On September 21 in Nanjing, Euromoney, one of the world’s leading financial media companies, and CreditEase, one of China’s top wealth management firms, joined together to explore the opportunities and risks facing high net-worth investors (HNWIs) considering how best to transfer their wealth. The two companies united on stage for a conference attended by some of the country’s wealthiest investors. They also took the opportunity to announce the launch of a special report that was more than nine months in the making.
The report, sponsored by CreditEase and written by Euromoney’s commercial content team, as well as by external lawyers and accountants, features interviews with a wide variety of high net-worth individuals and industry professionals. It spans Europe, the Americas, Africa and Asia. It offers case studies of both Western families and Chinese high net-worth individuals, considering everything from cultural factors, institutional differences, the legal tax system, and macro environment.
The purpose of the reportwas to investigate the differences between inheritance planning in China and the West, as well as what both regions can learn from each other. Through the comparison of Chinese and foreign family trusts, the report highlights the undoubted strengths of family trusts — and their increasingly important role in managing family wealth.
The big demand for inheritance planning
The reportfound that both the number of HNWIs and their total wealth have increased. It is estimated that there will be 44 million HNWIs by 2022 and total global wealth may exceed $100 trillion.
Much of that wealth is shifting towards China. The country is among the top in terms of HNWIs’ population growth and total wealth growth rate. At present, China is ranked fifth globally in terms of the HNWI population growth rate (following the USA, Germany, Australia and France in rank order). The HNWI population in China is expected to grow 41% to 2.7 million people by 2022, ranked only behind the USA and Japan.
This is driving a major boost in demand for family wealth inheritance services. In recent years, both Chinese and Western HNWIs have demonstrated strong demand for family wealth inheritance planning. Some 53% of HNWIs worldwide have initiated the consideration of family wealth inheritance and formulated practical and effective inheritance plans, among which the proportion for North America is 62%, followed by Europe at 58% and Asia at 49%.
In contemporary China, the creation and accumulation of social wealth can be traced back to the reform and opening-up of the country in 1978. Those first-generation entrepreneurs (FGE) have gradually grown older. The next generation is expected to inherit their wealth — and inheritance planning has become increasingly an urgent task.
In the meantime, the rapid growth in these objective data not only indicates a huge development space in the wealth management market, but also brings the topic of family wealth management and inheritance to the forefront for HNWIs and professional wealth management institutes. “For HNWIs in China, family inheritance is now an issue requiring serious treatment considering both subjective will and objective reality. To follow the trend, CreditEase has defined family trust operation as its key strategy and released this white paper along with Euromoney, world leading financial media, after conducting in-depth investigation,” says Tang Ning, CEO of CreditEase.
Through in-depth investigation,the report finds that there is a huge difference between Chinese HNWIs and Western HNWIs with regard to inheritance philosophy and inheritance method. Only after growing old and their children coming of age do Chinese HNWIs start to consider the issue of wealth inheritance. In the USA and Europe, however, most HNWIs are members of an “affluent third generation” who have experienced the three stages of wealth creation, wealth protection and wealth inheritance. Professional wealth management and inheritance institutes play a significant role in this process. Sound family wealth inheritance planning may promise more successes for later generations. Therefore, Chinese HNWIs may learn from the West about how to engage in family inheritance planning and the task must be performed as early as possible.
Professional institutions get involved, taking both Western experience and domestic reality into account
With rapidly increasing demand for family wealth management and inheritance services, tools for family wealth inheritance have shifted from traditional giving and inheritance to use of financial tools. Family trust, a new inheritance tool, has gradually become a part of the family wealth inheritance operation. Currently, fiduciary services (i.e. trust companies) and counselling services (i.e. institutions such as private banks and third-party wealth management companies) have entered into a stage of development featuring diversity and vitality. As an indispensable tool for wealth protection and inheritance, the family trust market has a promising future. The family wealth management business, however, still faces three major challenges in today’s China — namely, knowledge, system and service.
First, lack of systematic knowledge of family inheritance among HNWIs. It is rather difficult to realize successful family inheritance if relying only on trust tools. The correct view on wealth is essential. For most HNWIs, the family trust only takes care of the wealth management product, and they have no in-depth knowledge about the wealth management functions of the trust. This lack of knowledge may cause misgivings, which in turn may hamper the progress of the family trust. Family wealth management service providers should educate HNWIs about the family trust business in order to help them understand the role and functions of the family trust within the whole picture of family inheritance. This report is intended to offer a comprehensive perspective to Chinese HNWIs on family inheritance, to help them consider the issue of family inheritance systematically and comprehensively and to start planning at an early date.
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| Mr. Tang Ning, Founder and CEO of Creditease |
As Tang Ning, CEO of CreditEase, points out, “The arrival of family inheritance accelerated systematization of family wealth management. When considering the issue of family wealth inheritance, a lot of problems previously ignored may appear, prompting HNWIs to reconsider these problems from a long-term and forward-looking perspective in order to be able to implement systematic management of family wealth. As a good helper, family trust may promote systematization of family wealth management.” Second, the imperfect legal system in China. As China Trust Law is based on the continental law system, the registration, non-trading transfer and taxation systems that support the inclusion of assets into family trust remain imperfect, which has a negative impact on inclusion of capital such as real estate and equity into a family trust. However, due to the highly independent and flexibly designed trust structure, the problem of imperfect systems can be solved through the design of different types of family trust structures, as long as the practice does not violate law. As a result, the balance between objective, urgency and transaction cost increase of family trust can be established.
Third, wealth management institutes are expected to enhance their service capability. In today’s highly integrated world, Chinese HNWIs (including an increasing number of middle-class members) have spread their residence and wealth around the globe, and their wealth consequently requires global configuration, which in turn creates demand for cross-border wealth management and inheritance planning. In the long run, HNWIs need one-stop and comprehensive global inheritance planning services so as to achieve systematization of family internationalization plans. However, the problem of lack of diversity in products and services is often found in family trust service institutions and most institutions sell wealth management products as family trust.
To meet the challenges, family wealth management service institutions must develop three core abilities:
1) professional ability for systematic planning, as planning of family trust requires coordination of different sectors;
2) matching assets management ability, which involves both family business management and creation of family governance mechanisms;
3) strong ability in resources integration, which presents the biggest challenge.
According to Tang Ning, CEO of CreditEase, currently there is an adequate number of suppliers in the world who can provide effective services for HNWIs to meet their family inheritance needs. What is lacking is the professional service provider who has deep understanding of the needs of the client and who can select and integrate different fields based on the future needs of clients, to create a one-stop and comprehensive platform for provision of systematic solutions to family inheritance. This is the goal that leading wealth management institutions in China are pursuing. With an open-minded attitude, CreditEase is talking to outstanding overseas capital management companies, trust companies and other financial institutions in order to provide more globe-oriented capital configuration services for Chinese HNWIs.
To sum up, the rapid growth of the HNWI population and their wealth, along with the arrival of natural generational replacement, has created huge market demands from family wealth inheritance in China and, at the same time, accelerated development of the family wealth management business. Nevertheless, problems and challenges still exist in the family wealth management sector in China. A result of in-depth study of China’s family wealth inheritance by CreditEase and Euromoney, the reportcontains detailed first-hand research data and forward-looking industry trend predictions.Click here to access the full report.