How could PRC community property rules impact offshore trust planning?

How could PRC community property rules impact offshore trust planning?

Property acquired during marriage will be presumed as community property if not otherwise structured. Property planning helps to obtain clean title to the assets that a PRC settlor wishes to contribute to an offshore trust, and thus prevents potential risks and claims.

With the rapidly growing number of PRC high net worth individuals (“HNWIs”) and their increasing awareness of wealth planning, the use of an offshore trust by these HNWIs as a vehicle of wealth protection and preservation is becoming more and more popular in the PRC.

Setting up an offshore trust for a PRC HNWI could be a complicated task not only because of the PRC legal and tax constraints, but also as a result of the potential impact of the PRC community property rules. Under the PRC Marriage Law, any property acquired during marriage is presumed to be jointly owned by both spouses, i.e. community property. Therefore, a spouse contributing community property to a trust without the consent of the other spouse could face serious legal risks. The trustee in such a case may be exposed to certain liabilities as well if there is a lack of due diligence.

PRC Community Property Rules

Under the PRC Marriage Law, any property acquired by a couple or either spouse during marriage is presumed to be jointly owned by both spouses, unless there is specific evidence that would point to a contrary conclusion. Community property includes but is not limited to salaries and wages, bonuses, business income, investment income, income related to intellectual properties and gift income acquired by either spouse during marriage.

In comparison, separate property mainly refers to the following:

  1. Property acquired by a person prior to marriage
  2. Property acquired by gift or inheritance during marriage while the underlying gift agreement or the will specifies that the property belongs to one spouse
  3. Property agreed to be one spouse’s separate property in a pre-nuptial or post-nuptial agreement.

With the broad definition of community property, as a practical matter, most of the PRC HNWIs would be subject to the community property rules, especially those who are in their 40s or 50s and created their family wealth over the past two decades during which the PRC achieved record-high economic growth. To them, almost all their family wealth would theoretically be community property, even though some assets may have been recorded under one spouse’s name for title recording purposes.

One important question is whether the income generated from the investment of one spouse’s separate property during marriage would be community property or not. The answer is generally yes, with the exception that bank interest earned on separate property remains as separate property.

Because of the PRC community property rules, when community property is contributed by one spouse into an offshore trust without the consent of the other spouse, the contribution would be held invalid, which means that such property may thus need to be returned to the claimant spouse. One tricky related issue here is whether the trustee would be held liable to the other spouse, especially in the event where the trust assets have depreciated in value.

While there are no clear rules in the PRC dealing with such an issue, based on the general legal principles, a PRC court would likely base its decision on whether the trustee acts in good faith or with malice. Since the term “malice” is not clearly defined by the PRC laws, a PRC court may exercise extensive discretion on the interpretation. A trustee should thus conduct sufficient due diligence regarding the ownership of the assets in question and enough care must be taken to minimize such risks.

How to Best Deal with PRC Community Property Rules

A married couple can try to use pre-nuptial or post-nuptial agreements to work around the community property issue. The pre-nuptial or post-nuptial agreement is gradually becoming the most efficient way for spouses to determine their desired ownership entitlement to their community property, which is legally allowed under the PRC Marriage Law. A legally enforceable pre-nuptial or post-nuptial agreement preempts the application of the default community property rules.

Such an agreement can be executed either before marriage, at the point the couple get married or during the course of their marriage. And it can cover any property already owned by the couple and even their prospective property. It can also have the retroactive effect as long as that is a manifestation of the spouses’ genuine intent.

A common question asked by some US tax practitioners is whether the execution of a post-nuptial agreement would be treated as a gift from one spouse to the other spouse, which could potentially create certain US tax issues. A typical scenario is where the wife, a US citizen or green card holder, enters into a post-nuptial agreement with her husband, a Chinese citizen, under which she agrees that certain assets would belong to her husband. The theoretical view in the PRC currently seems to be that this should not be treated as a gift.

In the context of offshore trust, another common question is whether a consent letter signed by the other spouse, instead of a formal post-nuptial agreement, would be sufficient under the PRC laws. The current view of many practitioners in the PRC is that a carefully drafted consent letter based on the full knowledge of the other spouse should be sufficient.

