Wedding planning

Friday, 01 February 2013
Marital property and succession in China.

The phenomenal growth in the number of wealthy entrepreneurs in China has led to surging demands for wealth and estate planning.

For that reason, this article seeks to provide an overview of the Chinese laws pertaining to marital property and succession. Through their Soviet legal heritage, Chinese marriage and succession laws embrace the civil-law approach, although adjustments have been made to reflect traditional cultural values and evolving family dynamics in China.

Community property and nuptial agreements

In the absence of nuptial agreements, assets obtained by spouses during their civil marriage fall within joint or community property, to which both spouses have equal rights, irrespective of title registration in one only (article 17, Marriage Law 2001). However, since the rights of non-titular owners may be defeated by bona fide purchasers, they are best advised to have their names placed in the title documents.

The definition of community – as opposed to individual property – has evolved after three judicial interpretations of the Marriage Law, issued in 2001, 2003 and 2011. Community property now includes the following properties acquired during marriage: salaries and bonuses; earnings from production, business, individual property and intellectual property rights (but not ownership of such listed properties themselves if they were acquired before marriage); inheritance or gifts not designated for one spouse; and housing allowance, endowment insurance and retirement benefits actually obtained or legally payable.

In contrast, individual property includes ownership rights of property acquired before marriage; medical compensation and disability allowance; gifts or inheritance designated for a particular spouse; a spouse’s daily necessities; and, significantly, real estate purchased in a spouse’s name by funds provided by that spouse’s parents (on the basis that it is a deemed a gift to that spouse only).

Significantly, the Marriage Law 2001 allows parties to enter written agreements before or during marriage to determine their respective share of part or all of their properties, be they separately owned by them before marriage or acquired during marriage as individual or community property. Such nuptial agreements also bind knowing third-party creditors, such that if the agreement provides for separate ownership, creditors of a spouse may only exert their claims against their individual property. This new freedom has sparked interest in and use of nuptial agreements among newlyweds in China, especially in Shanghai and Beijing.

Division of community property on divorce

On divorce, article 39 of the Marriage Law provides that community property is to be distributed in accordance with any agreement to be reached by the divorcing couple, failing which the Chinese People’s Court will order distribution after taking into account practical circumstances relating to the property and the rights and interests of the child and wife. In practice, courts will always seek to mediate before resorting to mandatory orders to distribute marital property. The 2003 judicial interpretation of the Marriage Law also lays down specific rules of distribution pertaining to capital contributions of community property made in the name of one spouse to properties such as houses, limited companies, partnerships and sole-investor enterprises. Moreover, notwithstanding any agreement as to the distribution of property before or after a divorce, a spouse must use their individual property to, first, compensate the other for services in rearing children, caring for the elderly in the family and supporting their job (article 40, Marriage Law); and, second, provide help to the other spouse in financial difficulty, which is defined as being homeless or unable to maintain basic living standards in their place of residence. To protect a spouse who has agreed to property distribution as the result of duress or concealment of property by the other spouse, the former may, within one year after the distribution, petition the court for redistribution of property. The court may order a smaller or no share of the community property for the wrongdoing spouse.

Wills and succession

Concepts of community property are relevant not only when a married couple divorce, but also when one of them passes away. This is because, as in other civil-law jurisdictions, the estate of a decedent comprises the decedent’s individual property and half of their community property (articles 3 and 26, Succession Law 1985).

Succession in China may be intestate or by will. The default rules in intestate succession provide for equal division between heirs in the first order (spouse, children and parents), failing which by those in the second order (siblings, maternal and paternal grandparents), bearing in mind the heirs’ financial needs and their past services in maintaining the decedent. For this purpose, children include legitimate and illegitimate children (including unborn ones), adopted children and stepchildren that have been supported by the decedent.

Individuals may also execute wills, which may take four alternative forms: notarial wills; wills written by the testator themselves or by someone on their behalf; wills in sound recording; and nuncupative wills (articles 16 and 17, Succession Law). Except for notarial and self-written wills, all other forms require two or more witnesses, who cannot be heirs or the creditors of heirs. Of these available forms, clients are best advised to execute notarial wills where possible. These are to be executed by the testator in person at the relevant provincial branches of the notarial offices. The procedures for notarial wills may be found in the Detailed Rules on Will Notarisation 2000. Where an individual owns assets in different Chinese provinces, it is common to execute a will in each of those provinces, even though it is not required by law or regulation.

A valid and effective will governs the distribution of the decedent’s estate, subject, among other things, to, first, the need to set aside a necessary share for heirs with no ability to work or source of income (at the level needed to maintain basic living standards in the province where the relevant heir resides); second, the disinheritance of heirs who murder or abandon the decedent; and, third, legacies promised under legacy-support agreements entered into by the decedent with another party whereby they agree to make a legacy to the latter in consideration for support and maintenance during their lifetime.

Unlike common-law jurisdictions, when succession opens, ownership of the decedent’s estate passes directly to the heirs, who inherit subject to the obligations attached to the relevant property unless they renounce the inheritance within a prescribed time. Where testate succession is concerned, the executor of the will is a statutory agent responsible for administering the estate. For heirs to obtain their inheritance, the executor of the will or, if there is no will, the heirs themselves, should present relevant documents such as the will (if any), the death certificate, proof of identity of the heirs and title deeds of property to the regional notarial office to obtain a certificate of inheritance. They could then present the certificate to registration authorities or banks to have the assets transferred to the heirs formally.

Foreign elements and applicable law

Where foreign elements are involved, the Law on the Laws Applicable to Foreign-Related Civil Relations 2011 applies to determine the governing law for marital property, succession and the administration of estates. For example, without a choice of law, the laws at the common habitual residence of the couple shall govern their property relations. Without common habitual residence, the law of their common nationality shall apply (article 24). Succession of immovable property is governed by the lex situs, whereas that of movable property is governed by the laws at the habitual residence of the decedent at the time of death (article 31). The laws at the locality of an estate shall apply to the administration of the estate.

Accordingly, if a Chinese citizen owns real estate, say in Hong Kong, succession of that estate will be governed by Hong Kong law. Conversely, as far as Chinese private international law rules are concerned, whether the owner of real estate situated in China is a Chinese citizen or not, and whether they habitually reside in China or not, succession of such property is governed by Chinese law. If the owner wishes to dispose of it by a will executed in a foreign jurisdiction, the will should be notarised in the relevant Chinese embassy overseas for it to have effect in China.

If a foreign citizen who is habitually resident outside China owns movable property (such as deposits in a bank account) in China, succession of their proprietary rights to the bank account will be governed by foreign law, whereas the procedure for transferring those rights to the heirs will be governed by Chinese law. More specifically, the decedent’s foreign will needs to be notarised (for example, by the relevant Chinese embassy) and presented to the regional notarial office in the place where the bank account is situated to obtain a certificate of inheritance. The foreign executor may appoint an agent in China (such as a lawyer) to act on their behalf in China, but the power of attorney will also need to be authenticated in the home country or attested to by the relevant Chinese embassy overseas.

In light of these rules, Chinese citizens and foreign residents who may also own assets in China might wish to make use of the opportunities available under Chinese law to make voluntary arrangements for their marital property and the succession of their estate, or the default Chinese rules might apply to them.

Author block
Lusina Ho

Lusina Ho is Harold Hsiao-Wo Lee Professor in Trust and Equity at the Faculty of Law, University of Hong Kong.

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