February 2025

ESTATE PLANNING: BRIEF INTRODUCTION ON TRUST

Every Chinese New Year, people exchange blessings such as “Gong Xi Fa Cai”, “Cai Yuan Guang Jin”, “Nian Nian You Yu”, wishing each other wealth and prosperity in the coming year. Once the surplus of wealth is accumulated, asset inheritance becomes another main goal. People generally believe that making a will is sufficient to preserve their assets for future generations. However, this belief can be oversimplified. While a will is an important tool in estate planning, it may not address every aspect of asset preservation, protection and distribution. To achieve comprehensive estate planning, a trust is a crucial instrument.

What is a Trust?

A trust is a legally binding arrangement in which a person (known as the Settlor) transfers the legal title of the property owned by him/her (known as the Trust Property) to another person (known as the Trustee). The Trustee is bound to hold, manage and distribute the Trust Property separately, distinct from his/her own private property, for the benefit of other person(s) nominated by the Settlor (known as the Beneficiaries). Notably, the Settlor can also be one of the Beneficiaries, allowing for flexible arrangements in property distribution.

The Settlor and the Trustee would execute a trust instrument, setting out the powers vested in and the duties imposed on the Trustee to manage and distribute the Trust Property in accordance with the terms of the trust instrument.

Comparison between a Trust and a Will

A trust not only facilitates the avoidance of probate but also provides flexibility over asset distribution. Furthermore, a trust can safeguard assets from creditors, ensuring that assets are passed on to future generations more effectively. Below is a comparison between a trust and a will:

Trust / Will

Administrative Procedure The trust property belongs to the trustee, not to the deceased’s estate, allowing the trustee to distribute the trust property to the beneficiaries immediately. The estate belongs to the deceased. Hence, the executor must apply for a grant of probate before exercising his/her power to distribute the assets.

Generational Inheritance A trust can be structured to benefit multiple generations, allowing for a broader, longer-term and more flexible inheritance plan. Generational transfer in a will is typically limited to immediate heirs that cannot be passed down through generations.

Beneficiaries Asset distribution involves a wider range of beneficiaries and can extend beyond the immediate family of the deceased. Asset distribution typically only involves closest family members of the deceased, such as parents, spouse, children and siblings.

Asset Protection A trust offers greater protection against creditors, ensuring that the assets remain intact for the beneficiaries. A will does not provide asset protection, meaning that the estates are vulnerable to lawsuits and creditors.

Advantages to Set up a Trust in Hong Kong for Chinese Settlors

As both Chinese and English are official languages in Hong Kong, an English language trust instrument can be easily translated into Chinese language.
Hong Kong’s common law system and Trustee Ordinance render a stable and well-established legal framework for trust arrangements.
Hong Kong’s close proximity to Mainland China contributes to a better understanding of Chinese culture and law.
Hong Kong maintains a simple and low tax regime that income generated from trust assets, assets transfer into the trust and distribution of trust assets to beneficiaries are subject to a low or zero tax rate, making Hong Kong an attractive jurisdiction for establishing trusts.
The trust set up in Hong Kong is perpetual.