which give the FSC the power to vary, revoke or add conditions to a licence as it sees fit. The Cook Islands is committed to the implementation of and compliance with international regulatory best practice.
When these factors are combined with its modern communication facilities, sovereignty of its government, supportive political environment, banking options and convenient time zone for transacting business, the Cook Islands does stand out as the ideal option for the Chinese HNWI.
The Cook Islands Solution
The international wealth management plan should in all respects be just that – international. It will hold the HNWI’s non-domestic assets in vehicles established in jurisdictions and under laws which provide the maximum protection, flexibility and ease of administration. Financial assets will be custodied and managed in those financial centres with the professionals and institutions best suited to the HNWI’s needs. Depending on the HNWIs personal and family circumstances, the plan may be relatively simple or it may be more sophisticated requiring detail and focus on particular aspects.
Given that no two individuals are the same it follows that no two wealth management plans will be the same, however the Chinese HNWIs’ wealth management structure may look something like this:
- A Cook Islands International Trust administered by a Cook Islands resident trustee. The HNWI names a class of persons (which will include his/her spouse and children) to benefit from the trust;
- Powers to direct investment of trust assets is reserved to the HNWI or someone nominated by him/her;
- A bank account is opened in the trust’s name operated by the trustee to receive and hold cash to be distributed to beneficiaries;
- A letter from the HNWI to the trustee details his/her wishes as to the investment, management and distribution of assets both during his/her lifetime and beyond;
- The HNWI directs the trustee to invest in a Cook Islands LLC. The trustee is the 100% owner (member) of the LLC and the HNWI, or his/her nominee, can be the manager of the LLC and its assets.
- One or more offshore holding companies, depending on the type and number of assets to be held, can be transferred to the LLC. The holding companies may already exist or will need to be incorporated and assets transferred in;
- For example, one holding company holds financial assets, investment portfolios, security trading accounts, another holds real estate, commercial or residential, and a third holds shares in any trading company owned by the HNWI or his/her family;
It is imperative that Chinese HNWIs consult their domestic advisors now to discuss the wealth management possibilities available. Past and current local, regional and global economic and political events highlight the need for them to understand how such issues may impact their present and future wealth and how they might best protect it. A Cook Islands International Trust and Cook Islands resident trustee gives the Chinese HNWI a platform to secure existing and future wealth whilst having it invested, managed and distributed in accordance with his/her wishes both during his/her lifetime and indefinitely after his/her death. The Cook Islands would appear to provide a perfect solution.
By Alan Taylor