FOTIC Treads on Best Path for Family Enterprise Equity Inheritance

The 2017 China Wealth Forum was hosted by Qingdao Municipal People’s Government and organized by Caijing Magazine and Caijing Think Tank on June 17 in Qingdao. At the occasion, China Foreign Economy and Trade Trust Co., Ltd. (FOTIC) successfully held the Family Enterprise Equity Protection and Wealth Inheritance Summit. At the summit, FOTIC invited global experts and scholars from the field of family enterprise and wealth management to discuss the market environment of family wealth management, practices in dealing with family equity trust and other issues.

Family Wealth Inheritance Gaining Momentum:

Policy dividends released by reform and opening-up measures taken in the last four decades coupled with market expansion have led to a rapid increase in China’s national wealth, giving birth to a multitude of high-net-worth entrepreneurs. According to the latest statistics, China had about 89,000 ultra-high-net-worth individuals worth hundreds of millions of yuan in 2016, including about 50,000 individuals worth more than RMB 500 million each.

With the entry of new-generation entrepreneurs into the period of family property transition, the demand for “wealth guarantee” and “wealth inheritance” has been growing. In addition, the intergenerational transition of family wealth and family enterprises is expected to gain momentum in the coming five to ten years.

Family Trust is Preferred Instrument for Family Wealth Protection and Inheritance:

As a classic model for family wealth protection and inheritance, family trust has been in fashion for thousands of years among European and American high-net-worth individuals. The Rockefeller family, the Rothschild family, the Li Ka-shing family and other renowned families manage their family wealth and enterprises through trust.

“Family trust is a very important original business of trust companies. Unlike common trust financing products, it is more like a protection mechanism which can secure family wealth, shelter offspring, accomplish intergenerational inheritance and effectively avert risks faced by family business division,” said FOTIC Deputy General Manager Qi Bin.

“Family trust is the legal structure of family wealth management and inheritance as well as a sophisticated financial instrument. Family trust covers almost all asset categories, including financial assets, such as shares, bonds, futures and PE/VC, as well as physical assets, such as real estate, gold and artworks, with the most complex being family enterprise equity,” said Gao Hao, Director of Global Family Business Research Center, PBC School of Finance, Tsinghua University.

Family Enterprise Equity Trust Boosts Family Business:

Family enterprise inheritance is a global problem. According to a McKinsey survey, the average life of family enterprises around the world is only 24 years. About 30 percent of family enterprises can survive to the second generation and less than 13 percent to the third. Meanwhile, only 5 percent can still create value for shareholders after three generations. Transferring equity into trust and ensuring the stability and inheritance of the equity structure through family trust is of great significance to building century-old family enterprises.

As the trend of family enterprise equity trust has just emerged in China, trust registration system remains to be improved. According to some experts, it is difficult to execute a family trust in China, especially listed company equity trust, and the difficulty needs to be overcome through innovation and efforts.

“More professional managers can be found in the market through the separation of ownership and management to ensure the sustained and sound operation of the enterprise. Equity asset trust involves inheritance. Through the separation, with living conditions ensured, the second generation can plan their life, diversify the family’s future development and improve their anti-risk capability,” said FOTIC Wealth Management Center General Manager Wei Mengmeng.

As one of the first professional institutions to establish a family trust R&D team in the industry, FOTIC has been promoting family trust. FOTIC established family trust for listed companies’ equities in 2015.

Key Points of Family Trust:

More and more ultra-high-net-worth individuals are getting attracted towards inheritance-family trust. Unlike other wealth management instruments, family trust was designed in full consideration of the complexity of trusted assets, the persistence of legal structure and the dynamism of interest relationship.

How to choose an appropriate institution to set up family trust is a common concern of high-net-worth individuals. “Trustees need to investigate if trust institutions are professional in system construction, loyal to contracts and can provide sound services. Over the past three decades since its establishment in 1987, FOTIC has experienced intense economic fluctuations. We expect to accumulate experience and offer customers more professional and sound services over the next three decades or for a longer time to come,” said Wei.

FOTIC developed its domestic family trust service market from 2012 to 2014, laying the groundwork for provision of its services. At the same time, it accomplished the scale duplication of family trust from 2015 to 2016, with focus on operation guarantee.

On the premise of ensuring integrity, unity and sustainability of family enterprises, FOTIC aims at employing family trust instruments to help domestic family enterprises in gradually inheriting their familial spirit and culture alongside guaranteeing family wealth protection, thereby ensuring long-term prosperity of family enterprises.