New Hong Kong Trust Law to come into effect on 1 December 2013

On 17 July 2013, the Hong Kong Legislative Council passed the Trust Law (Amendment) Bill 2013, which will come into operation on 1 December 2013. The purpose of the amendments is to modernise Hong Kong trust law, which is considered to be outdated and out of step with more modern trust laws in comparable jurisdictions (eg, Singapore and England) and as a result has put off settlors from creating trusts in Hong Kong. The amendments cover three major areas, namely the clarifying and enhancing of trustees' duties and powers, the enhancing of beneficiaries' protection and the creation of greater flexibility and protection of trusts. The amendments that bring Hong Kong trust law at least partly in line with modern international standards are likely to be welcomed by settlors and to enhance Hong Kong's status as an international asset management centre. The key amendments include the following new provisions:

1. Enhancing trustees' default powers with a view to facilitating the effective administration of trusts:
   • Power to appoint agents etc: trustees will (in the absence of contrary provisions in the trust instrument) have a greater power to appoint agents, nominees and custodians to perform their "delegable" functions.  For non-charitable trusts there are few "non-delegable" functions and they include functions relating to the distribution of trust assets and the appointment of other trustees, whereas the delegable functions are more limited in relation to charitable trusts and extend only to functions that relate to the investment of assets, raising of funds and implementing the decisions of the trustees
   • Power to insure:  trustees will have a default power to insure trust property against the risk of loss or damage caused by any event (not just fire and typhoon as is currently the case) and without a limit on the amount of insurance that can be taken out
   • Entitlement to receive remuneration: the amendment contains a right of professional trustees to receive remuneration out of the trust fund even if the services are capable of being provided by a lay trustee, something that is currently only possible if there is an express provision saying so in the trust instrument.
2. Appropriate checks and balances with a view to enhancing beneficiaries' protection:
   • Statutory duty of care: trustees will owe a clearly defined statutory duty of care to exercise such care and skill as is reasonable in the circumstances having regard to any special knowledge or experience the trustee may have or, in the case of professional trustees, may be expected of a person acting in the course of the relevant kind of business.  This duty may be excluded or modified by the trust instrument
   • Limited validity of exculpation clauses: professional trustees will not be able to exclude liability arising from fraud, wilful misconduct and gross negligence.  Currently, trustees are able to include exculpation clauses in trust instruments that exclude liability for all breaches save fraud.  This new rule will apply to trusts created before or after commencement of the Ordinance, but will only come into effect in relation to existing trusts in December 2014
   • Beneficiaries' rights to appoint and retire trustees: beneficiaries who are absolutely entitled to the trust property will be able to appoint and retire trustees without the involvement of the court and without the requirement of terminating the trust.
3. Reserved powers by settlors: a trust will not be invalidated only because a settlor has retained any or all powers of investment or asset management functions.
4. Abolition of the rules against perpetuities and excessive accumulations of income: settlors will be able to set up perpetual trusts in Hong Kong (ie, trusts that last forever or for any period of time chosen by the settlor) and there will be no limits on periods for which income may be accumulated in relation to non-charitable trusts.
5. Protection against foreign forced heirship rules: trusts governed by Hong Kong law will be protected from foreign heirship rules.  This means that foreign laws that provide that a portion of a testator's wealth is to be reserved for certain heirs (eg, a spouse or children) will not affect the  validity of the trust, which means that a shortfall may not be clawed back out of the trust.
6. Scope of authorised investments: investment restrictions on trustees in default situations will be relaxed insofar as they relate to market capitalisation and dividend requirements of shares.  However, there will be an express prohibition on investment in structured products (subject to contrary provision in the trust deed).

Comment: The reforms bring the Hong Kong legislation to a very large extent in line with the equivalent legislation in England and Singapore and it will be interesting to see if Hong Kong experiences the same upturn in trusts business that Singapore experienced.  However, in terms of competing with the offshore world, Hong Kong's new trusts law is not as innovative as a number of jurisdictions who have introduced a number of novel vehicles (for example, STAR trusts in Cayman and VISTA trusts in BVI).  Clients seeking to use these types of vehicles will not find equivalents under Hong Kong law.  The new statute in Hong Kong has also not introduced as extensive firewall legislation as some offshore jurisdictions.  Hong Kong's firewall legislation covers forced heirship rules only, whereas other jurisdictions have also sought to protect their trusts from claims arising from (for example) divorce cases.  With divorce settlements becoming more and more substantial, clients may prefer to settle their assets into trusts which enjoy greater protections.

If you wish to discuss please contact Gareth Thomas or Richard Norridge.