Wahaha ruling underscores benefits of lifetime offshore trusts

Families and businesses in Hong Kong, mainland China and across Asia have long used BVI or Cayman corporate vehicles as holding entities for their businesses and assets. However, as we have seen from last year’s decision by the Hong Kong court, in Jacky Zong v Kelly Fuli Zong (the Wahaha case), it is very important that:

1. 1. Offshore trusts are established and have assets transferred into them during the settlor’s lifetime, not through posthumous instructions;
   2. Independent professional trustees operate the trust rather than family members, where interests may conflict as was the case in Wahaha, where the interests of Kelly Zong at the helm of the Wahaha group clearly conflicted with the interests of her three half-siblings who were seeking to be acknowledged as beneficiaries; and
   3. All trust structures are formally documented with unambiguous terms including clear details of the assets under the trust.

Cayman trusts offer certainty protection

Trusts established under Cayman Islands law are well known for providing tax benefits, flexible structures and effective mechanisms for asset protection and management, with a legal framework based on English common law designed to enhance certainty in court decisions. Chinese high net worth (HNW) persons find these features appealing when seeking to separate personal wealth from risks. Once assets are properly settled into a trust, legal title passes to the trustee, removing them from the settlor’s personal estate and from creditor risks, other business risks, and certain political and economic risks.

BVI trusts aid Asian wealth

Even accounting for CRS reporting obligations, and other rules and restrictions on the transfer of capital from China and other countries into offshore structures, there has been an increase in the use of BVI trusts by investors in Asia. As was shown by the Wahaha case, HNW families now acknowledge the importance and value of such planning in preserving and protecting wealth. Trusts, when properly established during the lifetime of the settlor, allow wealth to pass to beneficiaries outside of probate, avoiding the delays, publicity and costs of estate administration.

Settlor retains control in VISTA/STAR trusts

Both the Cayman Islands and the BVI have created special trust regimes that deal with the major concern around losing control of underlying businesses.

BVI VISTA trust. The VISTA regime in the BVI disapplies certain traditional trustee duties in relation to trusts owning shares in BVI companies. Although a BVI company’s shares are held in a VISTA trust, the directors of that company are free to administer the company as they see fit, without intervention from the trustee. Key family members may also take up the role of an “Office of Director Rules Appointor”, which allows them to have control over the members of the board of the BVI company. The BVI VISTA trust therefore addresses families’ need for succession planning while retaining some level of control of the underlying companies.

Cayman STAR trust. The STAR trust is unique to the Cayman Islands and can be structured for specific purposes including for the health and wellbeing of family members and/or for the education of the family’s children overseas, giving settlors great flexibility to define outcomes and governance mechanisms.

The settlor may retain a degree of control over other aspects, such as the power to approve distributions, the power to appoint and remove trustees, and the power to revoke the trust.

BVI Cayman trusts are tax neutral

Neither the BVI nor the Cayman Islands imposes taxes on income or capital gains on the assets in these trusts, increasing the interest of foreign investors. Both jurisdictions allow resident trustees and non-resident trustees to act, and both the BVI and the Cayman Islands remain tax-neutral with respect to the assets in the trust, which is particularly attractive for Chinese clients holding global assets.

Trustee ownership preserves client confidentiality

From a confidentiality and asset protection perspective, the counterparty of a BVI company or a Cayman company will only see the trustee as the legal owner of the company, and the settlor’s details will not appear in any publicly accessible documents. This privacy is a significant advantage for clients concerned about reputational exposure or political sensitivity.

Key distinctions between VISTA and STAR trusts

Gary Smith is a partner at Loeb Smith Attorneys in the Cayman Islands, and Yuri Zhang is an associate at Loeb Smith Attorneys in Hong Kong

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