China in your hand

Clients from mainland China are an increasingly important group for many private client advisers. However, they require different advice from other Asian clients (such as Hong Kong, Singaporean or other Southeast Asian clients).

They like offshore structures, which many will be considerably familiar with through their businesses (perhaps from using British Virgin Islands (BVI) companies as holding vehicles, or Cayman or Jersey companies as stock exchange listing vehicles).

These clients favour clear and robust legislation, quick and efficient transaction execution, availability of experienced advisers, positive approach to confidentiality, absence of corruption and efficient administration of justice.

This is now re-enforced by a growing awareness among many mainland Chinese clients of the need for private wealth planning. A range of factors has stoked this interest. Creditor protection continues to be viewed as an important attraction for private wealth planning. However, succession planning is an increasingly significant driver.

The certainty gained from sound private wealth planning and the avoidance of family disputes over assets is a big part of this (especially following the numerous high profile family disputes that have been heavily reported in recent years in both Hong Kong and mainland China).

Also, the threat to family assets from divorce claims is another recent development that more and more clients are beginning to consider seriously.

Vast wealth

These factors are all symptoms of two much more fundamental changes affecting many mainland Chinese clients.

First, there is the recent vast increase in wealth. With much larger sums of money at stake (as well as a more diverse range of assets, often located in multiple countries), a more sophisticated and structured approach to private wealth planning is now required.

Second, there is growing internationalisation. It is now common for mainland Chinese clients to have homes, property and other assets in multiple countries outside China, to have (or to be seeking) a second passport and/or immigration status in a country outside China and to have children and/or grandchildren living, working and/or being educated outside China.

All links to other countries, particularly where those countries are complex developed nations such as the US, the UK or EU member states, raise legal, tax, regulatory, disclosure and accounting issues that demand careful consideration and planning. These issues do not arise for clients whose affairs are limited to a single country.

But despite this clear appetite and need, many clients from mainland China still have relatively limited knowledge or understanding of private wealth structures. The concepts of trusts and trusteeship and the respective rights and obligations of trust settlors, trustees and beneficiaries are generally not understood; foundations even less so. The true nature of trust and foundation structures – such as the idea that a trustee has complete and unconstrained freedom to deal with trust assets or that the settlor automatically and inevitably ceases to have any role in a trust after it is established – is misunderstood.

It hasn’t helped that some ‘advisers’ ‘sell’ trusts as a ‘standard product’ (akin to a company or a bank account) with no advice about the opportunities available and the ability to tailor a trust’s terms to suit the client and their family. The position of Chinese trust companies, which are fundamentally different in their nature and role from professional corporate trustees outside China, adds confusion.

New restrictions

In addition, mainland Chinese clients and their advisers face a number of exceptional legal issues that affect clients’ ability to undertake private wealth planning. These include the domestic Chinese tax regime, foreign exchange controls and restrictions on the ownership of certain Chinese assets by non-Chinese persons (including trustees).

The anti-money laundering regimes and ‘know your client’ requirements imposed by the vast majority of offshore centres can also present a challenge ?(real or perceived) for some mainland Chinese clients wishing to establish relationships with offshore advisers and service providers.

There are also certain specific structural or conceptual issues that many mainland Chinese clients raise (and often find difficult) when considering private wealth planning. Principal among these are the interrelated issues on transferring ownership of assets to a third-party professional trustee and the resulting loss of ownership and control of those assets by the settlor.

Clearly, the transfer of ownership from the settlor is a fundamental element of the trust (or foundation) structure and, indeed, is necessary to generate many of the benefits that private wealth planning aims to achieve, such as asset protection and succession planning. That makes it no easier for clients to accept.

While loss of legal ownership is one thing, the loss of management and decision-making power for the operation and investment of the assets transferred to a trust is even more contentious for many clients.

Settlor involvement

Numerous offshore jurisdictions have been at the forefront of developments to ameliorate this concern and allow trust and foundation structures that permit continued settlor involvement in key decisions. These include Guernsey and Jersey reserved powers trusts, BVI VISTA trusts, Cayman STAR trusts, and Guernsey and Jersey foundations. All four such jurisdictions also provide the opportunity for private trust companies as well.

In the vast majority of cases, one or another of these alternatives, when suitably drafted and tailored to the client’s needs, is capable of addressing their concerns and offers a sufficient level of involvement in managing the underlying assets without prejudicing the fundamental integrity of the trust or foundation structure.

Deeply personal

Finally, it is crucial to be aware of further issues which, although not of a technical or legal nature, are of real importance.

Private wealth planning is about ?far more than simply technical, legal ?or financial issues. It often (indeed, usually) involves deeply personal and private matters, which are highly sensitive for clients and their families. This applies as much, if not more, to mainland Chinese clients.

Involving teams of advisers who are of an appropriate age and seniority to be taken seriously by the client, who have a shared cultural background with the client, and who speak the client’s language fluently are all important factors. Providing documents in the client’s first language is also very positive.

There is no question that clients from mainland China present a range of challenges for private wealth advisers. But the positive factors related to this important group of clients should not ?be overlooked.

Marcus Leese is a partner at Ogier in Hong Kong

---