Until December 1, 2013, Hong Kong’s trust law regime was mainly based on common law and supplemented principally by the Trustee Ordinance (Cap 29) (TO) and the Perpetuities and Accumulation Ordinance (Cap 257) (PAO) which were enacted in 1934 and 1970 respectively. While some common law jurisdictions such as the UK and Singapore have undergone trust law reforms, no substantial changes had been made in Hong Kong.
With the introduction of the Trust Law (Amendment) Ordinance 2013 (Amendment Ordinance), Hong Kong has responded to the needs of present-day trusts. The amendments aim to modernise trust law in Hong Kong by amending the TO and PAO and, it is hoped, make Hong Kong more competitive and attractive to settlors setting up trusts.
The Amendment Ordinance came into force on December 1, 2013. We examine the changes brought in by the Amendment Ordinance in the following areas:
1. Enhancement of Trustee’s Default Powers
The default powers of trustees have now been enhanced in order to facilitate the effective administration of trusts in cases where the trust instruments do not contain specific provisions. Trustees now have the power to: appoint agents, nominees and custodians generally to perform their functions; insure the trust property against risks of loss or damage caused by any event and without restrictions on the amount of insurance; receive remuneration under specific circumstances if they act in a professional capacity; and make investments with less restriction.
Appointment of agents, nominees and custodians
At common law, trustees have a duty to act personally and cannot delegate their functions unless they have the authority to do so under the trust instrument or the delegation is reasonably necessary in the circumstances. Before the enactment of the Amendment Ordinance, under the TO1 , the trustees were only able to employ and pay agents to assist in the execution of the trust in limited circumstances including: the receipt and payment of money; and the selling, converting, collecting, getting in, and executing and perfecting insurances of, or managing or cultivating, or otherwise administering any property, moveable or immovable, and to delegate aspects of their role by power of attorney for less than 12 months.
Under the new legislation2, the statutory powers of delegation are much wider and trustees may now delegate most of their duties provided that the appointees are professionals or a company controlled by the trustee and that the trustees must monitor the appointees and review their appointments. For delegation by power of attorney, the period of delegation can begin when the instrument creating the power of attorney specifies or, if this is not provided, the period of delegation begins when the power is first exercised and must continue for no more than 12 months to be an accepted delegation. If a trust has more than one trustee, power cannot be delegated to a single individual but can be delegated to a trust corporation. The amendments however do not apply to a power of attorney created before December 1, 20133.3
Power to insure
Before the enactment of the Amendment Ordinance, trustees had very limited statutory powers to insure trust property unless specifically provided in the trust instrument. Trustees are now given a general power to insure and pay premiums from the trust funds unless the trust is a bare trust where the power is subject to direction by the beneficiaries4.
Payment of trustees
Under the common law, trustees are not entitled to remuneration unless this is expressly provided for by the settlor. Trustees acting in the course of business or profession are not permitted to receive remuneration in respect of services that are capable of being provided by lay trustees unless they are expressly allowed to do so. With the introduction of sections 41Q to 41T of the TO, the following trustees may receive reasonable remuneration out of the trust funds for services provided even if the trust instrument does not so expressly provide:
- A trust corporation;
- An individual trustee who is acting in a professional capacity as a trustee, other than the sole trustee provided that each of the other trustees of the trust has agreed in writing that the trustee may be remunerated for services provided by the trustee to, or on behalf of, the trust; and
- A trustee of a charitable or non-charitable trust if remuneration is not expressly prohibited by a term in the instrument or enactment.
Reasonable remuneration is defined to mean remuneration that is reasonable in the circumstances and includes, in relation to the provision of services by a trustee who is an authorised institution under the Banking Ordinance (Cap 155) and provides those services in the course of, or incidental to, the exercise of its function as a trustee, the institution’s reasonable charges for the provision of those services5.
The restrictions on the power of investment of trustees are more relaxed now under the Amendment Ordinance6. For example, the permissible share investment may include companies with issued capital of HK$5 billion, rather than the previously required HK$10 billion, and which have issued a cash dividend in three of the preceding five years, rather than every year of the preceding five years. It is, however, expressly stipulated that the authorised investments do not include structured products as defined in the Securities and Futures Ordinance (Cap 571), because of the risk of these financial products. It is worth noting that the authorised investments provisions are subject to review by the Government in the future.
2. Statutory Duty of Care
It is the common law position that a trustee must execute a trust with reasonable diligence, and conduct the affairs relating to the trust in the same manner as an ordinary prudent person of business would conduct their own affairs. Beyond that there is no liability or obligation on the trustee. It has been decided by the English court that it could never be reasonable to require a trustee to adopt further and better precautions than an ordinary prudent person of business would adopt, or to conduct the business in any other way. If it were otherwise, the English Court of Appeal held, no one would be a trustee at all since he is not paid for it7. A paid trustee, however, is expected to exercise a higher standard of diligence and knowledge, in which the trustee must perform their role with the particular care and skill to be expected of a paid trustee8. This also applies to trust corporations, similar bodies which carry on a specialised behaviour of trust arrangement and professional corporate trustees. The latest common law position has been incorporated into the TO under section 3A by way of the Amendement Ordinance.
Section 3A of the TO seeks to provide a clear statement of the standard of care to be expected from a trustee. A 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 holds out 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.
The statutory duty may however be excluded by a deed executed in relation to an existing trust by the settlor or the beneficiaries, in order to give greater flexibility to the settlors to reflect their intention in the trust instrument. The proposed statutory duty of care is therefore default in nature and is not mandatory.
