The family trust is not an infallible "safe haven" for wealth.

Originating from Anglo-American legal systems, family trusts are widely used legal tools for the succession of family-owned businesses globally. According to the "Trust Law of the People's Republic of China," a trust is defined as "an act where the trustor, based on trust in the trustee, entrusts their property rights to the trustee, who manages or disposes of the assets in their name for the benefit of the beneficiaries or a specific purpose, according to the trustor's wishes." Family trusts, as a special form of trust, generally refer to the transfer of family assets by family members as trustors to a trustee, who then manages these assets for the benefit of family members or for a specific purpose based on the trust agreement, and transfers the assets to designated beneficiaries under specified circumstances.

Family trusts primarily serve three core functions in wealth succession: first, wealth succession and planning: by clearly defining asset distribution rules in contracts, family disputes over inheritance can be avoided, ensuring intergenerational transfer of wealth. Second, risk isolation and asset protection: theoretically, assets transferred into a trust are separated from the personal debts and corporate risks of the trustor, creating a legal firewall. Third, tax planning and privacy protection: by leveraging favorable tax policies in certain offshore jurisdictions, family trusts can optimize cross-border tax costs under compliant circumstances, while also safeguarding family wealth information.

However, in practice, many family business owners, due to incomplete understanding of trust rules or violations, have turned this tool, regarded as a "wealth safe," into a "wealth trap." In September 2025, the Hong Kong High Court's ruling on the Xu Jiayin family trust clearly revealed that family trusts are not a universal "safe haven" for wealth; if misused, their protective functions may be undermined by law.

The Collapse of Xu Jiayin's Family Trust

The $2.3 billion family trust established by Xu Jiayin before the full explosion of the Evergrande debt crisis was previously viewed as a key strategy for preserving his wealth. Public information shows that the trust structure was set up in 2019, with funds mainly sourced from over 50 billion yuan of dividends Xu Jiayin and his wife received from Evergrande from 2009 to 2022. These funds were injected into the trust after being transferred layer by layer through offshore companies, with his two sons designated as beneficiaries. The setup for his eldest son, Xu Zhijian, specified that he could "only receive benefits, with the principal reserved for the next generation," aimed at ensuring that the eldest son and his descendants remain well-provided for, while maintaining stable, long-term succession of family wealth.

However, this seemingly meticulously designed trust structure was ultimately ruled ineffective by the Hong Kong High Court based on the "Fraudulent Transfer Ordinance" and related legal principles. The reasons for the trust’s invalidity point directly to three foundational aspects of its lawful operation, which warrant in-depth analysis.

First, questionable motives for establishment: fraudulent transfers to evade debts. The Hong Kong court found that Evergrande had buried a financial black hole as early as 2017, yet Xu Jiayin, aware of the looming crisis, rushed to transfer assets to the family trust in 2019 just before the crisis erupted. The ruling indicated that this behavior clearly constituted "fraudulent asset transfer." According to the Hong Kong "Fraudulent Transfer Ordinance," if the primary purpose of establishing the trust was to "deliberately harm creditors’ interests," the court may deny the trust’s validity outright.

Simultaneously, Xu Jiayin finalized a divorce with his ex-wife Ding Yumei and transferred part of his assets to her name. The Hong Kong court established that this divorce "lacked a genuine basis of emotional breakdown and was specifically designed to evade claims from Evergrande’s creditors." The timing of these actions, occurring within the critical period leading up to the Evergrande debt crisis, further reinforced the court's judgment regarding Xu Jiayin's malicious debt evasion motives.

Second, questionable sources of funds: constructing a "castle in the air" with crisis funds. One of the foundational aspects of trust legality is the legitimacy of the source of trust property. Public information indicates that the $2.3 billion in Xu Jiayin's family trust primarily stems from dividends received from Evergrande. However, the dividends from 2020 to 2022 showed clear issues, as Evergrande was already exhibiting signs of debt default, with significant overdue commercial bills in 2021 exceeding 200 billion yuan. Given that the company was in a state of loss or potential loss, these dividends likely represented misappropriated funds from creditors’ investments, suppliers’ payments, and homebuyers’ deposits, transformed into illegal funds through "fictitious profit accounting." Consequently, the Hong Kong court ruled that a trust established with such funds lacks a legal foundation for protection.

