1 General Introduction
- The primary means of passing on family wealth under PRC law
In China, family wealth is primarily transferred from generation to generation via statutory succession, testamentary succession, legacy, donation, life insurance and family trusts.
Statutory succession: refers to the distribution of a decedent’s estate to the decedent’s statutory successors pursuant to the order and share provided under PRC law if the decedent dies intestate or if the will is ruled invalid by a court.
Testamentary succession: A testator, by voluntarily making a valid will, may designate one or more successors among his statutory successors to inherit his estate.
Legacy: A testator may designate the state, a collective or any person other than a statutory successor to inherit his or her estate.
Donation: A donor may donate his or her assets to a donee as an inter vivos gift, and the donee affirmatively accepts the donation.
Life insurance: refers to life insurance contract that is payable upon the death of the insured. When the insured dies,the designated beneficiary (generally a family member of the insured) is paid an insurance benefit.
Family trusts: A settlor may entrust his or her assets to a trustee who will manage or dispose the entrusted assets for the benefit of a beneficiary, usually the settlor’s family members, in accordance with the wishes of the settlor. - Are family wealth management agreements (family constitutions)between family members (such as parents and children) valid
Under PRC law, family constitutions may provide for the management of family assets and can be viewed as a set of conditional property agreements, except to the extent that is invalid due to violation of laws, compulsory provisions of administrative regulations or public policy. Family constitutions generally include a post-nuptial property management agreement, inter-generational gift agreement, property custody agreements among family members, etc. - Is it appropriate to consider family wealth transfers in the current environment
Yes. Based upon the tax laws currently in force, family wealth can be transferred among family members at a reasonable cost.
2 Inheritance - When do inheritance rules apply under PRC law
According to Article 36 of the Law of Succession of the People's Republic of China (“Succession Law”), the Succession Law applies in the case of statutory succession if the decedent was domiciled in China at death, or if the real estate to be inherited is located within China.
In the case of testamentary succession, the form of the will (i.e., whether the will was created) and its effectiveness will be governed by PRC law if the decedent was a PRC citizen, or if the decedent was a PRC domiciliary either at death or when creating the will. In addition, PRC law will govern the form of a will if the decedent created the will in China. - Distribution of a natural person’s estate at death
A decedent’s estate may be distributed through testamentary succession, legacy, a legacy-support agreement or statutory succession. According to the opinions of the Supreme People's Court, the order of priority of these forms of property distribution is:
a legacy-support agreement,
testamentary succession or legacy(testamentary succession or legacy is invalid to the extent that it is inconsistent with a legacy-support agreement), and
statutory succession. - Consequences of dying intestate
If the decedent dies without creating a will or making bequests,the decedent’s estate will be inherited by his or her statutory successors according to the order and in the share prescribed by the Succession Law. Statutory successors generally include first-in-order successors (spouses, children, parents) and second-in-ordersuccessors (siblings, paternal grandparents, maternal grandparents).Second-in-order successors will inherit the decedent’s estate in the absence of any first-in-order successors. Successors same in order shall inherit in equal shares. - Consequences of dying with a valid will
A will is a document by which a testator may voluntarily designate one or more persons among the testator’s statutory successors to inherit his or her estate. Once succession commences, a designated successor will be deemed to have accepted his or her share of the estate unless the successor affirmatively refuses to accept such share.
Wills should reserve shares of the estate for specified successors including disabled successors and unborn children (see paragraph 6 below). - Types of wills
Types of wills include notarial wills, testator-written wills, wills written on behalf of the testator, wills in the form of a sound recording and nuncupative wills. According to the provisions of Article 17 of the Succession Law, the requirements for validity of each type of will are as follows:
Notarial will: the will is made by the testator and notarized by a notary agency;
Testator-written will: A testator-written will is a will which the testator creates and signs in his or her own handwriting, and specifies the date on which it was created. Wills that are printed but not handwritten are generally considered invalid under PRC law.
Will written on behalf of the testator: A will written on behalf of the testator must be witnessed by two or more witnesses, of whom one writes the will, dates it and signs it along with the testator and the other witness or witnesses. A will written on behalf of the testator is usually required to be handwritten.
Will in the form of a sound recording: A testator can create a will in the form of a sound recording, which must be witnessed by two or more witnesses. Sound-recorded wills are relatively rare.
