In Part I of the article, He Bin from the China Philanthropist Magazine talked about how charitable trusts gradually became popular in China. Part II explores the topic further and looks at the relationship between charitable trusts and foundations.
“In fact, we have experienced a change in our mentality over the years,” recalled Li Yuanlong, general manager of the charitable trust department of Wanxiang Trust. He told China Philanthropist Magazine that when the Charity Law was first promulgated, the original intention of the legislation as understood by the industry was aimed at high-net-worth individuals, and Wanxiang Trust was no exception — between 2016 and 2019, most of their business served this group.
With the popularization of the concept of charitable trusts in Chinese society, the needs of some charitable organizations and foundations for trusts grew. Relatively small charitable trusts started to emerge, mainly thanks to the middle classes.
In Li’s view, three groups of people constitute the major players in charitable trusts, and companies should provide targeted solutions for different groups. For wealthy people such as entrepreneurs, the institutional attributes of charitable trusts should be used to fulfill the entrepreneurs’ desire to conduct long-term and sustainable philanthropy; for foundations and charitable organizations, trusts should serve as a tool to help them become more efficient; and for middle-class users, trusts should help families open a charity account to facilitate their participation in philanthropy.
Shanghai Adream Foundation was one of the earliest foundations to set up charitable trusts. The 2016 Adream No. 1 Educational Charitable Trust, with assets worth 820,000 yuan ($118,526), was registered on Sept 1, 2016, the same day that the Charity Law was officially implemented.
“After the introduction of the Charity Law, we were very curious whether we could take the opportunity to explore a new model of cooperation between finance and public welfare through charitable trusts, which may also broaden the path for charity in general,” said Zhu Qiuxia, deputy secretary-general of Adream Foundation.
However, some problems remain, which if not solved will have a big impact on the development of charitable trusts, according to Li.
First is the transaction cost of non-monetary property. When, for example, property transaction costs are too high, the cost of setting up charitable trusts for real estate increases. Also, when shares are donated, charitable trusts cannot act as a market participant on an equal footing, and it’s difficult to exercise the rights of shareholders — this is why many donors find it hard to decide whether to donate or set up charitable trusts using equity assets.
Last but not least, charitable trusts cannot be listed as company shareholders, perhaps leading to confusion about company ownership.
Due to the institutional restrictions on the qualifications of trustees, charitable trusts still face many problems in practice, Lu Xuan, director of the Shanghai Fuen Social Organizations Law Research and Service Center, told China Philanthropist Magazine.
Most trustees are trust companies, though there are foundations or charitable organizations acting as a trustee or jointly as double trustees with trust companies — most of them are left with no other options based on the tax system.
Although there are relevant provisions for tax preferences in the Trust Law and Charity Law, they have not been effectively implemented. Therefore, in practice, many charitable trust projects have no choice but to first donate money to the foundation and then entrust the foundation to set up a charitable trust, or have the foundation and trust company act as dual trustees.
Lu’s concern is that the main goal of a trust company is to make profit — asset trusts serve customers while charitable trusts serve the public. But once the interests of customers conflict with the public interest, how should a trust company that manages both types of trust behave? He also raised a question: once trust institutions become the main force of philanthropy, will foundations be replaced?
Zhu from Adream disagreed. She argued that the cooperation between foundations and professional trust companies is not only feasible but also necessary — because foundations and charitable trusts have different advantages and disadvantages and can complement each other.
The professionalism of financial institutions can make each item of expenditure compliant with the regulations and transparent, she explained. Compared with foundations, charitable trusts are not limited by the proportion of annual expenditure, so they can plan charitable projects more freely and flexibly.
Moreover, the establishment of a charitable trust by a foundation doesn’t mean the foundation is staying out of the way, instead, it’s a way for the foundation to mobilize the financial and legal power of the trust company to jointly participate in the planning, design, implementation and supervision of the project, Zhu said.