Conclusion

Obtaining clean title to the assets that a Chinese HNWI wishes to contribute to an offshore trust is far more complex than it appears. Without proper planning or care, the contribution would be problematic to both the settlor and the trustee. Therefore, both of them are highly recommended to seek sufficient professional legal advice before taking the first step. https://www.zhonglun.com/en/

Should I use a Liechtenstein foundation as a private trust company for my family?

Should I use a Liechtenstein foundation as a private trust company for my family?

Many families use trusts as an estate planning vehicle and for wealth preservation. Increasingly, instead of using a trustee company owned by a financial service provider, a private trust company (PTC) is appointed as a trustee. The use of a Liechtenstein foundation as such a PTC offers several key advantages.

Advantages of a private trust company

However, there has been a growing trend to create a so-called private trust company (PTC) to act as a privately held trustee company only for the trusts of one family. A key advantage of using a PTC is that instead of transferring the family wealth to a company that acts as a trustee for hundreds of trusts, the family has its own trustee which is not shared with others.

This removes the risk that the trusts of a certain family are affected by problems that have nothing to do with it. In contrast, if a trustee company owned by a financial services provider is used as a trustee, there is a chance that reputational or other issues relating to a specific trust spill-over to the trusts of another family because they share the same trustee.

Moreover, in case of a PTC, the client determines who will act as the PTCs initial directors. If a trust company is owned by a financial services provider, the composition of the board of directors generally cannot be changed.

Furthermore, using a PTC facilitates the transition to another administrator of the family trusts, should this be desired. In a traditional set-up, the trust assets are registered in the name of a trust company which is owned by a financial services provider. If a new trustee is appointed, it is necessary to transfer the legal ownership of the trust assets to the new trustee.

Additionally, in most cases the outgoing trustee company will request an indemnity against any liabilities it may have from acting previously as a trustee. If a PTC is used and it is intended to exchange the administrators of the family trusts, only the directors of the PTC need to be replaced.

A common set-up of a private trust company structure

In a common set-up, the PTC is a company limited by shares. While using a PTC has several benefits, it begs the question who should act as the shareholder of the privately held trustee company. In most cases, the shareholder cannot be the settlor of the trust because then the shares of the PTC would be part of his estate which would frustrate the estate planning purpose of the trusts. A common set-up to solve this problem has been to establish a separate purpose trust whose only purpose it is to hold the shares of the PTC.

The main drawback of this approach is that again a trustee is needed for the purpose trust holding the shares of the PTC. In most cases, a trustee company owned by a financial services company is used for this purpose. This means that the reasons for not using such a company as a trustee of the family trust are still present. However, they are moved to a remoter level and are mitigated because the only assets held by the trustee company of the purpose trust are the shares in the PTC.

Using a Liechtenstein foundation as a PTC

Using a Liechtenstein foundation removes entirely the need for a trustee company owned by a financial services provider and at the same time reduces complexity. The structure then simply consists of a Liechtenstein foundation acting as trustee of one or more family trust.

A Liechtenstein foundation essentially is a fund endowed for a specific purpose which acquires the status of a legal person. It has no shareholders and therefore the question who holds the foundation does not arise. Such a foundation can be established with the sole purpose to act as the trustee of one or more trusts for the benefit of a certain family.

An illustration of this set-up:

It should be noted that when a Liechtenstein foundation acts as a private trust company, generally no special business license is necessary in Liechtenstein. This was clarified recently by a submission of the Liechtenstein government to parliament dealing with an amendment of the Trustee Act. The Liechtenstein Trustee Act deals with the regulatory framework for professional trustees and trust companies. In this submission (BuA 42/2013, p. 40 et seq.), the Liechtenstein government clarified that a PTC does not qualify as a professional trust company and does not require a license under the Trustee Act.

The government noted that a Liechtenstein PTC, like all other Liechtenstein companies without a special business license, requires a member of the board who is licensed as a professional trustee or in an employment relationship with such a professional trustee. According to the Liechtenstein government, no separate regulation of the entity acting as a PTC is necessary.

The government pointed out that the licensing requirement only applies to “professional” trustees and that a privately held trustee company typically does not meet this criterion because it is not used with the goal to create profits. The government also mentioned that the fact that the directors charge a fee to the PTC is not harmful either.

Furthermore, the government stated that even if the Liechtenstein entity charges a trustee fee to the trusts, it still does not need to be regulated because the PTC offers its services only to a closed circle of persons. The government also specifically confirmed that a Liechtenstein foundation can act as a PTC.