Third, lack of independence: "nominal transfer with actual control" renders the trust effectively null. The core legal feature of a family trust is the trustor relinquishing substantial control over the assets; however, Xu Jiayin's actions completely contradicted this principle. Evidence disclosed by the Hong Kong court revealed that despite transferring assets into the trust, Xu Jiayin retained three core rights: first, the right to make investment decisions regarding trust assets, allowing him to directly instruct the trustee on buying or selling stocks and bonds; second, the right to change beneficiaries, enabling him to arbitrarily adjust the distribution proportions among family members; and third, the right to intervene in asset disposal, at one point directing the trustee to apply some trust funds to settle his personal related debts.

The ruling clearly stated: "Regardless of how the trust structure is packaged, as long as the trustor retains substantial control over asset management, the independence of the trust does not exist." Ultimately, the court invoked the "substance over form" principle (which asserts that no matter how complex the trust structure, if the trustor can practically control the assets, it does not qualify as a true independent trust) and the "anti-fraud principle" (which prohibits debtors from maintaining significant debts while using trusts to preserve family wealth), bringing the trust assets into the debt repayment scope.

In summary, the Xu Jiayin case reveals a key legal perspective: the protective function of family trusts is not absolute. When there are flaws in the motives for establishment, the sources of funds, or independence, the legal firewall may become vulnerable.

Five Major Risks of Family Trusts

The case of Xu Jiayin is not isolated; combining public cases such as that of Qiaojian Nan’s Zhang Lan with relevant provisions of trust law and civil code, we can systematically outline the five major risks of family trusts. These risks arise not from the tools themselves but from the trustee's disregard for the rules and misjudgment of the legal environment.

First, the risk of legality of funding sources: trusts with "tainted sources" lack legal basis. A core prerequisite for establishing a trust is the legality of the assets. If the source of funds is questionable, even a complex structure is unlikely to escape legal denouncement. Article 11 of the Trust Law stipulates: a trust established by a trustor using illegal property or property prohibited by law is invalid. In practice, two typical scenarios exist:

1. Abnormal dividends during corporate crises. In the Xu Jiayin case, dividends between 2020 and 2022 are considered "crisis funds," with timing clearly conflicting with the company's financial status. Such situations are not uncommon in private enterprises, where some owners transfer assets into trusts through dividends even when their companies have faced difficulties and accumulating debts, a practice easily deemed harmful to creditors’ interests.

2. Trusting gray profits. Some private business owners have directly placed off-the-books profits that haven’t been taxed into trusts, which similarly faces legal risks. According to trust laws and anti-money laundering regulations, financial institutions must strictly examine the sources of assets when receiving applications for establishing family trusts and require clients to provide reasonable explanations and corresponding proofs of the asset sources included in the trust. If they cannot prove the legality of the funds, the trust may be deemed invalid.

Thus, clarifying the sources of trust assets is critical. It necessitates a thorough review of past wealth accumulation histories, an inventory of current assets and liabilities within the family or business, and an assessment of potential future risks.

Second, the risk of lack of trust independence: covert control equals dismantling defenses. Many family business owners wish to enjoy the benefits of risk isolation while also retaining control, leading to paradoxical actions that often result in trust invalidation. The Zhang Lan family trust case is highly representative: In 2018, to evade debts, Zhang Lan transferred relevant shares into an offshore trust but retained voting rights via a "proxy holding agreement" and instructed the trustee to distribute dividends as per her directives. When creditors sought compulsory execution in 2022, the Hong Kong court found her covert control over trust assets, ultimately ruling that the trust assets essentially belonged to Zhang Lan and freezing them.

In practice, manifestations of covert control vary widely, including but not limited to: appointing trusted family members as trustees, setting "veto rights" in the trust contract (where significant decisions require the trustor's consent), issuing investment directives to trustees through informal channels, and confusing trust accounts with personal accounts. These practices may all be identified by courts as constituting "lack of independence," thereby leading to the failure of the trust's asset isolation capability.

Third, risk of illegal motives for establishment: evading debts and responsibilities will ultimately be legally dismissed. The legitimate use of a family trust is for prior succession planning, not for post-factum evasion of existing debts. Article 12 of the Trust Law states: If a trust is established by a trustor to harm creditors’ interests, creditors have the right to apply to the people’s court for the revocation of that trust.

From judicial practice, courts judge the illegality of motives based on several criteria, including: a high degree of overlap between the timing of trust establishment and debt occurrences, such as establishing a trust shortly before a debt crisis manifests or litigation initiates; unreasonable asset transfer pricing, such as significantly undervaluing or gifting assets to the trust; the trustor lacking a reasonable succession plan explanation, failing to align with the family's actual situation; and an imbalance in the proportion of asset transfers relative to the remaining assets of the trustor, resulting in insufficient remaining assets to cover known debts.

