Legal issues relating to settlors of charitable trusts

As a new and modern way of doing charity, charitable trusts are different from traditional giving in that they persist over time and are professional. Also, charitable trusts can be linked to other financial products and, with maturing and improving regulations, may also be combined with private-equity/venture-capital models to allow investors to fulfil their social responsibilities while realizing investment returns.

The concept of a public-benefit trust is mentioned in the 2001 Trust Law. However, it was not until the promulgation of the Charity Law in 2016 that the charitable trust-related systems were gradually established in China. All the same, the development of complementary systems remains incomplete. This column proposes to look at the regulatory requirements for the settlors of charitable trusts and analyse certain topical legal issues related to them at the practical operating level.

Can parent trust serve as settlor of charitable trust? The term parent trust refers to a parent charitable trust used to invest in other sub-charitable trusts. Using the parent/sub charitable trust method, it is possible to expand the sources of donated funds and enrich the charitable trusts’ investment orientation. In all, it rates as an innovative model in charitable trusts. However, pursuant to the Administrative Measures for Charitable Trusts, the settlor of a charitable trust is required to be a natural person, legal person or other lawfully established organization with full civil capacity to act. However, pursuant to the Trust Law, the term “Trust” means the acts whereby the settlor, based on his trust in the trustee, entrusts the rights in his property to the trustee and the trustee manages or disposes of such property in his own name in accordance with the wishes of the settlor for the benefit of the beneficiary or for a specified objective. This makes it impossible to include trusts within the scope of natural persons, legal persons or other organizations established in accordance with the law as specified in the General Provisions of the Civil Code. Complying strictly with the law means a parent trust may not serve as the settlor of a charitable trust.

Lily Xiao is an associate at Boss & Young

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