On July 17, Hong Kong’s Legislative Council has passed the Trust Law (Amendment) Bill 2013, amending previous legislation which dates back to 1934 and 1970. The bill was gazetted on July 26 and will come into force on 1 December 2013.
The reform of two major ordinances of the trust law regime in Hong Kong, namely the Trustee Ordinance (Cap 29) and the Perpetuities and Accumulations Ordinance (Cap 257), move the Hong Kong jurisdiction into line with other common law jurisdictions such as the UK and Singapore and will further improve Hong Kong’s standing as an international trust planning jurisdiction.
In its Justifications of the Trust Law (amendment) Bill 2013 titled as “Enhancement of Hong Kong’s status as an international asset management center”, the government stated clearly the imperative to modernize its trust laws as the trust industry in Hong Kong was estimated at the end of 2011 to hold assets of HK$2.6 trillion, and the reform will bolster the competitiveness of Hong Kong’s trust services industry and attract settlors to set up trusts there.
In view of increasing complexity of present-day trusts, the Bill introduces key legislative changes.
Enhancement of Trustees' default powers
This in order to facilitate the effective administration of trusts, where the trust instrument does not contain specific provisions on these matters, such as:
Power to appoint agents, nominees and custodians with delegation subjected to safeguards, in particular an obligation to keep the performance of the agents under review.
Powers to insure trust property extended to any risk of loss or damage.
Entitlement to receive reasonable remuneration in the absence of an express provision in the trust deed.
The default scope of authorized investments has been revised restricting trustees to a limited range of conservative investments; and market capitalization and dividend requirements regarding investment in shares has been relaxed to respectively HK$5 billion and 3 years track record cash dividends payment (previously, HK$10 billion and 5 years).
Introduction of a new default statutory duty of care
The default statutory duty of care, when it is applicable, replaces the existing common law duty of care. The trustee 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; and if the trustee is acting in the course of a business or profession, having regard to 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.
Introduction of a statutory control on exemption clauses in relation to trustees acting in a business or profession
Under the common law, a trustees’ exemption clause in the trust instrument can validly exempt trustees from liability of all breaches of trust except fraud.
To better protect beneficiaries in the event of a breach of trust, a remunerated Trustee, acting in a professional capacity, will not be exempt from liability for a breach of trust arising from the trustee's own fraud, willful misconduct or gross negligence.
Requirement for checks and balances in relation to the appointment of agents, nominees and custodians
The Trustee is required to give clear guidance to their agents who are delegated with functions relating to the investment of Trust assets and the acquisition, disposal and management of Trust property. The Trustee has a duty to review arrangements under which their agents, nominees and custodians act. There are also certain restrictions on the choice of nominees and custodians, such as if a trust has more than one trustee, a delegation should not result in having only one attorney or one trustee administering the trust, unless that attorney or trustee is a trust corporation. This will better reflect the settlor’s intention of having more than one trustee to administer the trust.
Removal of trustees
A court free process allows 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.
Clarification of reserved powers by settlors
It is generally acceptable under the common law for a settlor to reserve to himself some (but not excessive) powers to control the trust property. The Bill puts it beyond doubt that a trust would not be invalidated because of the mere fact that the settlor has retained the power of investment or asset management functions. In addition, where an investment power or asset management function has been reserved by the settlor, a trustee who has acted in accordance with the exercise of the power is exempt from liability.
Abolition of the rule against perpetuities (“RAP”) and the rule against excessive accumulations of income (“REA”)
Under the common law, RAP dictates that the interest in trust properties must vest in the beneficiaries not later than 21 years after the termination of the life of a specified individual at the time of the creation of such interest, otherwise the interest may fail.
The common law rules were modified by the Perpetuities and Accumulations Ordinance, which provides for an alternative fixed perpetuity period of 80 years and for the mitigation of strictness of the RAP. REA stipulates that settlors may choose one of the six statutory accumulation periods for which the income of a trust may be accumulated.
The Bill abolishes the RAP and REA with prospective effect for all new non-charitable trusts, and allows settlors to set up perpetual trusts in Hong Kong. Certain restrictions on accumulations of income for new charitable trusts are retained so that the income will be applied for the intended charitable purposes.
Provision against forced heirship rules
The bill introduces a statutory provision to the effect that foreign forced heirship rules will not affect the validity of a lifetime transfer of movable assets to a trust expressed to be governed by Hong Kong law. This has been introduced “In response to strong request by the trust industry and having considered the implications carefully, including the possibility to enhance Hong Kong’s attractiveness as a domicile for trusts”.
Over the last 8 years a joint committee of The Hong Kong Trustees’ Association and STEP Hong Kong have worked closely with, and provided substantive support to, the Financial Service and Treasury Bureau in the modernization of the HK Trust Law.
Today, the Bill will make Hong Kong law a more attractive choice as the governing law of private trusts, which may in turn result in a greater number of existing and new trusts being administered in Hong Kong.
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