With the rapid development of the Chinese economy, private wealth has gradually increased. Numerous financing products have become available to high-net-worth individuals in order to meet their wealth management needs. One of the most popular of these is the insurance trust, which creatively combines features of a trust and life insurance. Insurance trusts can preserve assets and control risks – the fundamental function of insurance – while also allowing the assets to be managed according to clients' instructions. This update analyses the principles behind insurance trusts in China and the legal relationships involved, as well as their feasibility and importance to wealth management.
An insurance trust is a specially designed trust that is both the owner and beneficiary of one or more insurance policies. On the death of the insured provided in these policies, the trustee administers the trust in accordance with the trustors' instructions, invests the trust estate (i.e., the insurance proceeds) and dispenses the investment proceeds to the beneficiaries designated by the trustor in the trust contract.
Principles
The operation of insurance trusts can be divided into three stages:
- The insurance policyholder chooses a high-level life insurance plan; at the same time, the policyholder – who acts as trustor – sets up a life insurance trust. The policyholder makes the life insurance trust the beneficiary in his or her life insurance policy.
- On the death of the insured, the life insurance trust can obtain from the insurer all of the proceeds under the life insurance policy and the trustee must subsequently perform his or her obligation to manage the insurance trust.
- The trustee should provide the designated beneficiary with the trust estate's investment proceeds. The trustor can decide the method of distributing the investment proceeds and even use underlying proceeds. Normally, these proceeds are used to cover education fees, housing and vehicle purchases, and other fees relating to the trustor's children.
Legal relationships involved
Two legal relationships are involved in the operation of insurance trusts:
- An insurer-beneficiary relationship under the insurance contract – the insurance policyholder and the insurer come to an agreement and sign an insurance contract. In this insurance policy, the insurance trust is the beneficiary. On occurrence of an accident covered under the policy, the trust can obtain the insurance proceeds and all corresponding rights as the assigned beneficiary.
- A trustee-beneficiary relationship under the trust contract – the trustor, who is also the policyholder, and the trustee come to an agreement and set up an insurance trust with an insurance policy as trust property. The trustee administers the insurance trust on behalf of the trust beneficiaries. The trust beneficiaries are not entitled to claim ownership of the trust property, unless certain conditions have been fulfilled according to the trust contract. However, they can acquire the proceeds from the investment of trust property.
Legal feasibility
Compliance with Insurance Law
As the insurance trust is a combination of insurance and trust; it must satisfy all relevant requirements and principles of the Insurance Law. The main issue in this regard is whether the insurance trust is eligible to be the beneficiary of an insurance policy. According to Article 39 of the Insurance Law, the beneficiary of a life insurance policy must be designated by the insured or policyholder. Life insurance policyholders must obtain the consent of the insured before designating the beneficiary.
Existing legislation and regulations do not prohibit legal persons from being beneficiaries of an insurance policy. Therefore, an insurance trust can be designated as the beneficiary of a life insurance policy by the policyholder directly where the policyholder and the insured are the same person. Where the life insurance policyholder is different from the insured, the policyholder can still designate the trust as beneficiary, as long as he or she has obtained consent from the insured.
Compliance with Trust Law
An insurance trust is a special integrated financing product and thus involves the establishment of a trust. The design of this product must satisfy all relevant requirements and principles under the Trust Law. First, the trustor and trustee must conclude a trust contract which reflects their declaration of intention to set up an insurance trust. Second, there must be a lawful transfer of assets, property or property rights.
According to Article 7 of the Trust Law, the existence of definite trust property is required for the creation of a trust and the trust property must be lawfully owned by the trustor (such property includes legislated property rights).
In the case of an insurance trust, the policyholder designates the trust as the insurance beneficiary and the trustee is thus entitled to receive the insurance proceeds on the occurrence of loss covered under the insurance policy. Meanwhile, the policyholder acts as trustor under the insurance trust and makes the insurance proceed the trust property. In other words, the trustor under an insurance trust fulfils his or her duty of transferring property to the trustee by designating the insurance trust as the beneficiary of the underlying insurance policy. Moreover, the trustor also designates a trust beneficiary under the trust contract who can receive the investment proceeds from the trustee's management of the trust estate.
Through its sophisticated structure and contract clauses, the insurance trust complies with all requirements and principles under the Trust Law.
Comment
Before the emergence of insurance trusts, high-net-worth individuals were inclined to use either insurance or trusts as their essential investment vehicle. Insurance trusts not only enjoy the merits of both trusts and insurance, but also have their own distinct strong points. Although the insurance trust is a new product on the Chinese financing market, its combined benefits of preserving wealth, protecting beneficiary rights and segregating property make it an enticing, unique means of wealth management.
Insurance trusts make it possible for individuals to set up a family trust with lower initial costs, which can be attributed to the aleatory nature of insurance. The premiums paid by life insurance policyholders are relatively low in relation to the insurance proceeds gained by the insurance beneficiary. Consequently, on the death of the insured, the insurance proceeds transferred to the trust property can be substantial, even if the premiums are low. With the special leverage effect provided by insurance, the threshold of Rmb50 million – the general lowest value of trust property required to set up a family trust – is not beyond reach.
Insurance trusts allow the life insurance policyholder (the trustor) to decide on how to distribute investment proceeds and use underlying proceeds, and also facilitate private wealth growth via the professional management and investment activities undertaken by the trustee.
Insurance trusts meet the needs of a diverse range of investors due to their highly customisable nature, especially for investors:
- Whose children are too young to handle financial matters or are otherwise unable to manage high-value property; and
- Who wish to keep the property from being embezzled.
Moreover, trust property is completely independent under the Trust Law and therefore has immunity against enforcement procedures. Once the life insurance proceeds are transferred to the insurance trust and become trust property, creditors of the policyholder or trust beneficiary cannot claim to settle debts with the insurance proceeds, unless the debts arise from the circumstances provided under Article 17 of the Trust Law.
Finally, insurance trusts are a special type of private trust; there is no prior legal approval procedure or registration requirement for their creation. The management and operation of the insurance trust and investments made with the trust property are all conducted in the name of trustee. Pursuant to the trust contract, the trustee is bound by a duty to maintain confidentiality. Therefore, the insurance trust is an ideal means of keeping the property data and personal information of the trust beneficiary strictly confidential.