Insights

Ningbo will trust: the property "into the trust" left to children, how to operate.

Ningbo Author：LuXu WANG

"putting the property into the trust" and then leaving it to the children is essentially to let the professional trustee manage the money for a long time and give money regularly according to the rules you set. It is a kind of inheritance tool that can be arranged directly in the will. Compared to transferring property, equity, and savings to one’s children all at once, the greatest advantage of a testamentary trust lies in clearly specifying “who receives what, how much, when, and how,” thereby preventing the assets from being rapidly depleted or divided if the children are young, lack financial management skills, or experience marital upheavals. Next, we will clearly outline the actionable pathways available to Ningbo families across six dimensions: what it is, how to set it up, how to draft the relevant clauses, who is responsible for oversight, what potential pitfalls to watch out for, and how to implement it effectively.

What is a 1. testamentary trust

Article 1,133, paragraph 4 of the Civil Code provides that natural persons may establish testamentary trusts in accordance with the law. This means that the testamentary trust has become the legal way of wealth inheritance, alongside the inheritance and bequest. According to Article 2 of the Trust Law, a trust is an act in which a principal entrusts his property rights to a trustee based on his trust in the trustee, who manages or disposes of it in his own name for the benefit of the beneficiary or for a specific purpose in accordance with the wishes of the principal. In the will scenario, the testator (principal) states in the will that all or part of the estate is handed over to the trustee, who will manage and distribute the property for the long term for the designated beneficiary in accordance with the purpose and objectives set by the will.

Compared with a regular will, the two address different issues. Ordinary wills solve the problem of "who to give things to". After a will designates an heir, the estate is usually delivered in one lump sum and transferred in one lump sum, and the heir can freely dispose of it when he gets it. A testamentary trust addresses the questions of “how the assets are distributed, for how long, and who manages them.” The estate does not fall directly into the personal name of the children, but first enters the trust and becomes an independent trust property, and then the trustee distributes the benefits to the beneficiaries on an annual, monthly or conditional basis. The beneficiary may take only the proceeds and not touch the principal, or may agree to gradually acquire the principal until a certain age.

Compared to a living family trust, the difference is at the point of establishment. A family trust is a trust contract between the settlor and the trust company when he is alive, and the property is delivered to the trust. The trust is established on the spot, and the settlor can see the operation of the trust during his lifetime; a testamentary trust is established in the form of a will. According to Article 8 of the Trust Law, the establishment of a trust shall be in writing. Written form includes trust contracts, wills, or other written documents as prescribed by laws and administrative regulations. Where a trust is established in another written form, the trust shall be deemed established when the trustee accepts the trust. In other words, a testamentary trust can only be fully implemented after the testator’s death and upon the will’s entry into force. Living trust is more controllable, the threshold and cost of testamentary trust is relatively low, but because the time of establishment is relatively late, it has more convergence issues to deal.

It should be reminded that testamentary trusts are not the same as bequests. Article 1,124 of the Civil Code provides that a beneficiary under a bequest shall, within sixty days of becoming aware of the bequest, indicate whether they accept or renounce it; if no such indication is made by the expiration of that period, it shall be deemed a renunciation. These sixty days are the reason why many family succession arrangements fall through. In contrast, under a testamentary trust arrangement, the beneficiary acquires a beneficial interest in the trust and is not subject to the same strict limitations as those imposed by the sixty-day prescriptive period. This is one of the reasons why testamentary trusts are highly valued in practice.

In practice, testamentary trusts are most suitable for three types of families:

  • Families with minor children. One or both parents die early and the children are still young. If the inheritance is handed over to the guardian at one time, it is easy to mix with the guardian's own property, and it is difficult to prevent one-time squandering when he grows up.
  • profligate children families. Children already have the ability to act, but excessive consumption, lack of financial ability, and even indulge in speculation. The trust can lock up the principal and only regularly pay for living expenses and specific expenses such as education and health care.
  • Families with children with special needs. The child has a disability or long-term illness and needs stable care for life. The trust can set a monthly payment for care and agree on the ownership of the remaining property to avoid no one behind it.

2. three establishment paths

testamentary trust has three common paths in law, with different cost, controllability and scope of application.

