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I. Introduction In recent years, the role of equity family trusts in wealth inheritance has garnered increasing attention. Family-owned enterprises can implement various functions through the trust mechanism, including asset isolation and intergenerational transfer, making such trusts a choice for many high-net-worth families. However, since the trust business in China started relatively late, the existing legal framework for trusts imposes limitations on the realization of equity trust functions. Typical transaction models and structures require risk identification and deep reform. This article will address the practical challenges of transaction models and structures and propose paths for resolving these challenges and suggestions for institutional improvement.

II. Typological Analysis of Equity Family Trust Transaction Models and Practical Challenges A. Legal Structure of Typical Transaction Models 1. Direct Holding Model The direct holding model refers to the situation where the trustee directly transfers family business equity to the trustee, who registers in the capacity of a shareholder and exercises shareholder rights. The core of this model's legal structure is to achieve "separation of equity ownership and benefit rights," with the trustee holding nominal shareholder status while the beneficiary enjoys the rights to trust benefits.

From foreign experience, VISTA trust in the British Virgin Islands is a typical representative of the direct holding model. According to local special trust legal regulations, the trustee's primary obligation is to hold the equity rather than pursue asset appreciation, and the trustee cannot dispose of the equity without board approval. The client can maintain control over company operations by participating in board activities. However, due to the absence of definitive legislative provisions regarding the registration procedures for equity trusts in China and the issues surrounding the final control rights of equity, the trust method of direct holding hasn't gained favor.

2. Indirect Holding Model The indirect holding model centers on "fund trust + SPV," employing a multi-layer structure to achieve indirect placement of equity into the trust, commonly seen in limited partnership or limited liability company situations serving as SPVs. Its legal structure comprises three layers: first, the client establishes a fund trust; second, the trustee contributes trust funds to become a limited partner (LP) of the SPV, while the client or a third party it controls serves as the general partner (GP); third, the SPV acquires the equity of the family business, realizing trust indirect holding. The indirect holding model has become a common choice in practice, as seen in companies like Opple Lighting and Sanfu Shares.

From a structural perspective, the indirect holding model is an ideal approach to equity trusts. However, it faces regulatory challenges in practice due to its inherent opacity regarding trust purposes, making it a focal point for regulatory scrutiny. For instance, under securities law, family trusts as the legal shareholders of listed companies are subject to supervised and prudent management. The legitimacy and eligibility of family trusts acting as founders of listed companies are among the significant concerns of the China Securities Regulatory Commission (CSRC) when reviewing IPO application documents. From the perspective of penetrating recognition, if the client still effectively controls the equity under the SPV structure, regulatory agencies may identify the trust and the client as "acting in concert." This forces some companies with high proportions of trust-held shares to dismantle established trusts to reduce regulatory risks. Furthermore, for already-listed companies, equity trusts must undergo a series of compliance reviews, significantly undermining the confidentiality effects of trusts.

B. Practical Challenges of Transaction Models 1. Compliance Difficulties in Equity Transfer The compliance difficulties in equity transfer primarily arise from non-transaction transfer obstacles and regulatory restrictions on listed companies. According to the "Implementation Rules for the Non-Transaction Transfer Business of Securities by China Securities Depository and Clearing Co., Ltd." (now amended), non-transaction transfer of equity applies only to situations such as inheritance or donations; "transferring equity to establish a trust" is not included, necessitating practice to complete the transfer in the form of a "transaction transfer," thereby increasing capital pressure.

For instance, when the actual controller of a listed company establishes an equity family trust, they may face high tax costs and regulatory requirements. If they transfer equity through block trading, they must pay a stamp duty of 0.05% on the transaction amount, which can be significant when the trading scale is large. Moreover, if a proposed listed company has trust holdings, it may be deemed one of the "three kinds of shareholders" with "unclear equity," posing a dilemma on whether to dismantle the equity trust.

