Hong Kong Court holds that trust has more advantages than gift for a mentally incapacitated person

Under the Mental Health Ordinance, Cap. 136 (the “MHO”), the court is empowered to make such orders as it thinks fit for, among other things, " the execution for the mentally incapacitated person of a will making any provision" and for "the settlement of any property of the mentally incapacitated person, or the gift of any property of that person " on behalf of a mentally incapacitated person ("MIP").

In LCK v DLKY and others (unreported, HCMH 7/2016), on 9 February 2022, the Hong Kong Court of First Instance reiterated the legal principles applicable to the exercise of these powers. Notably in this case, one of the sons of the MIP in question was also himself an MIP. A question before the Court, therefore, was whether it should make provision by way of a trust or a gift for that son.

Background

In LCK v DLKY and others, the Court was dealing with an application for a statutory will for an MIP, WSY.

WSY was the widow of the late LH. WSY was an MIP and she was represented by the WSY Committee, a mental health committee appointed by the Court for the estate of WSY pursuant to the MHO. WSY has one son with LH, CK. CK was also an MIP and, the same person acting as the WSY Committee was also appointed by the Court to be the committee of his estate. However, CK was represented by a litigation guardian especially appointed for the purposes of these proceedings ("CK's Guardian") to prevent conflicts of interest.

The WSY estate was valued at around HK$800 million. The parties to the statutory will proceedings all agreed that the provision for CK should be at least HK$320 million. However, there was a dispute over the mechanism for the provision for CK in the statutory will of WSY; more specifically, whether it should be made by way of a trust or a gift. The WSY Committee took the position that a trust should be set up for CK. On the other hand, CK’s Guardian argued that it should be in the form of an outright gift to CK (in which case, it will form part of CK's assets, administered by his court-appointed committee).

Decision

The Court held that the principles applicable to the making of a statutory will also apply in the case of a lifetime settlement or gift. In particular:

• The court shall have regard to, as a paramount consideration, the requirements of the MIP; and
• The court should have a reasonable degree of confidence that the disposition was both objectively reasonable and that it was something which the patient herself would have wished, if she had been of full capacity and aware of the circumstances.

Applying the above principles, the Court first recognised that if WSY were not an MIP, she would have catered for CK generously in the manner that a loving and devoted mother would cater for her disadvantaged son.

The Court noted there was no dispute as to the provision for CK being at least HK$320 million.

Turning to the mechanism for provision for CK, the Court agreed with the WSY Committee that a trust structure was preferable.

The Court said that there were two broad reasons why WSY would have wanted to set up a trust for CK:

• First, a trust structure would better avoid potential disputes or litigation in the future. As the assets were transferred to the trust, CK (as an MIP) would be exposed to less predatory attention and his estate with fewer assets would be less likely to be involved in complicated litigation in the future. Moreover, the in terrorem provisions in the trust deed which the WSY Committee drafted could create a disincentive for others to raise challenges.
• Second, a trust structure would provide more certainty for WSY that her assets were dealt with in ways which she would have wanted. A trust structure would provide a framework for (i) distributing WSY's estate assets during CK's lifetime by way of a division of labour between the trustees and the CK Committee and (ii) passing the remainder of assets after CK's death. A trust structure would also allow WSY to include any issues CK may have in the future as beneficiaries of her assets.

CK's Guardian referred to some English cases to support its argument. CK's Guardian referred to dicta in certain English authorities (SM v HM [2011] EWHC B30 (COP) and Watt v ABC [2016] EWHC 2532 (COP), [2017] 4 WLR 24) which discussed the advantages of an outright gift.

The Court held that these dicta did not apply to the present case, as they arose in different contexts.   Further, the Court highlighted the differences between the respective statutory frameworks for the protection of MIPs in England and Hong Kong:

• In England, a "deputy" appointed under the Mental Capacity Act 2005 is subject to effective supervision from the Office of Public Guardian. The Court noted that this might be the reason why a deputy might be preferable to a trustee in terms of administering the assets of the MIP in England.
• However, there is no similar supervision regime in Hong Kong. The committees appointed under the MHO are supervised by the Hong Kong courts which lacked the resource to proactively monitor the committees. In this regard, there would be unnecessary burden on the court's resources to give directions from time to time if WSY's assets were given outright to CK's Committee.

Based on the above reasons, the Court held that a trust arrangement would have more advantages than a gift arrangement in this case for CK.

The Court therefore ordered a trust be set up for the benefit of CK, with HSBC Trustee (Hong Kong) Ltd as the trustee. The Court believed that if WSY regained her mental capacity, she would have chosen HSBC mainly because “HSBC” is a household name to many people living in Hong Kong. The Court also ordered a statutory will be executed for WSY, which contained a bequest to the new trust for CK.

Comments

Trusts have long been used to provide for the vulnerable and this is another example of a suitable case for the establishment of a trust.  The flexibility of a trust to adapt to changing circumstances and the ability of a trust to deal with remainder interests are particular strengths of the structure.  This decision may suggest that the Hong Kong Court, taking into account local circumstances, may be inclined to prefer a trust arrangement over the gift arrangement when exercising its power under the MHO to make a provision for an MIP.

However, each case has its own factual pattern. The Court agreed with the observation of HH Judge Hazel Marshall QC in SM v HM that “[it] cannot … be over-emphasised that any actual decision is completely fact sensitive to the individual case, and that the weight of superficially similar factors may be very different in different cases."

Note: Herbert Smith Freehills advised and acted for the WSY Committee