Ten Practical Applications of Taiwan's Trust System

"The weakest link in a chain is the strongest because it can break it." Stanislaw J. Lec

With enactment of the Trust Act, the Trust Enterprise Act and trust-related portions of the tax code by the Legislative Yuan, Taiwan is now well on its way towards establishing a supportive legal environment for trusts. However, unlike countries such as England and the US, where trusts have become a commonplace property management mechanism used by ordinary people, the average person in Taiwan still has very little limited knowledge of trusts, their nature and social functions. The following, therefore, will present an analysis of Taiwan’s current system for trusts, their practical applications and the goals they can accomplish.

1. There’s an old saying: “Wealth does not last past three generations.” Generally, after the first generation gives the second generation the fortune it struggled so hard to build, property begins to shrink, perhaps because of poor management. The third generation, coming as it does from a rich family, spends with abandon and wealth declines at a terrific rate until it is finally all spent. By protecting the value of one’s estate through a trust mechanism, the management of which is delegated to a professional organization, and setting certain conditions that must be met before beneficiary rights may be enjoyed, one can accomplish effectively the goal of managed property use.
   
   
2. Traditional estate gifts or bequests regularly cause descendents to fall out among themselves as they fight over property, and this causes big social problems. If the wealth is in real estate, then after it has been given or passed down a few generations, a serious “commons” situation emerges which imperils the long-term use of the property. Through the trust mechanism, where the trustee follows the intent of the trust and the interest generated over the term of the trust is enjoyed by descendents in later generations, one can remedy a defect in inheritance that for ages had been unsolvable.
   
   
3. Under current laws, there are many limitations on setting up charitable foundations or funds, including restrictions on the amount of funds and the number of board members. It is worth noting that as (private) foundations get larger in size, they almost unavoidably become coveted by determined individuals. Using charitable public trusts gets around this problem.
   
   
4. Under the current Estate and Gift Tax Law, tax rates are as high as 50%. Interest rates, meanwhile, are at historic lows, so one must make good use of the “principal for yourself, interest for another” model to cut estate taxes while transferring property to the next generation. But be aware that the MOF is comes from a tax collection perspective, and its interpretations of related laws typically affect the results of tax planning, so companies should respond with caution.
   
   
5. Over the years, insurance products have become increasingly diverse. In addition to traditional life insurance and annuities, there is also so-called investment-oriented insurance. Whatever the purpose for buying the policy, when the insured party passes away and settlement is made, the next problem to face is how to manage and use the insurance settlement money. One way to solve this problem is to link insurance with trusts. When the payment is made, the insurance settlement money can be directly put into a trust account, so that the trustee can take care of the next generation in accordance with the intent of the trust.
   
   
6. Article 12 of the Trust Act stipulates that trust properties cannot be compulsorily executed. Since a storm can blow in “out of the blue”, people sometimes find themselves in a predicament where a loan falls due or other debts must be paid to a lender. If one manages to do appropriate estate planning, including trusts, then when some such unforeseen event occurs, at least the portion under trust will be protected by law from forced liquidation, since creditors or claimants cannot request that trust property be used to repay creditors or pay compensation. This can have a big impact on the trustee’s subsequent means of support.
   
   
7. In practice, for a variety of reasons, it is extremely common for large shareholders or substantial owners of a property to hold shares or properties under a nominal shareholder. Holding shares under a nominal shareholder accomplishes the goal of dispersing income. It avoids not only income tax risk, but also those derived from gift tax and asset loss problems. If it is not convenient to hold property under one’s own name based on confidentiality or other sensitive factors, then skillful use of trusts ought to reduce attendant problems for the nominal shareholder(s).
   
   
8. The Public Official Property Declaration Act requires the president, vice president, politically appointed officials, members of the Legislative Yuan, mayors, etc., to entrust their own and their spouse’s property to a government-recognized trust for its management and disposal. This use of trusts - mandating that public officials’ property be put under trusteeship - can partially resolve problems involving irregular fluctuations in property holdings.
   
   
9. Employees are a company’s most important assets, and the most important question for upper management has long been how to get the best employees to stay on and work together towards creating the greatest value for the company. One way is to use employee stock-ownership trusts. Here, a trustee purchases company shares each month according to the terms of a trust agreement, and the accumulated shares (or cash) are not handed over until the employee leaves or retires. The aim is mainly to tie the employee’s interest to the growth of the company by forcing investment of savings in the company’s stock. As a supplement to employee pension plans, wider use of such measures is worth encouraging.
   
   
10. In the case of employee bonus (profit-sharing) stock-ownership trusts, management establishes a share-holding committee, which signs a trust agreement with a trust company. Under the trust agreement, employee stock bonuses are consigned to a trust, and the accumulated shares (or cash equivalent) are not handed over until the employee leaves or retires.