2. Taxation Challenges in Transaction Pricing Currently, China lacks a specialized tax system for trusts; equity transfers are treated as "transaction behaviors," leading to burdensome tax liabilities. Under the direct holding model, the client transferring equity to the trustee must pay individual income tax; in the indirect holding model, the multi-layer structure results in "double taxation," as SPVs acquiring equity incur corporate income tax, and beneficiaries must also pay individual income tax when trust distributions are made. The property transfer nature of equity delivery mandates that tax authorities typically require proof of tax payment. Under the "Individual Income Tax Law" and the "Interim Regulations on Stamp Duty," the client must pay individual income tax and stamp duty on earnings from equity transfer. In practice, companies or individuals may lower their tax basis through reasonable pricing mechanisms, but they must strictly adhere to the "clearly low and justified" recognition standards in the "Management Measures for Individual Income Tax on Income from Equity Transfers." These measures specify that income reported as equity transfer revenue lower than the initial investment cost or lower than the amount paid to acquire the equity and related taxes will be regarded as significantly low.

3. Functional Limitations in Model Selection In the direct holding model, the trust company is appointed as a registered shareholder of the target company based on trust documents, but legal recognition of its "shareholder" identity can lead to disputes, resulting in identity recognition challenges in practice. From a commercial appearance perspective, third parties dealing with the company rely on the equity registration information displayed by the company's capital disclosure system and make transaction decisions based on reasonable expectations. This reliance interest is justly prioritized to protect trading safety and market order. From the essence of trust law, the trust company's ownership is a property management action based on the trust purpose and not representing its own assets to become a substantive shareholder. Requiring it to assume equivalent responsibilities as substantive shareholders clearly exceeds the obligations delineated by the trust documents, contradicts the principle of trust property independence, and undermines the substantive functions of the trust system in property management and risk isolation. Furthermore, it may also lead to obstacles in external equity transfer and equity pricing disputes, impacting the interests balancing between the client and other company shareholders and creditors.

Although the indirect holding model can circumvent the barriers of direct holding, it incurs increased transaction costs. Establishing multi-layer SPVs necessitates expenses like business registration fees and audit fees, making the costs of a three-layer structure understandably apparent. Moreover, regulatory agencies may deem multi-layer structures as "regulatory evasion," demanding the dismantling of structures and disclosure of actual controllers. In the trust indirect holding model, while building special purpose vehicle (SPV) structures can help bypass ambiguous shareholder identity and unclear liabilities of trustees, it significantly increases transaction costs and compliance risks. From a cost standpoint, establishing and maintaining multi-layer SPVs requires continuous payments of various fees that erode the earnings space of trust property.

From a compliance perspective, this model faces risks of regulatory penetration scrutiny. Under the principle of substantive over form, regulatory agencies may view multi-layer SPV structures as tools for avoiding oversight—such as evading equity concentration limits, industry access thresholds, or information disclosure duties—resulting in demands to dismantle redundant structures and compel disclosure of the actual controllers and funding sources behind the trusts, thereby enhancing operational uncertainty.

III. Analysis of the Transaction Structure of Equity Family Trusts and Practical Challenges A. Core Elements of Transaction Structure 1. Subject Rights and Obligations Configuration As an important tool for family wealth management and inheritance, equity family trusts exhibit a diverse structure with core subjects including the client, trustee, and beneficiaries. The rights and obligations configurations among these subjects must closely align with the essence of trust, balancing "client control" with "trust purpose realization" dynamically—respecting the client's rational intervention rights over trust affairs arising from family governance needs while preventing excessive control that undermines the principle of trust property independence, ensuring that the trustee can autonomously fulfill management responsibilities in accordance with the trust documents, ultimately achieving wealth inheritance and risk isolation.

