What’s behind the boom in charitable trusts? (Part I)

  • Home
  • >
  • Analysis
  • >
  • What’s behind the boom in charitable trusts? (Part I)

Foundations and charitable trusts have become two sustainable vehicles for high-net-worth individuals to achieve their charitable goals, and have developed rapidly, according to a recent report in China Philanthropist Magazine.

However, a series of controversies remain: is it necessary to set up a public trust when a foundation is already established? Is it a zero-sum game between charitable trusts and foundations or is it a cooperative relationship?

With the goal of “common prosperity” in China, the third distribution has become an important starting point. Under the third wave of distribution, how to continuously innovate donation methods and provide more landing options and institutional guarantees for the charitable goals of high-net-worth individuals has become a new problem for philanthropists.

In the nearly six years since the Charity Law was implemented in China, trust companies and foundations have been constantly exploring new ways.

According to China’s Trust Law released in 2001, trusts are divided into three categories: civil trusts, business trusts and charitable trusts.

Charitable trusts are an imported concept and are not commonly known in China. In fact, charitable trusts are rarely mentioned in the data regularly released by the China Trustee Association.

China’s first charitable trust in the standard sense — the “May 12 Earthquake Relief Charity Trust Plan” issued by Changan Trust (then called Xi’an Trust), was officially established seven years after the implementation of the Trust Law.

In 2004, China released its “Regulations on the Management of Foundations” and the government began to encourage more sectors to enter the philanthropic field. More and more enterprises and entrepreneurs started to set up their own foundations to achieve more strategic and sustainable public welfare goals.

However, it is difficult for foundations that reflect the will of businesses, families or individuals to achieve independence, and foundations are also subject to many restrictions in terms of their expenditure and ability to fundraise. In addition, many private equity foundations lack staff with the professional skills to achieve higher efficiency.

As the private companies that helped to power China’s Reform and Opening period enter the stage of intergenerational inheritance, more wealthy people expect to realize both the preservation and appreciation of their property and a sense of spiritual inheritance, and charitable trusts happen to meet their demands.

“Inheritance is not an abstract concept,” said Li Yuanlong, general manager of the charitable trust department of Wanxiang Trust.

He was mainly dealing with family trusts before he entered the field of charitable trusts. When he spoke to customers, he found that inheriting wealth was the core appeal to many entrepreneurs — who wanted to leave a long-term financial legacy for themselves and their family while also leaving a legacy for the whole of society. “They need a comprehensive inheritance plan,” he said.

In 2014, Wanxiang Trust’s first attempt was a charitable trust named “Wanxiang Trust-China Nature Conservation Charity Trust”, with the purpose of donating money to organizations or individuals who carry out environmental protection charitable projects in China.

Today, Wanxiang Trust is one of the country’s leading institutions conducting charitable business, having entrusted 130 trusts with record assets worth 1.09 billion yuan ($157.72 million).

Enacted in 2016, the Charity Law specially established a chapter on charitable trusts, and stipulated matters such as filing, supervision and management, tax reductions and exemptions, and clarified the respective rights and responsibilities of trustors, trustees and supervisors. After the Charity Law was officially implemented, 22 new charitable trusts were established that year with total assets of 265 million yuan.

In China, since family trusts are relatively new, most of them focus on property protection and inheritance. Although some family trusts specify that part of their property is used for charity, within a single family trust structure, the client’s charity goals are difficult to sustain — once the beneficiary changes direction and withdraws the funding, the charity project might be terminated at any time.

That’s where charitable trusts can be helpful. Once the philanthropic purpose of the trust is stipulated, it’s unchangeable. That is to say, after the establishment of a charitable trust, the assets no longer belong to the settlor and will not be affected by the settlor’s own financial status and disputes, leaving the assets free to be continuously used for the designated purpose. Therefore, charitable trusts have a higher degree of independence than family trusts.

With trusts becoming increasingly popular, they’re no longer limited to high-net-worth individuals and their families. Some foundations, charitable organizations, and even individuals have also established charitable trusts.

The extensive participation of charities frees charitable trusts from funding thresholds. According to all the registered charitable trusts on the “Charity China” website, the funds generally range from several thousand yuan to hundreds of millions of yuan, with the smallest worth just 1,000 yuan.