Trusts in Hong Kong
Hong Kong’s much criticised trust law recently underwent a significant overhaul. Pursuant to the Trust Law (Amendment) Bill 2013 (the “Amendment”), a substantial number of changes were introduced in the Trustee Ordinance (Cap. 29) (the “Ordinance”). Prior to the Amendment, only minor changes to the law of trusts in Hong Kong were made since its introduction in 1934. It was the general consensus that a thorough review was long overdue.
Under the Amendment, some of the changes which have been introduced are:-
A. Statutory duty of care
Prior to the Amendment, the duty of care laid upon Hong Kong trustees has been based upon 19th century English case law.
Re Whiteley (1886) 33 Ch D 347, established that a trustee must, in the absence of express provision to the contrary in his trust deed, observe the standards of an ordinary prudent business man. More recent decisions have struggled to define what this standard actually entails in the modern business world.
Section 3A of the Ordinance now requires that a trustee exercise such care and skill as is reasonable in the circumstances, having regard in particular, to any special knowledge or experience that the trustee has or holds himself out as having, and if the trustee is acting in the course of a business or profession, to any special knowledge or experience it is reasonable to expect of a person acting in the course of that kind of business or profession.
This new statutory duty of care has retrospective effect and will apply to all trustees irrespective of whether the trust was created before or after the enactment of the Amendment.
B. Abolition of the rule against perpetuities
As a long established common law principle, the rule against perpetuity dictates that the interest in trust properties must vest in the beneficiaries not later than 21 years after the termination of a life of a specified individual at the time of the creation of such interest, otherwise the interest may fail.
For various reasons, the 21 year period was insufficient and unable to meet the needs of those looking to create a trust in Hong Kong and time period was therefore extended to 80 years when the Perpetuities and Accumulations Ordinance (Cap. 257) came into effect in 1997.
Now with the Amendment, save in relation to non-charitable purpose trusts, and subject to the terms of the trust instrument, a trust may continue indefinitely and settlors will be able to set up perpetual trusts in Hong Kong. This means that a trust may either last forever or for any period as defined by the settlor.
On related note, the rule against excessive accumulations of income has also been abolished and there will also be no limits on periods for which income may be accumulated in relation to non-charitable trusts.
C. Power to delegate and appoint agents
One of the major criticisms of Hong Kong’s former trust law was the difficulty it created for those looking to appoint discretionary fund managers to manage a trust portfolio on behalf of a trustee.
The previous regime imposed various restrictions a trustee’s power of delegation in relation to Hong Kong assets to the exercise of purely administrative functions.
Under the Amendment, these restrictions have now been relaxed.
A broader discretion can now be conferred and trustees may now delegate any of their functions save and except for distributions to beneficiaries, the decision whether a payment should be made out of capital or income, the appointment of new trustees, delegation by agents themselves (i.e. sub-delegation) or the appointment by the agent of nominees or custodians.
Various safeguards have been put in place and are attached to this power of delegation. For example, the statutory duty of care (mentioned in Section A above) will apply to the employment of agents, nominees and custodians.
Moreover, trustees are required to give fund managers a “policy statement” setting out in detail how the assets are to be managed and the managers must not deviate from that. Trustees are also required to review from time to time their arrangements concerning agents, nominees and custodians.
The aim of the Amendment is to breathe new life into a sector of law that had been left alone for many years. One of the key features of the new trust law is that it brings Hong Kong more into line with other offshore jurisdictions that are popular for international trust business.
Publication Date: 14th May 2014