The Trust Law also specifies a time limitation for creditors to apply for revocation of trust, requiring them to exercise their rights within one year of knowing or being expected to know the grounds for revocation; otherwise, they forfeit this right after exceeding the exclusion period. This provision not only protects creditors’ interests but also provides stability guarantees for legitimately established trusts.

Fourth, risks related to cross-jurisdictional execution and legal applicability: offshore trusts may become asset wastelands. Many business owners tend to establish trusts in offshore jurisdictions (such as the Cayman Islands, British Virgin Islands, Singapore, etc.), neglecting the legal conflicts and enforcement challenges that can arise in cross-jurisdictional arrangements. Such arrangements generally face three types of risks:

1. Conflict of applicable law. Offshore trusts are typically governed by the laws of the jurisdiction where they are established; however, when courts in the trustor’s country or the country where the main assets are located render judgments inconsistent with those in the jurisdiction where the trust was established, judicial conflicts may arise. While the Hong Kong court ruled on Xu Jiayin's family trust, whether a trust established in the U.S. will be compromised remains dependent on the level of evidence acceptance by U.S. courts from Hong Kong liquidators.

2. Political interference. The legal environment of offshore regions may be influenced by international political and economic situations, especially in cases involving large-scale cross-border debt disputes, as the asset-holding country may adopt extraordinary measures for various reasons, increasing uncertainty regarding asset protection.

3. CRS (Common Reporting Standard) tax information exchange risk. With the advancement of CRS, offshore trust assets must be reported to tax authorities in the trustor's country. In 2022, a high-net-worth individual faced tax recovery and penalties exceeding 30 million yuan for failing to report their $120 million trust in Switzerland.

Additionally, the high entry barrier of offshore trusts also hides risks, as annual management fees for trust companies in places like Switzerland and Singapore are generally high. If the asset appreciation rate is lower than the management fee rate, it may lead to long-term asset shrinkage.

Fifth, risks associated with third-party management and asset depletion: lack of supervision may lead to wealth loss. The operation of family trusts relies on third-party management entities such as trustees and investment managers. Without effective supervision, trust assets risk being embezzled or lost due to poor decision-making. Public cases mainly focus on two scenarios:

1. Misappropriation of funds by trustees. In 2021, a manager of a trust company in Hong Kong misappropriated a client's 50 million yuan trust funds for personal stock trading, incurred losses, and forged investment reports to cover it up. Ultimately, although sentenced, only 20 million yuan was recovered.

2. Losses from poor investment decisions. Trustees might pursue high yields, causing trust funds to be invested in high-risk projects, leading to investment losses. This risk is particularly pronounced when trustees lack sufficient oversight or when the investment decision-making process lacks transparency. For example, trust companies seeking high returns invested the $100 million trust fund left to Elvis Presley’s daughter into high-risk private equity funds, resulting in only about $10 million remaining over 25 years due to investment losses and management fees.

Complicating matters, beneficiaries' rights to knowledge of the trust are often limited. Most offshore trust companies provide only simplified asset reports annually, omitting details on specific investments, making it difficult for beneficiaries to grasp the true status of assets and supervise them effectively.

Offshore trusts are not legal islands.

As a tool for wealth succession, family trusts themselves are neither good nor bad; the key lies in their legal and compliant application. Through an in-depth analysis of the Xu Jiayin case, we can draw the following conclusions:

First, the protective functions of family trusts are relative, not absolute. When flaws exist in the motives for establishing the trust, the sources of the funds, or the independence of the trust, its protective firewall may be breached legally.

Second, offshore trusts are not legal islands for asset protection. With the strengthening of international judicial cooperation and the establishment of frameworks like the CRS for international information exchange, the secrecy of offshore trusts has significantly diminished. In the Xu Jiayin case, Hong Kong liquidators froze $7.7 billion of assets belonging to Xu Jiayin and related parties across 12 countries and regions, indicating a growing capability to pursue assets cross-border in a global context.

Finally, the foundation for the succession of family businesses lies in institutions rather than just tools. Bosch Group has achieved a smooth transition from family control to socialized control through a governance model of "separation of powers,” laying a solid foundation for the century-long inheritance of the enterprise. The success of this model demonstrates that reasonable institutional designs are more effective than relying solely on one tool to ensure the long-term development of family businesses.

For Chinese family enterprises, the Xu Jiayin case and the Bosch model provide profound insights from both positive and negative perspectives: rather than exploiting loopholes in trust structures, it is better to achieve long-term healthy growth of family wealth and the business through lawful operations, compliant architectures, and reasonable institutional frameworks, genuinely resolving the intricate challenges of wealth inheritance.