Specifically, the core rights of the client focus on participation and oversight of trust affairs; besides the legal right to be informed about trust affairs, the client can adjust management methods and dismiss the trustee as stipulated in the trust documents, but exercising these rights must not infringe upon the legitimate interests of the beneficiaries. The trustee's core obligations revolve around prudent management of trust property, where they must fulfill their duty of care and manage equity assets with professional acumen while strictly disclosing information and regularly reporting to beneficiaries about the trust's finances, operational risks, and other relevant information.

2. Achieving Trust Property Independence The core guarantee of trust property independence is "registration and disclosure." According to Article 10 of the "Trust Law," the registration of trust property is a prerequisite for the property to produce effects against third parties. However, China's current system for equity trust registration is lacking, with practical implementation mainly relying on "double registration" to achieve trust property independence: first, by recording the transfer of equity to the trustee (direct holding model) or to the SPV (indirect holding model); secondly, by registering trust product information with CITIC Trust (China Trust Registration Co., Ltd.). While it is widely acknowledged that trust registration differentiates trust property from the client's personal assets and the trustee's inherent assets, allowing it to withstand improper third-party claims, this may also result in excessive information disclosure that increases trust costs and undermines the confidentiality of the trust.

In practice, due to the absence of relevant legislative provisions, judges handling disputes involving equity family trusts possess significant discretion, focusing their recognition standards on whether sufficient trust appearance has been established. In the case of "Galaxy Jin Hui vs. Anxin Trust Execution Objection," although Anxin Trust, as the trustee, did not register the equity trust, it submitted trust documents and payment receipts to the court, which ultimately recognized that the equity constituted "trust property appearance," thereby upholding the creditor's claim. This judgment first acknowledged the "substance over form" principle regarding registration. In addition, since 2020, CITIC Trust has commenced the information reporting process for unlisted company equity trusts, providing partial support for achieving the independence of trust property.

B. Practical Challenges of Coping with Transaction Models 1. Compliance Controversies in Client Rights Retention In the structure of equity family trusts, the client's retention of certain rights is a core demand arising from the uniqueness of wealth inheritance within families—the client desires to segregate property risk and achieve intergenerational transfer through the trust yet must maintain necessary control over trust affairs based on family governance and asset safety considerations. However, the expansion of client rights boundaries inevitably crowds the responsibility space of other trust subjects, particularly the trustee. The trustee, being the legal manager of trust property, must exercise their rights solely to achieve trust purposes. If a client exceeds reasonable limits and exercises management or disposal rights that should belong to the trustee, it undermines the core principle of trust property independence. The independence of trust property underscores the trust system's foundation. If the client exerts "de facto control" over trust property, it blurs the boundaries between trust assets and the client's personal assets, triggering legal risks that compromise the independence of trust property.

2. Barriers to Realizing Trust Property Independence Due to the lack of a systematic and friendly top-level institutional design for family equity trusts within China's company law, trust law, securities law, and tax law, trust property independence remains inadequately backed. For an extended period, this vacuum in equity trust property registration, coupled with inconsistent judicial standards and lack of formalized operational rules, has imposed significant barriers on the direct transfer of equity into trust: on one hand, the lack of clarity regarding property ownership under the trust structure hampers external disclosure of trust property attributes through registration; on the other hand, the ambiguity of ownership gives rise to unclear boundaries of trustee responsibilities and risk concentration among trust subjects, directly impacting the application of the principle of trust property independence. Due to the absence of registration as a legal verification and segregation medium, the boundaries of trust property can easily blur with the client's personal assets and the trustee's inherent assets, complicating the judicial identification of trust property independence and thus failing to fulfill effective risk isolation.

