Paul L. Caron

Thursday, July 16, 2020

Gergen: Stateless Dynastic Wealth And China

Mark P. Gergen (UC-Berkeley), The Possibility for Stateless Dynastic Wealth and the Case of China:

Part I of this paper explains how wealth managers have modified the trust to create the possibility for stateless dynastic wealth. By this I mean wealth that is held by a family through a trust that is established in a haven state to eliminate the power of other states to regulate and oversee transmission and management of wealth and to make it very difficult for courts in another state to levy against wealth on behalf of private creditors. These structures also permit legal tax avoidance if income and wealth is not attributed to family members. And they facilitate tax evasion by not reporting foreign income and wealth. I use the relatively novel structure of a perpetual purpose trust to illustrate.

Part II is a case study of China.

It draws on multiple sources of information to estimate the potential demand for wealth preservation services in China and the current extent of the use of such services. I selected China as a case study in part because it was in the remit of the conference for which this paper was written, which was sponsored by the Chinese Journal of Comparative Law. This was a happy coincidence. Several factors make China an interesting case study. Private wealth has grown exponentially in China in the last fifty years, creating large potential demand for wealth preservation services. But China has been slow in developing internal legal structures like family trusts that would enable wealth holders in China to preserve wealth using Chinese law and Chinese entities. This creates an incentive to move wealth outside of China in addition to the usual incentives canvassed in Part I. Political risk adds to the incentive to move wealth outside of China. But it seems that relatively little wealth has moved outside of China compared to other wealthy states.

Some of this lack of uptake of wealth management services may be attributed to unfamiliarity with such services. I speculate that a significant part can be attributed to restrictions imposed by China on the movement of capital. These restrictions increase the cost of moving capital out of China. This would imply is that there is not strong intrinsic demand for the more exotic services wealth managers can provide, such as the structure described in Part I. This is consistent with the experience in the U.S. where a change in tax law in 1986 is thought to explain an increase in demand for perpetual trusts. If this speculation is correct, then China would expect there to be a significant increase in capital export if it liberalized capital accounts and increased taxes on wealth. And, if the U.S. adopted significant wealth taxes such as have been proposed by some progressive Democrats, then we should expect wealthy individuals to respond by increasing use of structures such as the structure described in Part I.

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