Legal issues relating to settlors of charitable trusts

By Lily Xiao, Boss & Young

As a new and modern way of doing charity, charitable trusts are different from traditional giving in that they persist over time and are professional. Also, charitable trusts can be linked to other financial products and, with maturing and improving regulations, may also be combined with private-equity/venture-capital models to allow investors to fulfil their social responsibilities while realizing investment returns.

Lily Xiao
Boss & Young

The concept of a public-benefit trust is mentioned in the 2001 Trust Law. However, it was not until the promulgation of the Charity Law in 2016 that the charitable trust-related systems were gradually established in China. All the same, the development of complementary systems remains incomplete. This column proposes to look at the regulatory requirements for the settlors of charitable trusts and analyse certain topical legal issues related to them at the practical operating level.

Can parent trust serve as settlor of charitable trust? The term parent trust refers to a parent charitable trust used to invest in other sub-charitable trusts. Using the parent/sub charitable trust method, it is possible to expand the sources of donated funds and enrich the charitable trusts’ investment orientation. In all, it rates as an innovative model in charitable trusts. However, pursuant to the Administrative Measures for Charitable Trusts, the settlor of a charitable trust is required to be a natural person, legal person or other lawfully established organization with full civil capacity to act. However, pursuant to the Trust Law, the term “Trust” means the acts whereby the settlor, based on his trust in the trustee, entrusts the rights in his property to the trustee and the trustee manages or disposes of such property in his own name in accordance with the wishes of the settlor for the benefit of the beneficiary or for a specified objective. This makes it impossible to include trusts within the scope of natural persons, legal persons or other organizations established in accordance with the law as specified in the General Provisions of the Civil Code. Complying strictly with the law means a parent trust may not serve as the settlor of a charitable trust.

However, the writer of this article would argue that, notwithstanding the fact that the Trust Law also specifies that a settlor is a natural person, legal person or other lawfully established organization with full civil capacity to act, in for-profit trusts the parent/sub-trust model is extremely common. Furthermore, permitting a trust plan to serve as the settlor of a charitable trust does not breach the original intent of a charitable trust and is conducive to the development of the charitable trust, so it should not be unreasonably restricted.

Do criteria for qualified investors apply to settlors of charitable trusts? Pursuant to the most recent Notice of the Trust Department on Strengthening the Regulation of Trust Regulation Work During the Transition Period in the Asset Management Business, the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions do not apply to public benefit (charitable) trusts.

However, the Administrative Measures for the Pooled Fund Trust Plans of Trust Companies also set forth criteria for qualified investors, and charitable trusts with multiple donors clearly satisfy the criteria for pooled fund trusts. Under such a circumstance, the question of whether the settlor of a charitable trust is required to satisfy the criteria for a qualified investor remains unsettled.

This writer leans towards believing that the settlor of a charitable trust is not required to satisfy the criteria for a qualified investor. As donations to a charitable trust do not fit the typical meaning of an investment act, i.e., the settlor’s objective is not to make a profit, the assessment of the settlor’s risk identification capacity and risk bearing capacity is not necessary.

Compliance of charitable organizations serving as settlors of charitable trusts. One perspective holds that charitable organizations also have a donation-and-public-benefit function like charitable trusts, and whether it is necessary for them to carry out indirect giving through investment in charitable trusts is something still awaiting a final verdict. Furthermore, the likes of the China Banking and Insurance Regulatory Commission are currently encouraging the trust business to return to its roots, though a charitable organization serving as settlor of a charitable trust and achieving control over such through the provisions of the trust documents would seem to cause it again to turn into a channel.

This writer argues that, with respect to the situation as it stands today, on the one hand, foundations have a need and the motivation to invest in charitable trusts. Both the Charity Law and the Provisions on the Annual Expenditures and Management Fees of Charitable Organizations Carrying Out Charitable Activities specify the minimum that foundations are required to expend each year on specific public benefit and charitable activities, which results in foundations being required to spend a lot of energy searching for charitable projects that comply with the objectives set forth in their charters. However, if a foundation is permitted to invest in charitable trusts, the charitable objectives of which are consistent with its charter, then, by drawing on the strengths of the trustees of the trusts, such pressure on the foundation itself can be reduced. On the other hand, at present, only foundations can issue donation receipts, something charitable trusts are unable to do. This causes certain donors to seek to realise their tax planning objectives through a double SPV model under which a charitable trust links with a foundation. Accordingly, charitable trusts also need to draw on the strengths of foundations to attract donors.

In short, foundations, as settlors of charitable trusts are presently in a win-win situation for charitable trusts and foundations without violating prohibitive provisions of laws and regulations and, as such, should not be restricted. However, it should be noted that, if a foundation and a charitable trust continuously retain the donated funds at the foundation and charitable trust levels through circular investment, this would clearly run counter to charitable objectives. Accordingly, in this respect, a charitable trust may also refer to the current regulatory model for asset-management products, limiting the levels of nesting and implementing penetrative reviews, to ensure the sound development of foundations and charitable trusts.

Lily Xiao is an associate at Boss & Young


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