Conclusion

In a summary, a Liechtenstein foundation can therefore be used as a private trustee company that acts as the trustee of the trusts for a certain family. This leads to a relatively simple and cost-efficient structure and does not require a special licensing or other regulatory procedure.

The only legal requirement is the need for a local board member of the foundation who has a special business license, i.e. at least one board member of the foundation must be licensed as a Liechtenstein professional trustee or must be employed by a licensed trustee. https://www.marxerpartner.com/details-en/alias/dr-iur-markus-summer

Succession in Russia

Succession in Russia

Succession in Russia is possible by will and operation of law. The freedom of will is limited. To acquire the estate the heirs shall accept it. Succession in Russia is the only way to transfer property in case of death. The only way to change the order of succession established by law in Russia is to make a will. The freedom of will is limited by compulsory heirship rules and spouse’ part in the joint property. For more details please follow…

Order of Succession in Russia in Compliance with Domestic Law

Succession in Russia is the only way to transfer property in the case of death. Deceased’s estate (property, rights and obligations) shall pass to other persons by universal succession, i.e. in an unchanged, single form at the same time. It is an important fact that heirs have no right to waive part of inherited property. For example, it is impossible to accept deceased’s assets and to reject debts.

Rights and liabilities which are connected with the personality of the deceased shall not be included in the estate. In particular it will be the following rights:

  • the right to alimony,
  • right to damages for harm inflicted to the person’s life or health, and also
  • rights and liabilities prohibited for succession by law,

For example, rights arisen from the following agreements shall not be inherited:

  • gratuitous use agreements,
  • agency agreements,
  • contracts of commission agency.

The following personal incorporeal rights shall not be included in the estate:

  • right to the name,
  • right of authorship,
  • other personal non-property rights and intangible wealth.

Inheritance includes both properties situated in Russia and abroad. Whereby if testator’s last abode is situated abroad, only real property (immovable), situated in Russia, will be inherited by Russian law.

Succession in Russia may be provided by will and by operation of law. In the case of succession by operation of law all legal heirs, who are called upon to inherit in compliance with the priority, shall inherit in equal shares. The order of succession may be changed by composing a will which has a priority under succession by operation of law.

Inheritance by Will as the Way of Structuring of Succession in Russia

The will as the way of structuring of Succession in Russia shall be created personally and contain dispositions of only one person. It cannot be created through a representative and it cannot be created by two persons or more . As a general rule, the will shall be made in writing and attested by a notary. Failure to observe these rules causes the invalidity of the will.

The deceased can dispose of his/her property or a portion thereof by means of one or several wills . A will may contain dispositions relating to any property, in particular, a property that a testator might acquire after issuing a will .

The testator has the following rights:

  • to transfer property at his own discretion to any persons,
  • to define in any way the shares of the heirs in the inheritance,
  • to deprive of the inheritance several or all legal heirs, not explaining the reasons for such deprivation,
  • to include into the will other orders.

Nevertheless, irrespectively of the provisions of the will the following compulsory heirs excluded from the will automatically gain at least half of the share each of them is entitled to in the case of legal Succession in Russia :

  • minor or disabled children of the testator,
  • disabled spouse and parents,
  • disabled dependants of the testator.

Spouse’s Right to ½ Part of the Deceased Property

The property acquired by the spouses during their marriage shall be their joint property according to the Family Code of the Russian Federation . The shares of the spouses in their joint property are considered as equal, unless the alternative is provided by marriage contract. Therefore, in case the spouses do not agreed otherwise, the deceased’s spouse automatically gains half of jointly owned property. The second part of this common joined property shall be divided between all heirs by will or by operation of law.

Inheritance Acceptance as the Step of Succession in Russia

Inheritance acceptance is the important step of Succession in Russia. To acquire the inheritance the heirs shall accept it. There are two methods of inheritance acceptance :

  1. filing an application to the notary who maintain the inheritance case and
  2. making implicative actions.

The implicative actions will be made if the heir:

  • has commenced possession or administration of assets of the inheritance;
  • has taken measures for preserving assets of the estate, protecting it against third persons’ encroachments or claims;
  • has made expenses on his account towards maintenance of assets of the estate;
  • has paid the testator’s debts or received from third persons amounts of money payable to the testator.