Path 1: The will is established directly. The trust arrangement, including trust property, beneficiaries, trustees, distribution rules, etc., is stated directly in the self-written, written or notarized will. Its advantage is that it does not need to hand over the property before death, and the threshold is low. The disadvantage is that it has extremely high professional requirements for the text of the will, and it has to face the question of whether the trustee is willing to accept it.

Path 2: Will Plus Trust Company. Before passing away, first reach an agreement with the trust company regarding the trust matters and confirm its willingness to serve as trustee, then establish the trust through a will. This can solve the embarrassment of "writing a will but no one takes it" and put the trustee in place. At the time of establishment, the distribution rules, investment scope and fees can be fixed together through the trust company to avoid the failure of the trust to start after death.

Path 3: Living family trust plus will supplement.First, establish a lifetime family trust using your own assets and place your principal properties into the trust to get it operational; then, use your will to address any assets you may acquire in the future, or to make arrangements regarding the disposition of any remaining assets held by the trust. This kind of structure is the most mature and can be seen before and after, but the threshold is also the highest.

3. Core Clause Design

The key to a testamentary trust that can be settled is not "set or not", but whether the terms are written or not. The following seven aspects must be clearly understood.

Scope of beneficiaries. Indicate whether the beneficiary is a specific person or a certain category of people, such as "all my grandchildren". The Trust Act requires that the beneficiary or the scope of the beneficiary be determined, and if it is written too vaguely, the trust may be found to be invalid. The beneficiary may be one or more of the legal heirs, or an organization or individual other than the heir.

Assign conditions and rhythms. This is the key to a testamentary trust. Is it a regular quota or only when the conditions are met? It can be agreed that only living expenses and tuition fees will be paid before adulthood, and part of the principal can be obtained at the age of 25, and a one-time subsidy will be given when getting married, giving birth, starting a business and buying a house. The amount, proportion, trigger conditions to write specific, the trustee can be based on.

Trustee Option. The trustee may be a natural person or a trust. Natural person trustees are flexible, but there are risks in terms of life, ability and willingness. In practice, a combination of "institutional fiduciary plus natural person supervision" is often used.

Trust Monitor. The trust document may appoint a supervisor to supervise, on behalf of the beneficiary, whether the trustee acts as agreed and whether the interests of the beneficiary are infringed. Supervisors are particularly important to beneficiaries who are minors and incapacitated, and can make up for the shortcomings of the beneficiaries who are unable to supervise themselves.

Term of Trust. The term may be fixed, or it may extend until the beneficiary attains the capacity for independent management or reaches a specified age. If the term is set too short, it will not provide long-term protection; if it is set too long, the management costs will continue to consume the principal and need to be weighed.

Incentive and constraint provisions. It may be agreed to suspend distribution when the beneficiary is infected with gambling, drug abuse and other vices, or it may be agreed to give additional rewards for completing their studies and participating in public welfare. Such clauses can guide the beneficiary's behavior within the legal scope, but they cannot violate public order and good customs, nor can they completely deprive the legal must-keep.

Residual property vesting. It must be clearly specified to whom the remaining trust property will be distributed upon termination of the trust. It can be agreed to the children of the beneficiary or to a charity. If it is not written, it is prone to secondary disputes when the trust is terminated.

Connection between the 4. and the executor and the administrator of the estate

A testamentary trust involves two roles: who executes the will and who manages the money. A testamentary executor is the person designated by the testator in the will to administer and distribute the estate in accordance with the terms of the will. Article 1133 of the Civil Code provides that a natural person may make a will to dispose of personal property and may appoint an executor. According to Article 1145, after the beginning of inheritance, the executor of the will is the administrator of the estate. If there is no executor, the heir shall elect the administrator in time. If the heir is not elected, all the heirs shall act together. If there is no heir or heir, the civil affairs department or villagers' committee of the place where the decedent lived shall act.

The duties of the administrator of the estate are in accordance with Article 1,147 of the Civil Code, including clearing the estate and making an inventory of the estate, reporting the estate to the heirs, taking necessary measures to prevent the loss of the estate, dealing with the claims and debts of the decedent, dividing the estate in accordance with the will or in accordance with the provisions of the law, and other necessary acts related to the administration of the estate. In other words, before the trust is formally established and the trustee takes over, the estate administrator is the trader of the transition period, responsible for counting, preserving, paying debts, paying taxes, and then delivering the trust property to the trustee.

