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Trusts in Hong Kong: Establishing and Managing Trust Structures
Trusts are a well-recognised and understood concept in common law jurisdictions (including Hong Kong) and date back centuries. In Hong Kong, the establishment, management and administration of trusts is governed by the Trustee Ordinance (Cap. 29) (the “Trustee Ordinance”) and the common law. At its most basic level, a trust is a tripartite relationship between the settlor, the trustee and the beneficiaries.
The settlor is the person who transfers legal title and control of the assets to the trustee (i.e. he/she is the person who settles the assets on trust). Upon such transfer, the trustee becomes the legal owner of the assets that are settled on trust and holds these trust assets for the benefit of the beneficiaries (i.e. the beneficiaries). There is a separation between legal and beneficial ownership.
Key Characteristics of a Trust
Arguably, the most important characteristic of a trust is the separation of legal ownership (trustee) and beneficial ownership (beneficiary). Upon establishment of a trust, the settlor transfers the legal and beneficial title of the assets to the trustee who in turn holds the legal title (legal ownership) of these assets on behalf of and for the benefit of the beneficiaries who have beneficial ownership or interest. The beneficiaries do not hold legal title to the assets that are settled on trust.
The trust deed together with the Trustee Ordinance and the common law rules on trusts, govern the operation and management of the trust. The trustee must discharge its functions and powers strictly in accordance with the trust deed and applicable law and owes fiduciary duties to the beneficiaries. Additionally, the trustee must act in the best interest of the beneficiaries, act impartially as between the beneficiaries, avoid conflicts of interest and must exercise care and skill.
Upon creation of a valid trust, the trust assets no longer form part of the settlor’s personal estate (nor do they form part of beneficiaries estate in respect of a discretionary trust) as the legal title to the trust assets is with the trustee.
A protector can be appointed under the trust deed. The role of the protector is to provide for ‘checks and balances’ on the exercise of certain powers by the trustee and to supervise the trustee. This is achieved by granting the protector certain powers under the trust deed. Typically, the protector will have the power to appoint and remove the trustee and will be given a veto vote over certain decisions of the trustee. There is no legal requirement to appoint a protector, however, the settlor may appoint a protector when establishing the trust should he/she wish to do so. The appointment of a protector gives the settlor a degree of comfort that the trustee is being supervised and that there are ‘checks and balances’ on the exercise of certain powers by the trustee.
Creation of a Trust
To establish an express private trust, three certainties must be present. These are:
- (a) сertainty of intention – the settlor must have a clear intention to create the trust and must have demonstrated that intention (i.e. that a trust was intended to be created);
- (b) certainty of subject matter – there must be certainty in respect of the property/assets that are being settled on trust; and
- (c) certainty of object(s) – the beneficiaries of the trust must be readily ascertainable; (together, the “Three Certainties”)
The Three Certainties must be present to create a valid enforceable trust. For example, where there is no proper alienation of the trust property, or where the settlor exercises too much control over the trust, this will jeopardise the integrity of the trust and leave the trust vulnerable to challenge. Some settlors are not comfortable transferring legal ownership of their assets to a trustee and relinquishing control over those assets. To this extent, it is common for settlors to reserve certain powers for themselves (commonly known as reserved powers) including the power of investment. However, where the settlor does have reserved powers, care should be exercised to ensure that the exercise of these powers by the settlor does not jeopardise the validity and integrity of the trust.
In Hong Kong, the Trustee Ordinance makes it clear that where the settlor reserves the power of investment, a trust is not invalid only because the settlor reserves any or all powers of investment or asset management functions under the trust. However, in Hong Kong, the Trustee Ordinance does not provide for the reservation of other powers such as the power to appoint and removal of trustees or beneficiaries.
Benefits of a trust
A trust that is carefully structured and established, well maintained and where the Three Certainties are present, provides a number of advantages including asset protection, succession/estate planning (for example, it avoids the need to apply for probate upon the death on the settlor), confidentiality and potential tax benefits.
Hong Kong law recognises the separation of ownership. In this respect, Hong Kong law recognises that the assets held by the trustee do not form part of the trustee’s beneficially-owned assets and if the beneficial interests are discretionary in nature (i.e. the trust is a discretionary trust), typically, the beneficiaries do not have any vested or fixed interest in the trust assets. Therefore, a validly created trust can be a useful asset protection vehicle. However, this is always subject to specific creditor remedies and will be circumstance specific.
Hong Kong as a trust jurisdiction
Hong Kong’s legal system is based on common law and therefore has a well-established set of trust laws. Additionally, professional trustees are regulated in Hong Kong. Any professional trustee who by way of business provides professional trustee services in Hong Kong must be licensed under the Trust and Company Service Providers regime which is administered by the Companies Registry under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615).
Under the Trustee Ordinance, a trustee is under a statutory duty of care when exercising certain powers, including the power of investment, exercising supplementary powers to the powers of investment, and exercising the power to make deposits.
In addition to the above, in Hong Kong, rules that limit the lifespan of trusts have been abolished. This means that a settlor can settle a trust that can continue indefinitely. A lifetime transfer of movable property into a Hong Kong trust (provided certain conditions are met) is also permitted and is protected against foreign forced heirship rules.
Where Charltons can help
Charltons can assist in respect of all aspects of establishing a trust and frequently works with third party trustees and service providers.
The most common forms of trusts in Hong Kong are:
- (a) a private discretionary trusts (with or without reserved powers);
- (b) unit trusts;
- (c) fixed trusts; and
- (d) charitable trusts.
Charltons can assist with establishing any of the aforementioned trusts and can also provide professional trustee services to any one or more of the aforementioned trusts.
In establishing a trust, Charltons’ scope of work will include:
- advising on the structure of the trust;
- drafting the trust deed;
- drafting the required documents in relation to the transfer of assets to the trust from a Hong Kong law perspective (for example, bought and sold notes and instruments of transfer); and
- advising on the transfer of assets into a trust from a Hong Kong law perspective.