This is a guest article by Jason Tian, a senior partner at Landing Law Offices in Shanghai, China. For more than ten years, he and his team have been offering legal services related to inheritance and estate planning for clients from countries outside China. Find more articles about Chinese inheritance law on his blog, www.sinoblawg.com.
As per request from Ms. Jiah Kim, an American lawyer specializing in cross-border estate planning for her American clients, I am here to summarize Chinese inheritance and estate planning law. Most of this article will cover Chinese inheritance law, for estate planning in China is still in its infancy, and as yet there are few relevant laws.
I. Inheritance Law in China
Inheritance refers to the process of passing the deceased’s estate to heirs or other legatees pursuant to the law, or to the last valid will made by the deceased. So there are two types of inheritance or succession:
- Intestate succession, where the deceased has made no will, and;
- Testate succession, where the succession is carried out according to the terms of the valid will made by the deceased.
But things got tricky when China enacted applicable laws regarding foreign-related civil relationships, as you will see.
1. Intestate Inheritance/Succession
In the case of intestate inheritance, estates transfer to heirs in the following sequence, as determined by Chinese Succession Law:
- First Sequence–Parents, spouse and children;
- Second Sequence–Siblings, paternal grandparents and maternal grandparents.
When any heirs in the first sequence survive the deceased, they are entitled to receive equal shares. When there are no first sequence heirs, then the estate is inherited by the second sequence heirs in equal shares. A court may grant greater shares to certain heirs in some circumstances.
2. Testate Inheritance/Succession
Under Chinese inheritance law, when a valid will is made, it is generally respected. So these estates pass to the beneficiaries designated in the will.
Later, we will discuss making a will in Estate Planning, section II.
3. Estate Administration and Distribution
Whether testate or intestate, the question is how should clients go about the inheritance process to acquire ownership or titles to the assets left by the decedent.
Many countries have probate court proceedings for the purpose of liquidating a decedent’s estate and distributing the assets to heirs in accordance with applicable law and any will left by the decedent. Unfortunately, as of this writing, China lacks this kind of probate process. But China has other ways of conducting inheritance and distribution of estates:
- Inheritance Right Notarization
When the heirs have no disputes, they and other vested parties may appear before the notary officers local to the estate to demonstrate that they are in agreement regarding the division and distribution of the estate. The notary office will then issue notarization documents confirming the heirs’ right to inherit the estate. Heirs can present these documents to relevant entities such as banks, insurance companies, securities brokers, and real estate and corporation registration authorities to affect title transfer for the assets.
Since 2016, notarization of the right to inherit real estate in China is no longer required. Heirs can directly present documents to the real estate authority to prove their right to inherit. Officials review the documents and decide whether the applicants are entitled to the assets. This is a move by the central government to reduce the financial burden of this legal process. Still, all relevant parties must appear before the real estate authority to demonstrate that there are no disputes.
While these options may benefit Chinese citizens, they mean little to foreigners entitled to estates in China because:
- It is too costly and cumbersome to arrange for multiple foreign heirs to appear at the same time before the real estate authority and;
- Real estate authority officials are unaccustomed to laws and rules related to inheritance by foreigners. They may be reluctant to process claims by foreigners and often defer the matter to notary offices.
C. The Courts
When there are disputes between relevant parties, or when proper documentation is unavailable to be presented to the notary office, the way to move forward may be to take the inheritance matter to court.
Estate practitioners in China sometimes complain that lawyers fabricate lawsuits in order to help clients complete their inheritance process, because China doesn’t have a probate-like proceeding. As an example, right now I am advising a client from the United Kingdom regarding a real estate property in Guangzhou, which is not far from Hong Kong. The will left by the client’s mother designated three beneficiaries, but the client has been unable to locate or contact the other two beneficiaries. This prevents us from filing the case with the notary.
4. Applicable Laws
China’s foreign-related civil relationships law from 2011 provides:
Article 31. The laws at the habitual residence of the deceased at the time of death shall apply to legal inheritance, but the laws at the locality of the real estate shall apply to the legal inheritance of real estate.
Article 32. A testament shall be confirmed as duly made if its form conforms to the laws at the habitual residence, of the state of nationality or at the locality of the testamentary acts when the testament is made or at the time of death of the testator.
Article 33. The laws at the habitual residence or of the state of nationality when the testament is made or at the time of death of the testator shall apply to the validity of a testament.
So, in either testate or intestate succession, it is possible that a foreign law may be applied, especially in relation to inheritance of estates that are more properties or personal properties. When a foreign law is applicable to the inheritance process, Chinese notary offices may be averse to working on such cases because they are unfamiliar with the foreign laws, and may be unable to determine whether a beneficiary is entitled to assets under said foreign laws. This is why many cases, even without disputes, wind up in court.
II. Estate Planning in China
The concept of estate planning is new to Chinese people. But it has become increasingly popular in recent years thanks to overseas institutions’ promotion of family asset succession that targets wealthy Chinese clients, and because of the chorus of domestic law firms and family offices.
Unlike common law countries, China possesses few legal instruments for processing a solid estate plan. But because China does not levy estate or inheritance tax, nor does it collect a gift tax, there is less demand for estate planning, which tends to focus on tax savings. However, family business succession is looming large in China, with many first generation entrepreneurs approaching retirement.
What are the legal tools available under Chinese law?
- A Will
You can make a will to pass on your assets in China. But it may not be straightforward. For a foreign citizen with Chinese assets such as real estate or corporate stock, you can write yourself a will and sign and date it. But to ensure clarity and mitigate disputes regarding said will, common practice is to have it notarized.
But if the foreign citizen lacks habitual residence in China, then the validity of their will isn’t governed by Chinese law, so the Chinese notary offices refuse to assist, until or unless the person lives in China for more than a year, establishing their habitual residence in China. Foreign citizens often have to notarize their wills in their home countries. Unless they do so, upon their death, their heirs will have difficulty obtaining an inheritance right notarization from Chinese notaries.
2. A Durable Power of Attorney
A durable power of attorney is commonly used in the United States, the UK and other common law jurisdictions. This document allows others–often family members–to act on their behalf when they become incapacitated or imobile.
Until enactment of the General Principles of China Civil Code in 2017, China lacked a law specifically allowing its citizens to grant Power of Attorney. This new law provides:
Article 33. A major person in full capacity may appoint in writing his or her custodian after consulting with his or her close relatives, other persons or organizations that are willing to serve as his or her custodian. The custodian so appointed shall perform the custodian duties upon the major person losing his or her capacity in full or in part.
But since this is a relatively new development in Chinese law, it remains to be seen how this will be implemented. We anticipate that a POA will be required to be duly notarized at a notary office in order for it to be recognized by creditors, banks, insurance companies or government agencies.
3. A Trust
Chinese Trust Law has been used almost exclusively in financial markets in the past, and at this writing it appears it would serve little if any function for the purpose of estate planning in China. But clients from common law jurisdictions love trusts, which, in their countries, are effective tools in estate planning and family asset protection and succession.
However, if you wish to include your Chinese properties in your trusts, then you should be careful about your choice of trustees. To take advantage of trusts, wealthy Chinese people have begun to create trusts in settlor-friendly offshore jurisdictions.
4. Foundations, Partnership and Other Tools
You may resort to other legal mechanisms to partially achieve your goals in estate planning, such as corporations, contracts, partnerships and foundations.