Families have been using trusts to preserve and manage their wealth for the benefit of their heirs for centuries. At its simplest, a trust is an arrangement whereby property or assets are transferred from one person (the ‘settlor’) to another person (the ‘trustee’) to hold the property for the benefit of a specified list or class of persons (the ‘beneficiaries’).
The practical advantages of a trust are gained from the distinction that is drawn between the formal or legal owner of property, the trustee, and those people that have the use or benefit of the property, the beneficiaries. Unlike corporate vehicles, the lack of rigid formal requirements for the creation and operation of trusts, and the tremendous flexibility of trust instruments, make them uniquely useful for estate and succession planning.
Although many of the tax benefits that were associated with trusts have been eroded in recent years by anti-tax avoidance legislation, they still offer great advantages – particularly for individuals who are changing, or planning to change, their domicile, residence or citizenship; those with families resident abroad; those seeking asset protection; and those who wish to dispose of their estate on death freely and without recourse to a lengthy and expensive probate procedure.
People unfamiliar with the trust concept are often concerned at the idea of transferring ownership of their property to a trustee. This concern can be alleviated if the trust concept and the distinction between legal and beneficial ownership is properly understood and it is clear that the trust is governed by a reliable trust law that can be enforced in a reputable jurisdiction.
Hong Kong’s trust regime was comprehensively modernised by the Trust Law (Amendment) Ordinance 2013, which was specifically designed to improve the competitiveness of Hong Kong’s trust services and attract settlors to set up trusts in Hong Kong.
Importantly, new provisions were introduced to enhance protection for beneficiaries and to provide settlors with reserved powers in respect of investment or asset management functions. Further changes provided statutory protection from foreign laws of inheritance – such as forced heirship rules – and abolished the previous rules against perpetuities and excessive accumulations of income in order to encourage settlors to establish perpetual trusts. Trustees were also given enhanced default powers to facilitate the effective administration of trusts.
Placing the shares of a non-resident (offshore) company within a Hong Kong trust can offer significant advantages in respect of income and capital gains tax during the settlor’s lifetime, as well as potential inheritance tax charges on death.
Assets placed in trust also enjoy enhanced protection from future financial difficulties, divorce proceedings or litigation, and can be passed on to the next generation according to your wishes without the disruption, delays, costs and loss of confidentiality associated with obtaining probate under a will.
Generally the settlor of a Hong Kong trust need not be Hong Kong resident, there is no minimum trust fund, trust instruments do not require registration and the laws of forced heirship do not apply.