Case Study: Avoiding Uncertainties in Statutory Inheritance

Mr. Tang, at 56 years old, due to health issues, passed his business on to his son, Xiao Tang, who was already married with children. Xiao Tang spent several years expanding the family business. Unfortunately, during a business trip, Xiao Tang was involved in a fatal car accident and passed away without leaving a will. As a result, his estate was divided according to statutory inheritance laws.

The assets that Mr. Tang passed on to his son are considered part of the marital property shared between Xiao Tang and his wife. Therefore, 50% of these assets legally belong to his daughter-in-law, and the remaining 50% constitutes Xiao Tang’s estate subject to statutory inheritance. Consequently, Mr. Tang and his wife inherit 25% of the total assets, while the remaining 75% goes under the management of Xiao Tang’s wife.

Mr. Tang is dissatisfied with the statutory division of inheritance but feels he has no choice but to accept it. In fact, Mr. Tang could have established a trust with part of his assets before transferring them to Xiao Tang. By doing so, he could have specified Xiao Tang, his grandson, or other designated beneficiaries to inherit the assets under agreed terms and proportions, following the contract set by the trust.

Establishing a Family Trust would allow Mr. Tang’s assets to avoid uncertainties associated with statutory inheritance. A trust can execute conditions set by the grantor, safeguarding the grantor’s interests and protecting assets from risks, as well as avoiding the uncertainties of statutory inheritance.

Even if an unexpected event occurs in the future, Article 15 of the Trust Law states that “if the grantor is not the sole beneficiary, the trust remains in effect, and the trust assets are not part of the estate or subject to liquidation.” Since assets placed in a trust are not considered part of the legally inheritable estate, they are safeguarded from the risk of distribution due to statutory inheritance.

Advantages

• Legal Protection: Family trusts are protected by law, preventing asset loss.
• Risk Isolation: A trust creates a firewall mechanism between individuals, family, business, and other stakeholders, minimizing the impact of marital changes, business risks, and unexpected events on family wealth.
• Wealth Transfer: A family trust ensures family members receive their rightful share without complex inheritance procedures.

Considerations

When parents transfer assets to their children without taking precautionary measures, there is a high risk of asset depletion. Many entrepreneurs do not realize that when they pass the family business to the next generation, events like marital changes or accidental deaths of the next generation may lead to the division of hard-earned assets. Planning in advance can help you avoid asset division risks. Please feel free to contact a trust advisor to customize a trust solution!