Withers, the global law firm, examines new trust legislation enacted in Hong Kong, with potential major implications for the sector.

In a potentially highly significant move, Hong
Kong’s Legislative Council last week passed the Trust Law
(Amendment) Bill 2013. According to Withers, the international law firm, the
trust industry in Hong Kong held assets of an
estimated HK$2,600 billion as at the end of 2011. Withers says the amendments
will further improve Hong Kong’s standing as an international trust planning
jurisdiction and it has set out a summary of key points below.

This [Bill] amends the Trustee Ordinance (Cap.29) and the
Perpetuities and Accumulations Ordinance (Cap.257) which date back respectively
to 1934 and 1970. Other common law jurisdictions such as the UK and Singapore
have already significantly modernised their trust law during this period,
leaving Hong Kong at a competitive
disadvantage.

Hong Kong amendments usher in much needed improvements to
the legal infrastructure for trusts subject to Hong Kong law and will further
improve Hong Kong’s standing as an
international trust planning jurisdiction. Following those changes, families
should consider reviewing their succession planning, both wills and trusts.

This is also an opportunity for international trust
companies to consider setting up a Hong Kong
operation.

Key legislative changes:

Reserved powers

Settlors often wish to reserve to themselves powers relating
to investment or asset management functions. There are new provisions which
will confirm that the inclusion of such provisions in the trust deed will not
invalidate the trust. This will increase the attractiveness of Hong Kong as a governing law where a settlor wishes to
retain a degree of control over the investment of trust assets.

Forced heirship

The new legislation provides that foreign forced heirship
rules will not affect the validity of a lifetime transfer of movable assets to
a trust expressly governed by Hong Kong law.
This will help make Hong Kong trusts appealing
for settlors in jurisdictions which limit testamentary freedom.

Abolition of the rule against remoteness of vesting

Any Hong Kong trust can now
be set up so that it lasts for an unlimited period of time. This is a fundamental
change that will make Hong Kong trusts
appealing for those settling very high value trusts where a long-stop date
might not be attractive for succession planning purposes. Families may wish to
have existing trusts reviewed and resettled in order to create a perpetual
trust.

Enhancement of
trustees’ default powers where trust instrument is silent

Trustees’ powers are found in the relevant trust’s governing
instrument. If that instrument fails to confer adequate powers then the Trustee
Ordinance steps in to provide default powers. These default powers will be enhanced
as follows:

(a) Appointment of agents, nominees and custodians

Trustees will now be able to appoint agents to perform most
of their trustee functions. For example trustees will be able to delegate the
management of investments to suitable fund managers thus enabling the trust
portfolio to be managed on a discretionary basis. Delegation of such powers
however will be subject to safeguards, in particular an obligation to keep the
performance of the agents under review.

(b) Powers to insure

The default powers to insure trust property will be extended
to any risk of loss or damage, not just loss through fire and typhoon which is
the present position.

(c) Trustees’ remuneration

Hitherto it has not been possible for trustees to be paid
unless there is an express provision in the trust deed to that effect.
Professional trustees may now receive reasonable remuneration in the absence of
an express provision in the trust deed.

(d) Authorised investments

The Second Schedule to the Ordinance restricts trustees, in
the absence of an express

provision to the contrary, to a limited range of
conservative investments. In the case of quoted companies, trustees are
currently limited to investing in companies with a market capitalisation of not
less than HK$10 billion and a track record of having paid cash dividends over
the preceding 5 years. These two requirements will now be relaxed to HK$5
billion and 3 years respectively.

Duty of care

Subject to the terms of the trust instrument, the new
legislation imposes a statutory duty of care on trustees so that they must
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 that
is held out by the trustee as having; if the trustee is acting in the course of
a business or profession, having regard in any special knowledge or experience
that it is reasonable to expect of a person acting in the

course of that kind of business or profession.

Exemption clauses

At common law, a trust instrument can exempt a trustee from
liability for all breaches of trust except for fraud or wilful default. The new
amendments provide a degree of protection for beneficiaries. A trust instrument
can no longer exempt a trustee from liability for wilful misconduct and gross negligence,
as well as fraud. This applies to trust created before or after the
commencement of the new Ordinance. These provisions will however be limited to
professional trustees.

Removal of trustees

The new legislation includes a court free process for
beneficiaries of full age and capacity who are absolutely entitled under the
trust to appoint new trustees in place of the existing trustees, without terminating
the trust.

The legislation will come into force on 1 December 2013.