How Ultra High Net Worth People Use Charitable Trusts in China

The concept of “charitable trust”, as an emerging charity model, has the dual attributes of charitable affairs management and financial services. While isolating wealth risks, achieving charitable purposes, and managing property preservation and appreciation, through the concept, it is also possible to inherit the familial philanthropic culture and carry out philanthropy in a more professional manner, something which is gradually becoming an important choice for more Chinese ultra-high-net-worth people.

What is a Charitable Trust? 

According to section 44 of the Charity Act, charitable trusts refers to the act of the trustor entrusting their property to the trustee for charitable purposes, and the trustee managing and disposing the property in their own name, according to the trustor’s wishes, while at the same time using the property to carry out charitable activities. In a charitable trust, there are five important roles; the principal or the trustor, the trustee, the beneficiary, the supervisor and the custodian. Understanding the rights and obligations of these subjects makes it easier to understand the intricate legal nature of charitable trusts.

Trustor: They who hand the trust property over to the trustee, choosing to participate in trust management decision-making matters, such as trust property investment and beneficiary selection, according to their own wishes.

Trustee: They who/which manage and uses the trust property and its proceeds in accordance with the trust documents, at the same time performing statutory or agreed obligations such as reporting and information disclosure. The trustee of a charitable trust is usually a trust company, a charitable organisation or another entity.

Beneficiary: They who obtain the trust benefit based on the agreement in the trust document.

Supervisor: They who/which is responsible for supervising the trustee’s behaviour and reporting any breach of contract or dereliction of duty to the client.

Custodian: They responsible for the custody of the trust property.

The Status of Charitable Trusts in China

Relevant data for 2021 reveals that the willingness of trustors who have already established charitable trusts to establish new trusts, or to add new trustors to those trusts already established, has increased compared with a few years ago. Meanwhile, the purposes for which charitable trusts are set up are gradually diversifying, while the terms of the trust are becoming more and more flexible.

In addition, we have learned that the number of individual trustors and charities using trusts to carry out charitable activities in 2021 also continued to grow. In charitable trusts, the number of individuals as trustors increased by 6.59 percent over the previous year, and the number of charitable organisations as trustors increased by 21.61 percent. In 2021, charitable trusts continued to be concentrated in the fields of education and poverty alleviation, and in the past 2 years, the number of charitable trusts established for the purpose of health has also increased significantly.

Compared with the traditional philanthropic model (such as direct donations to beneficiaries or the establishment of charitable foundations, etc.), charitable trusts have many advantages, such as being more independent in the management of property, more flexible and transparent for high-net-worth families to achieve their charitable purposes, while having the function of risk isolation, etc. Charitable trusts can not only entrust professional institutions to plan and execute charitable activities, they can also realise the preservation and appreciation of trust assets through trust institutions. In addition, the trust methods, operation methods and management mechanisms of charitable trusts are more mature, while they can also be tailored according to the specific needs of high-net-worth families.

As an important mechanism and tool, the Charitable trusts can help the wealthy to manage and support charity in a more orderly, transparent and efficient manner. With the development of charitable trusts, in the long run, we look forward to the corresponding legal and tax supporting policies becoming more and more sound and improved.

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