Nuncupative will: A testator may make a nuncupative (oral) will in emergency situations, which must be witnessed by two or more witnesses. The content of the will shall be determined according to witnesses’ memory. Nuncupative wills automatically become invalid when the emergency no longer exists, and the testator is able to create a will in writing or in the form of a sound recording.
None of the following persons may act as a witness to a will: persons with no capacity or with limited capacity, successors and legatees, or persons whose interests are related to those of any successor or legatee (including creditors, debtors or joint venture partners of successors or legatees). - What are the implications of statutory succession
Wills should reserve shares of the testator’s estate for specified statutory successors, including shares for disabled successors and for unborn children.Specifically, shares reserved for disabled successors refer to court-determined shares of the estate reserved for successors who lack the ability to work and have no source of income at the time when the will takes effect. Shares reserved for unborn children refer to shares reserved for fetuses (a statutory reservation; the share reserved shall, if the baby is stillborn, be dealt with in accordance with statutory succession.). Wills that fail to make reservations as described above may be considered invalid to the extent such reservations were required to be made. In such case, the successor entitled to a reserved share will have the right to initiate a lawsuit requiring a partition of the estate. - Do testators have the right to deprive the right to inheritance of his or her children or spouse
A testator may deprive the right to inheritance of his or her children or spouse, provided that such child or spouse independently owns property and has a source of income (see paragraph 6). - What special rights are granted to a decedent’s spouse
According to the Succession Law, a decedent's spouse must satisfy the following conditions in order to enjoy a right to inheritance: i) the marriage between the decedent and the spouse was valid, ii) the decedent was not divorced from the spouse prior to the decedent’s death.
Homosexual marriage is not recognized by the Marriage Law of the People’s Republic of China. Therefore, if a same-sex couple registers a marriage outside China and does not obtain a certified marriage certificate from a PRC embassy or consulate, the marriage would not be deemed valid for purposes of succession.
If the family residence is personal property of the decedent and is inherited by a successor other than the decedent’s spouse, the spouse may continue residing in the family residence by concluding a long-term property rental agreement with the designated successor, although this right to reside is not stipulated under PRC law. - Can a prenuptial agreement stipulate terms similar to a will
According to Article 17 of the Succession Law, a will must satisfy certain formal statutory conditions. Therefore, provisions that have an effect equivalent to a will in prenuptial agreements or other legal documents will be considered invalid. - Conflict of wills
According to Article 20 of the Succession Law, where a decedent creates several wills with terms that conflict with one another in content, the last one shall prevail. A notarial will may not be revoked or altered by a testator-written will, a will written on behalf of the testator, a will in the form of a sound-recording or a nuncupative will. - Limits on succession
According to Article 33 of the Succession Law, the successor to an estate shall pay all taxes and debts payable by the decedent according to law, up to the actual value of such estate, unless the successor pays voluntarily in excess of the limit.
The successor who disclaims inheritance assumes no responsibility for the payment of taxes and debts payable by the decedent according to law. - Inheritance-related taxes
China has not yet instituted an inheritance tax. Inheritances (including statutory succession and testamentary succession) are not subject to individual income tax, value added tax, deed tax, land value-added tax, business tax or surcharges. However, a stamp duty will be due if the inheritance involves property registration amendments, such as the inheritance of company stock rights or real estate.
3 Legacy - Consequences of the decedent’s expression of intent of legacy
Legacy refers to a document by which a testator may designate a person other than the testator’s statutory successors as a legatee to inherit the testator’s estate. A legatee should indicate whether he or she accepts the legacy within two months of learning of the legacy. If the legatee does not indicate acceptance within the specified period, he or she will be deemed to have disclaimed the legacy. - Limitations on wills
Legacy may not be against public policy. For example, the will of the testator that bequeaths all the testator’s estate to an illegal cohabitant is invalid. However, the act of transferring assets to children born out of wedlock by will or an inter vivos gift will be considered valid. - Legacy-related taxes
Legacies are not subject to individual income tax, business tax,land value-added tax or value-added tax. However, legatees are required to pay a stamp duty of 0.05% of the contract price of the legacy as well as the deed tax.
If a legatee later sells the real property which he or she has accepted, individual income tax will apply at a rate of 20% on the gain from the sale, which equals the sales price of the property less the legator’s actual cost basis and the taxes and expenses the legatee has paid in relation to the receipt and sale of the property.