Hong Kong's New Trust Law: Is It Adequate?

The Hong Kong Legislative Council passed the Trust Law (Amendment) Bill on 17 July 2013, bringing to a conclusion a long period of consultation and debate as to just how Hong Kong’s antiquated Trust Law could be hauled into the 21st century. The authors tell us what it does and does not do.

Until now our Trust Law has been essentially a re-enactment of the English Trustee Act 1925 which was introduced into Hong Kong way back in 1934. Although minor adjustments have been made over the years, it was generally agreed that a thorough overhaul was required.

Until the Sino-British Declaration in 1984, which provided for the cessation of British administration here in 1997, trusts governed by Hong Kong law were relatively common. However in the 1980s the trust industry, like many others, contracted the 1997 jitters and most trustees changed the governing law of their trusts from Hong Kong law to that of one of the various offshore jurisdictions which have come to dominate the trust business over the last 20 or 30 years.

Article 8 of the Basic Law guarantees that the principles of common law and equity will be maintained in Hong Kong. Equity obviously includes the law of trusts. It is clear from the terms of Article 8 itself that the principles of equity were not deep frozen or ossified on 1 July 1997 but that Hong Kong’s legal system is a dynamic one which is happy to benefit from the experience of other jurisdictions when it is clearly in the interests of Hong Kong to do so. Our system is able to embrace significant developments in equity and other fields of law so as to ensure that our system moves with the times.

It is against this background that the amendments make significant changes to the Trustee Ordinance.


Trustees’ Duty of Care

Up to now, the duty of care laid upon Hong Kong trustees has been based upon a 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 businessman. In modern circumstances, it may be difficult to define just what such a standard entails.

The new legislation therefore requires a trustee to 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.

The new statutory duty of care will apply, regardless of whether the trust was created before or after the coming into force of the new legislation. As with the previous benchmark of the ordinary prudent man of business, this standard may be modified, or even excluded altogether, by express provision in the trust’s governing instrument.


Exemption clauses

The question of modifying the standard of care leads logically to the issue of exemption clauses. These are to be found in most modern trust deeds, particularly those offered by professional trust companies.

Their purpose is to exonerate a trustee from liability for any mistake that he may make in the administration of his trust, provided that mistake does not amount to dishonesty or wilful default.

The new legislation provides a degree of protection to beneficiaries in that such exemption clauses may not relieve a trustee from liability for fraud, misconduct or gross negligence or otherwise such clauses will be void. This provision, like the new statutory duty of care, applies to both existing trusts and those yet to come into existence.

However the new restrictions on exemption clauses will only apply to professional trustees and there is to be a moratorium of one year before they come into effect so the trustees who do not wish to continue in office can arrange to step down during that period. This also gives time for professional trustees to modify their existing exemption clauses.


Power to delegate and appoint agents

Hitherto one of the least satisfactory aspects of Hong Kong trust law was the difficulty in appointing discretionary fund managers to manage the trust portfolio on behalf of the trustees. The old trust law restricted the trustees’ power of delegation in relation to Hong Kong assets to the exercise of administrative functions.

A broader discretion could be conferred in relation to trust assets outside Hong Kong. Trustees may now delegate any of their functions except distributions to beneficiaries, the decision whether a payment should be made out of capital or income, the appointment of new trustees, delegation by the agents themselves (that is sub-delegation) or the appointment by the agent of nominees or custodians. The position will be slightly more restrictive for charity trustees whose agents will be limited to the generating of income to advance a charity’s objects but not carrying out those objects.

Various safeguards are attached to this power of delegation. First the statutory duty of care will apply to the employment of agents, nominees and custodians. Secondly trustees must give fund managers a policy statement saying how the assets are to be managed and the managers must agree to abide by that. Thirdly only professional nominees or custodians may be appointed or a company controlled by the trustees so that ‘amateurs’ do not become involved in these important tasks. Lastly trustees must review from time to time their arrangements concerning agents, nominees and custodians.


Power to insure

The previous default power (that is the trustees’ power in the absence of any provisions to the contrary in their trust deed) was restricted to insurance against loss or damage to trust assets by fire or typhoon. This was plainly insufficient. The new provisions permit trustees to insure against any risk and the premiums may be paid out of trust assets in line with the law in many other jurisdictions.


Remuneration of trustees

Equity has always taken the view that trustees should not be paid for their services. Until now therefore it was only possible to pay trustees if there was an express provision to that effect in the trust deed or the court authorised such remuneration. This is plainly unrealistic and accordingly the legislation permits trustees of private trusts where there is no express provision for remuneration, to charge a reasonable sum. This is only applicable if the trustee is not a sole trustee and the other trustee(s) have agreed to such remuneration.

The position in relation to charitable trusts is slightly different. If the trust deed permits the trustee to charge, then a professional trustee or trust corporation will be entitled to charge. This is conditional on such professional trustee not being the only trustee and that he/she will only be permitted to charge if the majority of the remainder of the trustee body so agree.

The practical implication of such a condition is that when setting up a charitable trust, a trust corporation or more than one trustee must be appointed if the intention is to delegate the trust administration to a professional trustee for remuneration. Where there is no express power for charging in a charitable trust, then a trust corporation or a professional trustee may charge reasonable remuneration provided that such a professional trustee is not the sole trustee, the other trustee(s) agree in writing and there is no provision in the trust deed forbidding remuneration.