There are two key points of convergence here. First, the boundaries of responsibility should be written clearly. The power of the estate manager is not small, once the management dereliction of duty, may be responsible for the heirs, legatees, creditors, so it is best to specify in the terms of the trust when it will hand over the property to the trustee, what to hand over, how to review, reduce the wrangling. Second, don’t fight with other characters. If the estate is left to minor children and a person other than the guardian is appointed as a trustee for a certain period of time, there may be a situation where the two sets of management rights of "the guardian is in charge of the guardian's property" and "the trustee is in charge of the trust property" coexist, and the law has no clear rules on which priority, which is prone to disputes in the future. It is safe to stagger the authority and timeline of the two in the will.

5. Risks and Precautions

Defect of Form Elements. A testamentary trust is first and foremost a will, which must satisfy the formal elements of the will, otherwise it is completely invalid. Self-written wills should be written, signed and marked on the date of the year and month. The act of disposing of property after the making of a will If the property disposed of by the will is lost, partially lost or transferred before the beginning of the inheritance, the will will will be regarded as revocation or partial revocation.

The trustee is unwilling to accept. Article 13 of the Trust Law stipulates that if the person designated by the will refuses or is unable to act as a trustee, the beneficiary shall elect the trustee separately. In other words, if the trustee doesn't do it, the trust may not be abolished, but there will be a vacuum. Communicating with the proposed trustee and obtaining his or her written commitment before he or she dies is key to reducing risk.

Trust Property Independence. According to Articles 15 and 16 of the Trust Law, the trust property shall be distinguished from other property in which the trustee has not established a trust, and shall also be distinguished from the inherent property of the trustee and shall not be classified as the inherent property of the trustee. Article 17 also stipulates that trust property shall not be enforced except under statutory circumstances. Independence is the basis for the trust to isolate debt and prevent division. However, if it is established on the common property of the husband and wife without the consent of the spouse, it may be invalid or revoked because it is not entitled to dispose of it; if it is established to avoid debt, it may also be revoked by the creditor. Independence is not absolute, and the origin and purpose of the property at the time of establishment must stand the test.

Management Fee. Institutional trustees usually charge an annual management fee based on the size of the trust property, as well as an establishment fee and distribution fee. In the long run, fees will continue to erode the principal, and the longer the term of the trust, the more it is necessary to calculate in advance the impact of the fee on the actual income of the beneficiary and write it into the trust document.

Tax. At present, China has not yet introduced inheritance tax and gift tax, real estate between family members inheritance, gift link usually does not involve personal income tax, value-added tax, deed tax and other tax burden, so the tax attractiveness of the will trust is temporarily limited, the main value is still in the distribution rules and property isolation. However, the income generated by the trust property in the investment operation will still have a corresponding tax burden, and if the tax system changes in the future, the terms design should leave room for adjustment.

6. Checklist of implementation steps

  • The first step is to take stock of assets. The real estate, equity, deposits, insurance policies, claims, intellectual property rights are listed one by one, distinguish between personal property and the joint property of the husband and wife, and clarify which can be put into the trust.
  • The second step is to define the target and three types of people. What problems do you want to solve, to whom (beneficiaries), who will be in charge (trustees), who will supervise (supervisors), think clearly before you write.
  • The third step is to choose the path. Depending on the size of the assets, the situation of the children, and whether they are willing to deliver them alive, choose whether to set up a will directly, a will plus a trust company, or a living trust plus a will arrangement.
  • The fourth step is to interface with the proposed trustee. To obtain the fiduciary will of the institution or individual, and to negotiate the management fee, the scope of the investment, and the manner of implementation of the allocation.
  • Step 5, draft the terms of the trust and the will. The beneficiary, distribution rhythm, term, supervisor, residual property ownership, if necessary, notarization.
  • The sixth step is to appoint the executor or the administrator of the estate, and make clear the handover process and responsibilities during the transition period.
  • Step 7: Preserve evidence and documents. Keep the will, trust documents, property deeds, and spousal consent documents in a secure, centralized location, and inform a trusted person of their whereabouts.
  • The eighth step is to review and update regularly. When there are changes in assets, family relationships, tax laws, or the status of trustees, promptly update your will and trust arrangements.