IV. Paths to Resolve Practical Challenges and Suggestions for Institutional Improvement A. Suggestions for Fit in Model Selection For many listed companies, when establishing equity family trusts, choosing the "fund family trust + SPV" model can avoid regulatory scrutiny stemming from multi-layer structures. In practice, Opple Lighting has successively adopted this model, presenting a relatively successful template. Firstly, a fund trust is established: Ma Xiuhui (as the client) and Guangda Trust (as the trustee) set up the trust, with trust documents explicitly outlining the trust fund's purpose as acquiring a 99.9983% partnership interest in Shanghai Fengyue Enterprise Management Partnership, with the trust beneficiaries being Ma Xiuhui’s family members (primarily her two children). Subsequently, the partnership interest transfer is completed: Guangda Trust and Ma Xiuhui sign the transfer agreement for the 99.9983% partnership interest in Shanghai Fengyue and complete the business registration change, formalizing this part of the partnership interest as trust assets. Given that Guangda Trust is a limited partner and Zhongshan Opple (holding a 0.0017% share) is the general partner, Ma Xiuhui retains effective control over Shanghai Fengyue. Finally, the equity is placed in the family trust: Ma Xiuhui transfers her 1.01% equity in Opple Lighting to Shanghai Fengyue, successfully positioning this listed company equity into the family trust.

This model complies with regulatory requirements for "clear equity," effectively reducing transaction costs. Additionally, listed companies should pay attention to compliance in information disclosure; Opple Lighting actively engaged in disclosure during its family trust implementation, publishing "Equity Change Announcements" to clarify the relationship of concerted action between the trust and the client, thus avoiding being labeled as "regulatory evasion."

For unlisted companies, a wider array of models can be employed; direct holding models may be simpler for companies with uncomplicated management of target equity and employee stock incentive needs. For companies that wish to achieve separation, distribution, and inheritance through trusts while maintaining flexible operational and decision-making control for the client and their family members, holding equity through limited liability companies or limited partnerships is an ideal choice. Additionally, unlisted companies can leverage the opportunity from the amended "Company Law" to agree upon "special rules for equity trust transfer" within their articles of association to simplify the equity transfer process.

Compared to listed companies, unlisted companies enjoy greater flexibility in selecting equity trust models, adapting different structures based on their needs: for non-listed companies with straightforward equity operation management and existing employee stock incentive plans, the direct holding model is the preferable choice—as it eliminates the need for complex intermediate entities, allowing trust parties to hold target company equity directly, simplifying equity management processes, avoiding redundant responsibilities caused by multi-layer structures, while clearly defining the scope and rights of employee incentive brackets via the trust mechanism. This minimizes the operational difficulties of incentive plans, resulting in a more straightforward structural framework conducive to daily operations and regulatory compliance.

Additionally, non-listed companies may also utilize the revision of the "Company Law" to adapt their articles of association to include provisions for "special rules for equity trust transfer"—for example, clarifying the activation conditions for equity trust transfer, pathways for expedited registration processes, and exceptions for preferential purchase rights of other shareholders—thus mitigating procedural barriers within conventional equity transfer protocols and further reducing operational costs associated with establishing equity trusts and transferring property, enhancing efficiency in model implementation.

B. Defining the Scope of Client Rights Retention The core purpose of a family business client establishing an equity family trust is to achieve legal wealth inheritance and maintain family control; if they engage in fraud by retaining rights, the validity of the trust should be legally denied. The rights retained by the client can be limited to "non-core control rights," specifically including rights to information about trust affairs, rights to adjust beneficiaries, and rights to dismiss trustees. There are views that reserving certain powers by the client may jeopardize the independence of trust property, allowing creditors of the client trustee to enforce claims upon trust assets. A "red line" has been offered indicating that clients can freely retain important rights such as methods of utilizing trust property and altering beneficiaries or beneficiary rights without compromising trust property independence. However, should the client freely allow any individual to become a beneficiary and directly distribute trust benefits, they would be exercising complete control over the trust, rendering the trust almost indistinguishable from a revocable trust.