Removal of trustees

The new law includes a simplified procedure for removing trustees where all the beneficiaries are in agreement and the trust deed does not confer on any party an express power to remove trustees. This new procedure will not normally involve an application to the court and follows the practice in the UK.
 

Reserved powers

Settlors sometimes reserve for themselves particular powers such as the power of investment or a power to remove and appoint trustees. Problems can arise if the degree of control which the settlor exercises, calls into question the validity of the trust. A valid trust requires both certainty of intention to create the trust coupled with the alienation of the trust property by the settlor.

To ensure that the reservation of investment powers by the settlor does not infringe these principles, the new law makes it clear that a Hong Kong trust will not be invalid solely because the settlor has reserved to himself powers of investment or asset management. Settlors frequently require such powers and this amendment will no doubt make Hong Kong trusts more attractive in the trust market.

The new law, however, does not include reservation of other major powers by the settlor such as the power of revocation or powers to appoint and remove trustees or beneficiaries. This issue was discussed during the consultation period since revocable trusts are acommon tax planning tool, particularly where a non-US settlor is setting up a trust for the benefit of US beneficiaries. But as the Government was concerned that reserving too much of the settlor’s power may lead to a challenge that the Trust is a sham, it decided to adopt the Singapore model and restrict the reserved powers to investment and asset management only.


Forced heirship

The legal systems of some countries (mainly those based on Roman law or sharia) require a testator to leave a fixed portion of his estate to close family members. This is in sharp contrast to common law systems such as Hong Kong’s, where generally a person can leave his estate to whomever he wishes, subject to providing for his spouse and other dependants.

This principle of forced heirship can come into conflict with trusts where a testator whose country of domicile has such a system, has settled a large part of his estate on trust for beneficiaries who are not necessarily his close family members. The amending legislation makes it clear that foreign systems of forced heirship will not normally have any effect on the validity of a Hong Kong trust.


Perpetuities and accumulations

The rule against perpetuities is an ancient rule of English law. It was considered contrary to public policy that land in particular should be tied up in trust for many generations and thus never available on the market.

Hong Kong law incorporates this rule although its rigour has been mitigated by the Perpetuities and Accumulations Ordinance which provides that a settlor can fix a period for his trust to endure of up to 80 years or adopt a more complicated formula based on lives in being at the date of the trust.

Many settlors are attracted by being able to create a trust for very much longer than 80 years and many jurisdictions make this possible. So there seems little justification for the current restrictions in the circumstances of Hong Kong.

Therefore the new law permits trusts to be created from the commencement date of the new Ordinance to be perpetual with no fixed termination date. This should prove an attraction to settlors who wish to create a high value dynastic trust lasting many generations. The new rule applies to private trusts only as charitable trusts, by their very nature, are already perpetual.

Another complex and possibly old fashioned rule is the restriction on excessive accumulation of income. Again for many centuries it was a principle of English law that trustees should not deny beneficiaries from receiving income for more than a limited period. The new legislation allows income from private trusts to be accumulated indefinitely.

As for charitable trusts, it is obviously against public policy that the income from charity donations be withheld indefinitely from the charitable purposes intended by donors. The new law therefore provides that any direction in a charitable trust requiring the accumulation of income will cease to have effect after 21 years.


What the legislation does not do

There are several important areas of trust law which are untouched by this legislation.

During the consultation process, prior to the introduction of the Amendment Bill into the Legislative Council, there was some discussion as to whether there should be a statutory provision governing the right of beneficiaries to information about their trust.

The Government concluded, after taking expert advice, that such matters should be left to the courts without any legislative intervention. Most common law jurisdictions have followed the Privy Council decision in Schmidt v Rosewood (2003) 3 All ER 76, which is generally interpreted as requiring trustees to provide beneficiaries with basic information such as trust deeds and accounts. It is likely that the Hong Kong courts would follow this lead.

Another area on which the legislation is silent is the licensing of trustees. Although there are specific requirements for the establishment of a trust corporation under the Trustee Ordinance, there is no system for the regulation or licensing of professional trustees. At least one member of the Legislative Council has suggested that this is a serious deficiency in our law and that the Government should move to remedy it. On the other side of the argument it is perhaps fair to point out that the absence of regulation in this area is encouraging the establishment of a number of trust companies in Hong Kong.

Other areas of trust law which are unaffected by the new law are:

  • there are no provisions protecting Hong Kong trusts from the orders of foreign divorce courts; many jurisdictions have enacted provisions stating that the orders of a foreign divorce court, e.g. purporting to vary the provisions of a trust deed in favour of a divorcing spouse, are to be of no effect;
  • similarly there is no protection from foreign creditors; some jurisdictions have legislated to make it more difficult for creditors of the settlor to break into a trust with a view to obtaining trust assets in satisfaction of debts owed to them.

 

The arguments for and against such provisions are complex. With regard to protection from foreign divorce orders, it may be that legislation aimed at frustrating such orders in Hong Kong would lead to unwillingness on the part of foreign courts to enforce orders of Hong Kong divorce judges. As for protection from creditors, it seems very likely that the Hong Kong Government is anxious not to acquire a reputation as a home for asset protection trusts.


Conclusion

Overall the new legislation is to be welcomed as a positive development, bringing much needed new provisions into the Trustee Ordinance so that hopefully Hong Kong will be able to attract more trust business than it has in recent years. With the updated trust law and the absence of licensing requirements for trust companies, Hong Kong becomes an attractive jurisdiction for the setting up of trust companies and sophisticated succession planning structures.
 

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