Key Points of Judgment Reference: The Third Batch of Reference Cases of Shanghai Higher People's Court in 2023 (Key Words: testamentary succession and testamentary trust) Key Points of Judgment: If the decedent does not explicitly propose to establish a trust in his will, but the people's court finds that the content of the will has the legal characteristics of trust relationship after hearing, it shall be determined to constitute testamentary trust according to the true meaning of the decedent; the execution of the testamentary trust should be based on the principle of maximizing the validity of the will, and the inability to execute part of the trust does not affect the validity of the rest. Article 1133, paragraph 4, of the the People's Republic of China Civil Code shall apply.

7. Frequently Asked Questions

Question 1: Can testamentary trust and ordinary will be used at the same time?Sure. The testamentary trust itself takes the will as the carrier, you can in the same will not only deal with the property that does not enter the trust, but also set up a trust to deal with the property that needs to be managed for a long time, the two do not conflict.

Question 2: Can the house and equity be put into a testamentary trust?Yes, but they need to be handled separately. Real estate involves transfer and registration, the operation chain is long, equity inheritance should first be handled in accordance with the articles of association, if there are other arrangements, it is recommended to negotiate with other shareholders in advance, in accordance with the law to amend the articles of association or reach an agreement, to avoid the death of shareholders do not agree, equity into the trust.

Question 3: Must a trust be established through a trust company? Not necessarily. Natural persons may also serve as trustees, but they are subject to uncertainties regarding their lifespan, capacity, and willingness. It is safer to hand over to a licensed trust with larger assets that require professional investment and long-term sound operation.

Question 4: How are the beneficiaries’ interests of minor children protected? mainly depends on three things, one is to write the distribution rhythm clearly, the other is to set the trust supervisor, and the third is to stagger the authority of the guardian and the trustee. When necessary, a notary public may be engaged to enhance the formality and enforceability of the documents.

Question 5: Do you want to leave a share for the heirs who lack the ability to work and have no source of income by taking the testamentary trust?. This is a mandatory requirement of the law, even if the estate as a whole enters the trust, the necessary share of the estate must be reserved for such heirs and fetuses, otherwise the relevant arrangements will be adjusted.

Question 6: If a family has already signed a legacy support agreement, can they still establish a testamentary trust? The relationship between the two should be clarified first. The estate dealt with by the will cannot conflict with a valid bequest maintenance agreement, otherwise the will may be found invalid. In addition, the agreement between the elderly and their children on "who provides for the aged and who owns the property" is risky and easy to be questioned and needs to be handled carefully.

Practical Experience of 8. Lawyers

Many families want to leave property for their children, but they are worried that after the one-time transfer of ownership, the children will not be taken care of when they are young, or they will be separated due to marital accidents. The testamentary trust solves the problem of how to give things, how long to give them, and who is in charge of them. It gives the estate to the trustee first, and distributes it to the beneficiaries regularly and according to the rules you set, instead of falling into the name of the children and letting them dispose of it. Compared to living family trusts, testamentary trusts are established with wills, lower thresholds and lower costs, but the point of establishment is behind them and there are more convergence issues. First, clarify whether I want to address this issue with a one-time solution or a long-term approach, and then decide whether to pursue this particular tool.

Operationally, the route selection should be decided as early as possible. The most convenient thing is to write the trust arrangement directly in the self-written, written or notarized will, and the trust property, beneficiaries, trustees, and distribution rules are listed one by one. It is safer to negotiate with a trust company or a trusted individual about his or her willingness to act as a trustee, and then put the trustee in place with a will. The core terms should specify when to start distribution, monthly or annual, when to deliver the principal, how to deal with nodes such as the beneficiary's adulthood or marriage, and how to replace the trustee's dereliction of duty. If the terms are vague, the execution will be stuck.

Seamlessness is the most common pitfall in testamentary trusts. Unlike a bequest, the beneficiary acquires the right to benefit from the trust and is not subject to the strict restrictions of the sixty-day statement of the bequest, which is one of the reasons why it is valued. It is proposed to appoint an executor or administrator of the estate at the same time, who is responsible for delivering the estate to the trustee and supervising the distribution. If there are minors, profligate children or children with special needs among the beneficiaries, the earlier the arrangement is, the more active it is. Don't wait until you are in poor health to make a temporary decision. At that time, it is difficult to guarantee the quality of the text and the witnesses.