Clear cases of clients exceeding this red line, resulting in the trust being pierced, are frequently encountered in practice, such as Zhang Lan retaining direct control over trust assets after they were established and acting multiple times as the sole signatory to transfer trust funds for purposes like buying an apartment in New York or swiftly transferring large amounts before and after asset preservation orders were issued. The recent judicial ruling in Hong Kong determining that Xu Jiayin’s trust actions constituted fraudulent transfers underscores the pressing need to observe the red line preserving asset independence.

In the actual operations of equity family trusts, for most clients establishing such trusts, retaining investment management rights is commonly sought, whereby clients may clarify their advisory role regarding investment decisions in the trust document. Specifically, clients can provide the trustee with recommendations, market information, or directional guidance concerning investments; however, the ultimate judgment and decision-making power for trust property investment remains with the trustee, who acts independently in accordance with the trust’s objectives and their duty of caution. This approach allows clients to express reasonable and necessary opinions regarding the company’s operational development.

C. Trust Property Protection Systems 1. Establishing an Equity Family Trust Registration System Due to the lack of effective implementation in the past for registering equity held as trust property, on April 10, 2025, the Beijing office of the National Financial Supervision Administration and the Beijing Market Supervision Administration jointly issued a notice titled "Notice on Carrying Out the Registration of Equity Trust Property (Trial)" (Jing Jin Fa [2025] No. 40), clarifying that equity in limited liability companies registered in Beijing can apply for equity trust property registration. On April 16, 2025, CITIC Trust, as the trustee, completed the equity trust property registration for "CITIC Trust – Special Service Trust for the Bankruptcy Reorganization of Dongfang Yuyuan" at the Chaoyang District Market Supervision Administration in Beijing, obtaining a business license denoting equity trust product information. This registration marks the nation's first equity trust property registration, symbolizing the first successful implementation of equity trust property registration in Beijing, thereby clarifying trust property attributes through the business registration public disclosure mechanism and providing a practical model for the standardized development of equity trust business. However, due to the lack of clear regulations in regions outside Beijing, in current practice, all subjects should preserve comprehensive trust documents and payment receipts that ensure the legality of trust purposes and independence of trust property to prevent the "pollution" of trust property.

2. Improving the Trust Tax System Currently, China’s tax system for equity trusts faces issues like ambiguities in regulations and unreasonable tax burdens. At the establishment stage, due to failing to distinguish between "transaction transfers" and "non-transaction transfers," clients transferring equity to trustees might be taxed on personal or corporate income tax and stamp duties, significantly inflating establishment costs contrary to the essence of non-transaction transfers of trust property. At the continuation stage, the problem of double taxation is prominent: dividends generated from trust properties first incur corporate income tax from trustees and, upon distribution to beneficiaries, are subject to individual income tax; furthermore, without a clear "beneficiary tax principle," some regions may tax undistributed profits directly to the trust, exacerbating burdens. Improvements could be rolled out in two phases: at the establishment stage, clarifying that equity trust transfers constitute "non-transaction transfers," exempting clients from personal and corporate income tax upon providing trust registration documents while only charging stamp duty, thereby lowering the establishment threshold. During the continuation stage, fully implementing the "beneficiary tax principle," which mandates that trust income is taxable only when distributed, avoiding double taxation; borrowing from the U.S. "Internal Revenue Code," accumulated earnings could be taxed at higher rates while distributed earnings are taxed based on individual beneficiary rates, employing a rate differential to mitigate tax evasion.

V. Conclusion The challenges faced by equity family trusts in transaction models and structures essentially reflect the mismatch between institutional supply and practical demand. China’s equity family trusts are gradually seeking development paths that fit the domestic market. In the future, revisions of the "Trust Law" could clarify trust property rights, improve registration systems, optimize tax policies to lower transaction costs, and refine regulatory frameworks to balance compliance requirements with innovation demands. Only through comprehensive institutional improvement and practical exploration can equity family trusts emerge as core tools for family enterprise inheritance, ultimately achieving the dual goals of "sustaining the family business" and "ensuring stability in capital markets."