A Hong Kong Trust can be created with a settlor’s declaration that a trustee holds property for the benefit of a specific person(s) or for a purpose. Then the settlor transfers the property to the trustee. This is basic English common law followed in the United Kingdom, its colonies and territories for centuries. Former colonies adopted English common law into their legal systems like Canada and the United States.
Hong Kong followed English common law and supplemented it with several laws like the Trustee Ordinance of 1934, the Perpetuities and Accumulation Ordinance of 1970.
Then Hong Kong modernized trusts laws to compete with other countries when it enacted the Trust Law Ordinance of 2013. This new law made the following changes:
• Abolished the Rule Against Perpetuity for non-charitable trusts so they can be set up indefinitely (perpetual).
• Protected against forced heirship laws found in other countries by declaring that movable properties will not be subject to foreign inheritance laws.
• A trust cannot be declared invalid when a settlor retains the power of asset management and investment decisions.
• Established clear standards of care by trustees.
• Limited the trustees from exemption of liabilities in order to better protect the beneficiaries. Trustees cannot be exempt from liability for committing fraud, gross negligence or misconduct.
• Provided greater powers for trustees to:
(a) appoint nominees, agents, and custodians [This allows trustees to appoint experts to assist with the management of assets which may be beyond the trustee’s expertise];
(b) obtain insurance for trust properties against damage or loss caused by any events [In the past, trustees did not have the power to purchase insurance for the assets];
(c) have less restrictions for making investments [This provides greater discretion and powers for trustees to actively participate in trust investments]; and
(d) receive compensation when acting in a professional capacity. [Unless a professional trustee services company was hired, there was no mechanism to pay trustees for their time]
Hong Kong Trust Benefits
A Hong Kong Trust obtains these benefits:
• Foreign Owner: The settlor can be from any country along with the beneficiaries and the trust properties can also be located in other countries.
• Tax Savings: The trust can avoid inheritance tax, gift tax, wealth tax, transfer tax, and the beneficiaries can receive income and assets free of income taxes. However, U.S. taxpayers and others in countries taxing global income must report all income to their tax agencies.
• Asset Protection: Trusts assets are beyond the reach of the settlor’s and beneficiaries creditors.
• Probate Avoidance: Trust assets can quickly pass to generations of heirs without disruptions, costs, and loss of confidentiality and privacy due to probate proceedings when assets are bequeathed by a will.
• Control: Hong Kong trust laws allows settlors to retain substantial control over trust assets investments without jeopardizing the legality of the trust.
• Privacy: Since trusts are not registered with the government, there are no public records about them.
• English: As a former British Territory, English is the official second language.
Every trust must contain the word “Trust” at the end of its name. Otherwise, the trust name should not create confusion by resembling a company or corporation’s name.
Creating a Trust
There are three facts which must be present for a Trust Deed to create a valid trust:
1. The settlor must intend to create a trust. [This means that the settlor’s intention is clear that he or she wants to create a trust relationship and not just asking someone to hold onto an asset.];
2. The trust property is clearly identified and can be transferred to a trust. [This means that the property is known and the settlor has the legal capacity to transfer ownership to a trust] and;
3. The beneficiaries must be clearly identified or easily ascertained. [This means that either the beneficiaries are named so there is no confusion with other persons, or “ascertained” which means “to discover with certainty”. An example would be an unborn child who will be ascertained upon birth.]
In addition, the trust properties must be vested in the trustee who holds them in the capacity as a trustee to benefit the beneficiaries. A trust is not created when the settlor asks a third party to merely hold onto a property for a while.
The reason why the document creating the trust is called a “Trust Deed” is because it identifies the settlor’s named properties (assets) and transfers title to the trustee just like a deed.
Hong Kong does not require their trusts to register with the government. As a result of no registration of trusts, no regulators of trusts in Hong Kong.
Tax exemption is only allowed when the settlor is a non-resident to Hong Kong. Therefore, this type of trust was created for foreigners.
Hong Kong does not require its trust services companies to be licensed.
Beneficiaries must be non-residents of Hong Kong in order to assure tax exemptions.
The 2013 law gives beneficiaries powers to remove trustees under specific circumstances. When all of the beneficiaries agree to remove a trustee and the Trust Deed does not grant express power to anyone else to remove a trustee. No court orders will be necessary to remove a trustee which follows current practices in the United Kingdom.
Non-resident trusts are 100% exempt from all taxes. Note: that U.S. taxpayers and all others residing in countries which tax global income must declare all income to their governments.
Accounting & Audits
There are no standards of what accounting practices the trustee must follow while maintaining records and books.
Since trusts are not registered, there are no public records about them.
Time for Formation
Trust can be prepared in one day depending upon the company creating the trust.
Forming a Hong Kong trust offers the following benefits: 100% ownership, settlor retains control, no taxation, privacy, asset protection, estate planning, and English is the second official language.