The advantages of using a trust include reduced exposure to taxation and any potential creditors who may arise in the future, as well as being unaffected by the probate process. A trust separates ownership and liability from control and benefit, giving you increased freedom from regulation and taxation based on ownership but letting you determine who benefits from your assets, and allowing you to retain control over them. “The secret to success,” advised Nelson Rockefeller, “is to own nothing, but control everything.” That’s what a trust lets you do.
If you’ve never considered using a trust before, it’s worth looking at what using one could do for your estate planning. Especially in jurisdictions like Hong Kong, where you can have maximal control over how your trust is set up and operated, it’s possible to create a tailored plan for your assets that matches your goals very closely.
Advantages of a trust for estate management
Trusts reduce tax exposure and enable long-term financial planning. Assets that have been transferred into trust are no longer legally the property of the settlor, so income and capital gains generated by those assets will be taxed according to the laws and regulations applicable to the trustee. This means your assets will not be subject to inheritance tax, for instance.
In some jurisdictions, there is legislation intended to regulate or manage this outcome, but a properly structured and administered trust should, in any case, ensure that tax liabilities are known well in advance and aren’t changed by circumstances. This is especially true in Hong Kong where a trust can operate in perpetuity, enabling planning for decades ahead.
Additionally, a trust can ensure that your estate doesn’t go through probate. A deceased person’s assets remain technically theirs until a court adjudges otherwise, a process called probate that requires heirs to petition the court to have the title on assets passed to them. Since the process is public, all assets must be publicly disclosed, which might not suit your plans or preferences. A trust means your assets will never pass through probate, and your financial affairs remain a private matter.
Knowing how to use a trust can give you real control over your estate, now and in the future. Being freed from the probate process isn’t the only way a trust can free you from courts. There’s also no risk of falling foul of forced heirship laws, which mandate individuals who must inherit some of your estate.
Managing and operating a trust: trustees and investments
In most cases, after a trust deed has been drafted and the trust set up, the settlor and beneficiaries don’t have much to do with the day-to-day management of the trust. In the course of providing estate administration services, trustees routinely manage assets and offer investment advice as ancillary to the carrying on of its trustee functions. For many people, leaving that kind of thing in the hands of a trustee is one of the significant benefits of a trust.
Generally speaking, when it comes to investment choices, trustees are required to make decisions following the range of authorized investments in Schedule 2 to the Trustee Ordinance. However, it is often recognized in our industry that trustees are professional investors, but not investment professionals. That said, more often than not, the asset management and advisory functions are delegated to a qualified third party. In cases where settlor already has a relationship with a preferred asset manager, it’s even possible for them to nominate one for the trustee’s consideration. Settlor-directed trusts and other options
Alternatively, if the majority of your estate consists of operating assets such as a company or real estate, a well-drafted trust instrument can allow your family to benefit for generations within specific guidelines set by you.
In Hong Kong, trust law allows for the settlor — the person who sets up the trust — to retain certain investment and asset management powers over the trust, or to hand it over only partially to the trustee. Thus, a settlor can reserve some or all powers of investment or asset management functions in a trust without running the risk of invalidating the trust.
For example, multiple income properties can be held by a company whose shares are, in turn, held in a trust. There are multiple options for administering an arrangement like this. Many settlors will simply wish to establish a trust, place assets in the trust and leave a trustee-appointed asset manager to handle day-to-day trust operations, and a property management firm to manage the property. In other cases, settlors may wish to be directly involved in the asset management functions.
Creating a trust
It is important to know that a trust will only come into existence if there is “certainty of words, certainty of subject matter and certainty of objects” as per Lord Langdale MR in Knight v Knight (1840) 3 Beav 148 at 173. In order to craft appropriate guidelines for a trust deed, it’s necessary to have a grasp of the environment the trust will operate within, desired outcomes, and to know which rules are possible for your trust. To get the best from a trust arrangement, it makes sense to design a trust in collaboration with a trust professional.
Legacy has over three decades’ experience in creating and operating trusts to match sometimes-complex client needs. We’ve helped individuals from across the globe manage their estates, working with them to consider and arrive at the right trust structure for them.