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Hong Kong Trusts

Hong Kong’s legal system is based on English common law, supplemented by local legislation resulting in a legal system different from the rest of China.

Hong Kong's trust law is based on common law, supplemented by the Trustee Ordinance (TO) and other specific legislation. The law was recently subject to an extensive review and modernisation to bring Hong Kong's trust law and practice in line with best practice in comparable common law jurisdictions.

Hong Kong's New Trust Law
Revisions to trust law, includes changes to the trustee’s duty of care and limitations to trustees’ exemption clause, thus providing greater beneficiary protection.

Settlors have been granted reserved powers to ensure certainty and validity of trusts.  Trustees’ powers have been extended to facilitate effective trust administration.

The application of forced heirship rules have been reduced and the rules against perpetuities and the  accumulation of income have been abolished.

1. Trustees Duties
a. Statutory standard of care. Trustees must act with reasonable diligence and prudence when administering a trust.  A higher standard of skill and care is expected of a paid or professional trustee.

A statutory duty of care requires a trustee to exercise reasonable skill and care having regard to the knowledge and experience of the trustee. 

b. Statutory control on exemption clause. Previously, trustees could exclude liability for breach of trust (except fraud) by exemption clauses in the trust instruments.  Now professional trustees cannot rely on exemption clauses to exclude liability for misconduct or negligence.  The rule applies retrospectively to trusts created before the legislation date.

2. Default Power of Trustees
Trustees’ powers have been extended to ease trust trusts administration in the absence of specific provision in the trust deeds.

a. Power to appoint agents, nominees and custodians. Trustees are subject to a general duty to act without delegating their functions, except when the power of delegation is granted or is necessary. 

The legislation permits trustees to appoint agents, nominees and custodians to exercise their delegable functions; unless prohibited by the trust instrument. 

A distinction is drawn with charitable trusts where only limited functions may be delegated relating to investment or capital maintenance.

b. Power to insure. The restrictions on a trustees’ power to insure has been removed and replaced with a general power to insure and pay premiums from the trust fund, against all risks to market value or full replacement value.

3. Trustees' Remuneration
Professional trustees are entitled to reasonable remuneration from trust funds for their services, even without express provision in the trust deed and if the services could be provided by a lay trustee.

The change will benefit:

A trust corporation including authorised institutions;
Individual trustees acting professionally, except a sole trustee, provided the trustees agree; and
Trustees if remuneration is not expressly prohibited.

Remuneration must be reasonable in the circumstances for the provision of services and incidental to acting as a trustee.

4. Authorized Investments
The default position allows a wider range of authorised  investments to Trustees who now have a free hand to invest in most investment products, except low market cap shares (less than HK$5 billion), irregular dividend shares (less than 3 years dividends in the preceding 5 years) and structured products as defined in the Securities and Futures Ordinance.

5. Beneficiaries Power of Appointment
Beneficiaries with an absolute entitlement to trust assets may appoint new trustees to replace the existing trustees without having to apply for a court order.

6. Reserved Power of Settlors
A trust is no longer invalidated by reason of the settler reserving to himself any or all powers of investment or asset management.  The settlor is now permitted to reserve such powers and a Trustee who acts in accordance with the settlor’s exercise of the power is not treated as being in breach of trust.

7. Provision against Forced Heirship
Certain civil law jurisdictions apply mandatory forced heirship rules, which reserves part of an estate to a class of beneficiaries. Under Hong Kong law a lifetime transfer of movable property to a Hong Kong trust is protected from challenge under any forced heirship rules.

8. Abolition of the Rule against Perpetuities and Accumulation of Income
Rules that limit the duration of trusts have been abolished, making it possible for a trust to continue indefinitely. It is also possible for income to now be accumulated within the trust.

The new rules do not apply to existing trusts only trusts taking effect on or after the commencement of the amended legislation.

Conclusion
The modernisation of Hong Kong's trust law is a major initiative to increase the attractiveness of the jurisdiction to settlors, beneficiaries, families and trustees.  With a clear legal framework and reputable trust services professionals, Hong Kong is one of the leading international trust centers.  

If you would like any further information or wish to discuss this summary in detail, please contact us.