The term for inheritance acceptance consists of 6 months after the date of the testator’s death. The heir may accept the assets after this term in two cases:

  1. reinitiating the term for inheritance acceptance by the court order
  2. without applying to the court if other hers have no objections.

The inheritance by minors has some special features:

  • assets to be transferred to the minors may be accepted by their legal representatives (for example by the parents alive),
  • in certain cases the disposal of the property owned by minors cannot be performed without preliminary consent of the guardianship agency. https://www.alrud.com
Prenuptial agreements and wealth planning

Prenuptial agreements and wealth planning

Prenuptial agreements can be used to protect family wealth and to ensure a fair settlement for all parties without the necessity of going to court. This article relates to international families and their use of prenuptial agreements to make wealth planning decisions for the future. We look at what they are, how the courts view them in different jurisdictions and how and why they are currently being used.

What are prenuptial and postnuptial agreements?

‘Pre-nuptial agreements’ are also referred to as pre-marital agreements, ante-nuptial agreements and often shortened to ‘prenups’. They are contracts made by two parties in contemplation of marriage. They outline each party’s responsibilities and property rights in the unfortunate event of their marriage breaking down.

A ‘post nuptial agreement’ is one which is entered into during the marriage and may be, as with a prenuptial agreement, made in case of marital breakdown, or one which has been made following the breakdown of the marriage (a ‘separation agreement’). Post nuptial agreements made in contemplation of marital breakdown are often drawn up to re-enforce a previous prenuptial agreement. For ease of reading, we will refer to prenuptial agreements here.

Why do couples enter into pre-nuptial agreements?

In certain jurisdictions, prenuptial agreements are the norm. In others they are considered unusual, and frankly, unromantic! But there are good reasons for entering into an agreement these days in particular for wealthy families with an international lifestyle and a range of assets held globally hoping to ensure that this wealth stays with that party or his/her family:

  • To provide asset protection: protect family wealth from what has become an increasingly generous series of awards in favour of the weaker party and the vulnerability of inherited wealth, particularly in some common law jurisdictions. Where the wealth has been brought into the family solely by one party, and this could be for many reasons but including where one party is older and has successfully accumulated wealth by his own efforts or because a party has the benefit of family and inherited wealth. It is common for prenuptial agreements to ring fence premarital assets and allow for a fair distribution of only those assets which are accumulated during the marriage;
  • To simplify matters on divorce, create certainty and avoid lengthy and expensive litigation;
  • To protect the interests of children from a previous marriage;
  • Although traditionally seen as a tool for the wealthy, a prenup can also record and allow compensation to a party for giving up employment, or moving jurisdictions for the sake of the family.

How do the courts view prenuptial agreements?

There has been a significant change in attitude towards prenuptial agreements in recent years. Originally they were seen by the courts as a threat to the flexible jurisdiction which prevailed protecting the rights of the financially weaker spouse. In common law countries such as England and Hong Kong, family law has been designed to ensure a fair division of marital property, dependant on a number of different factors to determine who should get what in order to allow the parties to carry on with their lives as comfortably as possible after divorce. The trouble was, the outcome was unpredictable and could differ from one judge to another, depending on his exercise of his judicial discretion. If there was a prenuptial agreement is was just one of the factors the court would consider.

Prenuptial agreements were seen as a tool of the wealthy to limit the rights of the weaker spouse by making her (traditionally) sign an agreement which would arrange that a certain amount would be payable dependant upon the number of years they were married, how many children they had and so on. However, with the increase in awards, particularly in common law jurisdictions, the perception of the prenuptial agreement has changed to one of prudent planning, so long as the rights of the weaker spouse and children are protected within the document.

Very recently in England, the Law Commission has recommended that there be a change in the legislation to make prenuptial agreements legally binding. This has been controversial as in many sectors of society, particularly the Church, prenuptial agreements are considered against public policy as they undermine the idea of marriage as a life long union. Now the papers are all reporting that DIY divorce will become all the rage as couples can write their own contracts before getting married which the courts will recognize as valid.

In reality, society has changed over the years and divorce has become commonplace. Consequently the courts have become more sympathetic to the parties’ wish to regulate their affairs in what is hoped to be a cost efficient way. In most jurisdictions, however, safeguards have been put in place to ensure that such agreements are fair, that financial responsibilities are met and they are not designed by the parties to defeat creditors. Some guidelines common to many jurisdictions are set out below.

