In the past decade, preserving family wealth has emerged as a prominent concern among entrepreneurs in the People's Republic of China (PRC), leading to the establishment of numerous trusts in Hong Kong, Singapore, and key offshore jurisdictions like the British Virgin Islands (BVI), Cayman Islands, Jersey, among others. This trend continues despite the considerable divergence between the trust laws of these jurisdictions and those of the PRC. For a significant number of these entrepreneurs, the process of establishing a trust often means the execution of trust documents resembling contractual agreements, allowing them to retain the control over the management and utilization of the trust assets. Such misconceptions often lead to inappropriate operational practices pertaining to trusts which can potentially expose trust assets to legal challenges.

The recent legal case in Singapore, La Dolce Vita Fine Dining v Zhang Lan and others [2022] SGHC 278A, serves as a noteworthy illustration highlighting the importance of meticulously structuring and managing trusts. The ownership of property that Ms. Zhang had previously asserted as assets of a family trust is now recognized as her personal property. This recognition has paved the way for creditors to take enforcement actions against these assets. Consequently, this judicial outcome has triggered concerns regarding the security of trust assets in the face of creditor claims, leading to a re-evaluation of trust structures for safeguarding wealth. It further underscores the paramount significance of adhering to proper procedures when establishing a trust, executing effective trust management, and seeking legal advice to ensure the sustained efficacy of trust structures.

The case's backdrop is outlined as follows:

The conflict between La Dolce Vita and Ms. Zhang originated in 2013 when La Dolce Vita acquired shares in companies holding Ms. Zhang’s South Beauty chain of restaurants in mainland China, setting off subsequent disputes. Shortly after the business sale, Ms. Zhang incorporated Success Elegant Trading Limited (SETL) which opened accounts with Credit Suisse AG and Deutsche Bank AG (the Bank Accounts) with Ms. Zhang as the sole authorised signatory. Between December 2013 and June 2014, Ms. Zhang received sale proceeds of US$286 million in her account at Bank Safra Sarasin Hong Kong. From there, she transferred a total of US$142M to the Bank Accounts.

In June 2014, Ms. Zhang, a PRC resident and a national of St Kitts and Nevis, established the Success Elegant Trust (the Trust), a Cook Islands family trust created for the benefit of her son, his descendants, and extended family members according to the advice of her asset manager. Simultaneously, she transferred the sole share of SETL together with the Bank Accounts to Asia Trust Limited, the trustee of the newly established trust.

Between June 2014 and February 2015, there were several big transfers out of the Credit Suisse account. Noting that Ms. Zhang is not a beneficiary of the Trust, the court questioned the four transfers to her personal account. Ms. Zhang had no answer to the transfers made on 22 September 2014 and 10 February 2015. She alleged that the transfers made on 19 January and 11 February 2015 were for the benefit of her son. For all these transfers, there is no evidence showing that the trustee directed Ms. Zhang to make such transfers.

It also transpired that Ms. Zhang made the following “urgent” substantial transfers from Deutsche Bank account shortly after her becoming aware of the freezing order granted in Hong Kong on 2 March 2015 imposed on the Bank Accounts.

In May 2020, following the judgments in Hong Kong that enforced arbitral awards derived from CIETAC arbitration proceedings, La Dolce Vita being Ms. Zhang’s creditor endeavoured to enforce these judgments in Singapore and initiated proceedings to appoint receivers for assets, including cash and securities held in the Bank Accounts. Their argument for this enforcement rested on the contention that despite SETL's legal ownership of the Bank Accounts under the Trust, Ms. Zhang retained beneficial ownership, thus rendering the accounts susceptible to claims by her creditors.

The key legal issue is whether the extent to which Ms. Zhang involved in the Bank Account would render her retaining the beneficial interest in the funds. The Court scrutinized Ms. Zhang's intent during the transfers involving the Bank Accounts and concluded that Ms. Zhang's actions were driven by her intention to shield her funds from potential claims by La Dolce Vita. Her actions indicated her intention to retain beneficial ownership of the assets, shielding them from claims, and retaining control over the Bank Accounts for her personal benefit.

Ms. Zhang's pronounced dominion over the Bank Accounts, coupled with the acceptance of these actions by SETL, ultimately culminated in the issuance of orders for the appointment of receivers.

Several key lessons emerge from this case:

Ownership and Treatment of Assets: Assets once injected into the trust no longer belong to the settlor and should be treated as such in practice as well. Ms. Zhang's conduct conveyed her perspective of these assets as belonging to her. The self-directed transfers of funds from the bank account, executed on her own terms, serve to underline her assertion of ownership over these assets. This amplifies the notion that the implications of a trust stretch beyond mere legal contracts and transactions.

Trust Beyond Formalities: A trust transcends the straightforward act of transferring assets to a trustee. The true essence of a trust encompasses its operational intricacies, which frequently extend beyond mere formal protocols. This encompasses the way trust assets are managed, as clearly illustrated by the actions of Ms. Zhang.

Limits of Asset Protection: The case places a spotlight on the boundaries of asset protection within a trust structure. While trusts are conventionally instituted to shield assets from potential liabilities, this instance illustrates that such safeguarding can be undermined when the settlor retain extensive control and treat trust assets as if they were their personal possessions.

For PRC entrepreneurs (or any person who wishes to set up a trust) to derive the maximum benefit from a trust structure, the following principles are recommended:

1. Consultation with an Experienced Advisor: Engaging a trusted and seasoned advisor is of paramount importance. In the intricate landscape of wealth structures and the interplay of underlying entities and assets across multiple jurisdictions, the counsel of advisors possessing comprehensive expertise is invaluable. Professionals possessing profound knowledge spanning diverse jurisdictions and disciplines such as trust, legal, company, tax, property, charity, and succession can provide real assistance. Their proficiency is instrumental in skilfully navigating the intricacy of trust structures, guaranteeing their appropriate establishment and proficient management.

2. Comprehensive Understanding: A thorough comprehension of how the trust operates, its legal implications, and the anticipated behaviours surrounding it is crucial. This understanding can help mitigate unintended consequences. For families managing their own private trust companies, a bespoke trust operations manual setting out the roles of each party and how the trust should operate would be helpful for the implementation of trust governance.

3. Tailored Structure Design: Every situation is unique, necessitating a custom trust structure designed to align with specific goals and circumstances of a family. A well-designed structure can mitigate risks and maximize benefits.

4. Accurate Trust Documents: Precise and accurate trust documents are imperative. They should clearly delineate the trust's structure, objectives, and the roles and responsibilities of all involved parties.

5. Regular Structure Health Check: The family circumstances, the law and policy in jurisdictions involved in a wealth structure change over time. A structure that works well at the time of establishment may not be efficient or ideal as time goes by. Structure should be reviewed by experienced advisor at least annually to ensure their compliance and re-structure if necessary.

The case serves as a powerful reminder of the importance of meticulous trust governance, upholding a distinct demarcation between personal affairs and trust-related dealings is paramount to the safeguarding of trust assets and the unintended consequences that can arise from inadequate trust management, rendering assets susceptible to legal entanglements.