3. Reserved Powers of the Settlor
At common law, once a settlor creates a trust, he loses all interest in the trust unless he is a beneficiary or trustee and the settlor cannot revoke the trust once it is established. A settlor may reserve express powers of revocation in the trust instrument. However, if a settlor reserves powers to himself that are inconsistent with the existence of a trust, the court may declare that the powers are incompatible with the existence of a trust and that no trust exists under the common law doctrine of a ‘sham’. For example if property is transferred to another purportedly on trust but there is no true intention for the recipient to hold the property on trust, the transaction may be set aside9.
To enhance the certainty of the validity of trusts where some powers are reserved to the settlor, the TO introduces a new provision to put it beyond doubt that a trust would not be invalidated because of the mere fact that the settlor has kept to himself the power of investment or asset management functions10. It also provides that a trustee who has acted in accordance with the exercise of a settlor’s reserved power or function is exempted from liability. This power of investment and asset management functions will be retrospective unless such power has previously been challenged and the trust declared invalid.
4. Provisions against forced heirship rules
Forced heirship rules are mandatory rules typically found in civil law jurisdictions to restrict the freedom of testators in determining how to pass their estate on their death. The rules require a particular portion of the estate to be reserved for designated categories of heirs. If there is not enough left in the estate to satisfy the indefeasible portions of the designated heirs, property in trusts set up by the testator during his lifetime may be clawed back to make up for the shortfall.
The Government considered that a statutory change could help reassure potential settlors that trusts set up in Hong Kong during their lifetime will be protected from forced heirship rules. It is now provided in section 41Y of the TO that the transfer of movable property held on trust is not affected by foreign law of inheritance if the settlor has the requisite capacity to make the transfer. This provision is retrospective and will apply to all Hong Kong trusts that are expressed to be governed by Hong Kong law and that are controlled by trustees who are individuals ordinarily resident in Hong Kong or a body corporate which is managed and controlled in Hong Kong.
5. Abolition of the Rule Against Perpetuities (RAP)
RAP has evolved over the years. Under the common law, an interest in a trust is to be treated as invalid from the outset (void ab initio) unless the interest can vest within a relevant life or lives in being plus 21 years. A trust is also void if it is intended to be of perpetual or indefinite duration. The strict application of the common law rule was relaxed by PAO, which provided that in relation to limitations in instruments taking effect on or after March 13, 1970, such limitations were valid until, after ‘waiting and seeing’, it became clear that an interest could only vest outside the perpetuity period of statutory lives in being plus 21 years or a period of up to 80 years specified in the instrument as the perpetuity period.
It is now provided that the RAP shall cease to have effect in relation to instruments creating trusts or special powers of appointment taking effect on or after the commencement of the Amendment Ordinance, and subject to the terms of the trust, a charitable trust can continue in existence for an unlimited period of time11.
It is noted that the abolition of RAP may enhance Hong Kong’s attractiveness as a trust domicile vis-à-vis the UK and Singapore where there are still perpetuity periods for trusts of 125 years and 100 years respectively.
6. Abolition of the Rule Against Excessive Accumulations of Income (REA)
Prior to the enactment of the Amendment Ordinance, accumulation of income beyond any of the six statutory accumulation periods was not allowed12. The six accumulation periods are, subject to certain conditions:
- The life of the settlor; or
- A term of 21 years from the death of the settlor; or
- The duration of the minority of any person in being at the death of the settlor; or
- The duration of the minority or respective minorities only of any person who under the limitations of the instrument directing the accumulations would, for the time being, if of full age, be entitled to the income directed to be accumulated; or
- A term of 21 years from the date of the making of the disposition; or
- The duration of the minority or respective minorities of any person or persons in being at the date of the making of the disposition.
Upon the enactment of the Amendment Ordinance, REA shall cease to have effect in relation to instruments creating trusts or special powers of appointment taking effect on or after the commencement of the Amendment Ordinance13. However, certain restrictions are maintained on accumulations of income of charitable trusts, namely to ensure that no charitable trust may accumulate income for a period of more than 21 years14.
7. Statutory control on trustees’ exemption clause
At common law, a trustee’s exemption clause in the trust instrument can validly exempt the trustee from liability for all breaches of trust except fraud. This was established in case law that the words ‘actual fraud’ are equivalent to dishonesty and unless dishonesty could be established the trustee cannot be held liable.
A trustee may exclude liability for their errors and negligence even if gross negligence arises.
A new section 41W of the TO is introduced in order to provide better protection to beneficiaries. This new section provides that trustees acting in a professional capacity and receiving remuneration would not be exempted from liability for breach of trust arising from the trustees’ own fraud, wilful misconduct and gross negligence. Any exemption clause seeking to exempt a trustee from liability in those circumstances will be invalid.
Please note that this section applies to trusts whether created before or after the enactment of the Amendment Ordinance, but in case of existing trusts, it will take effect one year after the commencement of the Amendment Ordinance (i.e. December 1, 2014) to allow trustees of existing trusts to make necessary preparation for the change, e.g. to review their exemption clauses to bring in line with the statutory controls, to review their liability insurance coverage, or even to resign as trustees.
It was the Government’s intention to improve the competitiveness of Hong Kong’s trust services and attract settlors to set up trusts in Hong Kong by introducing this Amendment Ordinance. The Amendment Ordinance has adopted the common law position on the trustee’s duty of care and has limited the use of trustees’ exemption clause to enhance the protection for beneficiaries. New provisions were introduced to provide settlors with the reserved powers so as to ensure the certainty and validity of trusts. Trustees are also given enhanced default powers to facilitate effective administration of trusts. Further, by diminishing the effect of the forced heirship rules and abolishing RAP and REA, it should encourage settlors to establish perpetual trusts.