Some considerations in setting up a trust

If you are concerned about how your assets could be protected or how your loved ones could continue to receive financial provisions or assets during your lifetime and after your death, establishing a Hong Kong trust is worth considering and in particular, a discretionary trust as it offers various benefits including without limitation the option to change persons whom you wish to benefit from your trust.

How to establish a discretionary trust?

To establish a discretionary trust, you (known as settlor) will need to enter into a relationship with a third person (known as trustee)[1], who would generally be a professional trustee or someone you trust, as you will transfer your assets to your trustee to manage and hold in trust for your loved ones (generally known as beneficiaries) by signing a trust deed with your trustee.  As the assets are no longer held in your name but in the name of the trustee, there would be a layer of protection on your assets from future creditors.

You may then wonder how and when your assets will be given to your loved ones if you do not have control of them anymore.  You may from time to time provide to your trustee a letter of wishes setting out your wishes on how the assets should be handled.  This letter of wishes is not legally binding on your trustee, but offers guidance to your trustee to consider when administering your assets.     

For example, if you have children and are worried that they may go on a shopping spree once they receive all of your assets after your death or may not know how to invest or manage them, you may want to put some conditions on when your children should receive your assets.  You may specify in your letter of wishes that you wish for your children to receive a monthly income of say HK$30,000 after your death until they reach a specified age say 30 years of age or have completed their tertiary education, after which they could then receive the capital of all your assets. 

Who can be the beneficiaries?

The beneficiaries can be anyone you wish to benefit from your trust.  Generally, at the initial stage of establishing your trust, you can specifically list out the persons whom you wish to be the beneficiaries including without limitation, your spouse, children, partner, friends or family members.  If you forget to include any person, do not worry, as you may from time to time inform your trustee by way of a letter of wishes that you wish for a specific person to be appointed as a beneficiary of your trust. 

What if I’m concerned about my working relationship with the trustee in the future?

If you are concerned that after you establish a trust with your trustee your working relationship may not be ideal, you can include a mechanism in your trust deed whereby your trustee could be replaced with a new trustee at any time during the administration of your trust.  An example would be creating a role known as protector, who would generally be given powers including without limitation giving consent to the trustee to appoint new beneficiaries and replacing the trustee with a new trustee. 

 Can I still make investments with the assets in the trust?

Once the assets are transferred to your trustee, generally speaking, you cannot deal with your assets anymore.  However, you may reserve to yourself certain powers of investment and asset management functions.  

Can the trust continue beyond my death?

Your trust can last perpetually and continue beyond your death.  Having said that, there are circumstances in which your trust can end such as when all assets have been distributed to your beneficiaries or your trustee declares a date to end your trust.

If I make a Will, do I still need a trust?

A Will and a trust serve different purposes and they can work together. 

During your lifetime, you will likely need to keep certain essential assets with you in order to maintain your living standards such as bank accounts.  Such essential assets can generally be held under your sole name and will form part of your estate after death.  Your Will could deal with such essential assets.  Your trust, on the other hand, could deal with your non-essential and long term assets which you intend to provide for your beneficiaries in the future such as securities portfolios.

The major difference between a Will and a trust is that after your death, your assets held under your sole name would generally be frozen and cannot be accessed by the beneficiaries of your Will until your executors of your Will complete the lengthy probate process, whilst the assets under your trust could still be used by your trustee and be provided for the beneficiaries of your trust without having the need to go through the same lengthy probate process.

If you want your loved ones to receive your assets and financial provisions securely, it is worth considering setting up a Hong Kong discretionary trust.

Jonathan Yeung

If you would like to discuss any of the matters raised in this article, please contact:

Eddie Look
Partner | E-mail

Disclaimer: This article is meant to provide helpful but general guidance only. It should not be taken as legal advice. Please seek professional advice when you are contemplating entering into any material contract.

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[1] Trustee Ordinance (Cap. 29)