Guidelines

Generally, a prenuptial agreement will be enforceable if:

  • Both parties have received independent legal advice – although this is not always fatal if a party was able to take legal advice but chose not to;
  • There has been full disclosure. It is important that each party has the information material to his or her decision and each party had intended that this agreement would govern the financial consequences of the marital breakdown;
  • There is no evidence of duress, fraud or misrepresentation which would in any event put a contract into question, but in addition to this, evidence of undue influence and other unworthy conduct, such as exploitation of a dominant position to secure an unfair advantage, may render the agreement unenforceable. It has been suggested that there should be at least 28 days between signing the agreement and the wedding to allow proper consideration of the implications of the agreement and to ensure that there is no question of pressure at the time of signing;
  • The agreement must be fair. If one party wishes to ring fence inherited or pre marital assets, it is as well to compensate the other party in the division of the post marital assets. If the marriage is long, inherited wealth, pre marital assets and trusts will all be more vulnerable to a claim. The law differs from one jurisdiction to the next in respect of premarital and inherited wealth but in England and Hong Kong the needs of both parties will be considered first. If there is any surplus for distribution, factors such as the duration of the marriage and whether the inherited or premarital wealth has been mingled and used by the parties in their general living expenses will be relevant. If so the funds will be vulnerable, even if there has been an attempt to ring fence that asset by, for example, putting it in a trust.
  • Special care should be taken to provide for children and the inclusion of a review clause is advisable as the contract may become less relevant over time.
  • Are nuptial agreements enforceable in all jurisdictions?
  • For the international client, it is important to know where prenuptial agreements will be enforceable. There is a tread, even where they are not enforceable, that they should be taken into account:
  • In most countries in Europe as well as the US and Russia, prenuptial agreements are strictly enforced and in China, they are enforceable under Article 19 of the Marriage Law;
  • In Canada, New Zealand and Australia they are binding generally. In Canada they are binding, so long as there has been independent legal advice and full disclosure. Further the courts can intervene if the provision for division of property is unfair. In Australia, prenuptial agreements are binding pursuant to Part VIIIA of the Family Law Act. In New Zealand, they are binding unless a court considers that letting the contract stand would cause ‘serious injustice’;
  • In England and Wales, following the 2010 Supreme Court case of Radmacher v Granatino, prenuptial agreements are enforceable, subject to certain conditions, and we await the outcome of the Law Commission’s report;
  • In Singapore, following the Court of Appeal case of TQ v TR, where, in addition to allowing the principle that a pre-nuptial agreement may be considered in a court’s determination of a fair result, it further held that foreign prenuptial agreements governed by foreign law will be given significant weight and would normally be enforceable;
  • In Hong Kong, prenuptial agreements are not enforceable per se, but the existence of such a contract will be a factor which will be taken into account in all the circumstances of the case.

Are nuptial agreements enforceable between jurisdictions?

It is material where the agreement has been finalised but it is more important where the case is heard. In Radmacher v Granatino, the case involved a prenuptial agreement which had been settled in Germany, between a German wife and a French husband with a German law clause. As the couple were resident in London at the time of the divorce, and the petition was issued there, the matter was determined by the English court. In Germany, the agreement would have been strictly enforced, in England, before its determination by the Supreme Court, it was not.

The current disparity between jurisdictions can often give rise to a dispute over forum. The party in whose favour the prenuptial agreement has been made may well go to great lengths to establish that that country should hear the dispute as to financial division particularly where the contract is strictly enforced. At present, if the case is to be heard in England or Hong Kong, the outcome is less certain. A governing law clause may help in a forum dispute, but may not be determinative. If there is a forum dispute, the whereabouts of the assets will be material.

Conclusion

Given the prevalence of prenuptial agreements and the fact that in most jurisdictions they are enforceable, they are a useful tool for international wealthy families. They are regularly viewed as prudent wealth planning, along with the creation of family trusts. The fact that inherited wealth and trusts, which would normally be vulnerable to asset division upon divorce, particularly in England and Hong Kong, can be ring fenced with a prenuptial agreement is particularly attractive.

However, even where such agreements are enforceable, care must be taken with the drafting as many agreements end up being litigated – the opposite of the parties’ intentions. There have been a string of high profile cases in Australia over the last few years. The idea of the ‘DIY prenup’ is therefore not an attractive thought and experts in the field should be consulted to avoid expensive court battles. https://arantxatobaruela.com/