Overseas Chambers of Peter Harris

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50. Trusts in China: a recent decision of the Shang'hai Court

September 30th 2020

In 2001, China adopted a trust law. It had all the features of a framework provision and, until this case heard last year, does not seem to have received judicial attention. However, it is clear that with their typically modest but implacable  industry, the Chinese legal professions have been working at the concept wih a degree of dilgence and understanding that puts the French tax administration to shame.

Here, a holographic (handwritten) and yet formally valid will gave rise to problems of interpretation and implementation. This meant that these issues, as a result of intra family disagreement were brought to Court and came before to the attention of the Shanghai Court of appeal. Handwritten wills are now the toast of the Shanghai Bar.

The testator had left immovable estate in China to a Chinese Foundation. The problem lay in the fact that a Foundation in China, unlike some other jurisdictions such as Jersey, cannot act as a private foundation. It can only act in the public good. The beneficiaries were private Chinese citizens.

The Shanghai Court simply decided that, on the basis of the wording of the will,  the testator's intention was to create a trust with the Foundation acting not in its own capacity but as a trustee of the trusts which the Court interpreted the will as constituting on the death of the testator. The 2001 law provided the framework, if you will.

The judgment is fundamentally important for several reasons:

Firstly, it endorses a formally valid Chinese will as a legal form of trust document and, if the content of a will is consistent with the legal elements of a trust, such will/ testamentary trust is legally binding without the need for formal trust product registration.

Secondly, it recognised the legitimacy of natural persons acting as trustees, though such recognition is accompanied by the court's oversight and its active control of fiduciary obligations.

Thirdly, when the trust property in a testamentary trust does not meet the requisite formal conditions to establish a trust in the current legal environment, the reasonableness of the otherwise compromised scheme of establishing a monetary trust by way of asset cash realisation was also recognised by the Court. What appeas to be comparable to the doctrine of conversion of immovables into movables which was the basis of English trust law in relation to Land, prior to its abolition in ToLATA 1996  appears to have been applied in reverse in a very constructive manner by the Shang'hai Court to overcome the technical difficulty of applying a trust to land.

Western lawyers are likely to be overtaken very quickly in trust matters, as both eth Shanghai Bar and  its Court appear to have mastered not only the issues, but also the practicalities of the constitution and operation of trusts within their own domestic legal environment. Note also that the PRC Civil Code will come into effect on 1 January 2021,

For further detailed analysis see the article by Dr Hao Gao and Jun Luo, with acknowledgement to the TQR:  http://www.overseaschambers.com/media/52611/trusts%20quarterly%20review%20q3%202020.pdf