HONG KONG SAR, CHINA Law and Practice Contributed by: Alfred Ip, Hugill & Ip
However, the legal consequences of a settlor or bene - ficiary acting as trustee are significant. Where a settlor retains excessive control over a trust ‒ for example, by acting as sole trustee with unfettered powers ‒ the trust may be vulnerable to challenge as a “sham” trust (where the parties never truly intended to create a trust) or an “illusory” trust (where the trustee’s dis - cretion is so fettered as to be meaningless). In either case, the assets would be treated as remaining in the settlor’s personal estate, defeating the asset protec - tion and succession objectives of the structure. For a detailed analysis of these risks, see Can a Settlor Maintain Control and Avoid an Illusory or Sham Trust? In practice, to maintain the integrity of the trust struc - ture, independent professional trustees are appointed, either exclusively or as co-trustees alongside family members. Where family members serve as co-trus - tees, their powers are carefully circumscribed in the trust deed to ensure that the professional trustee retains meaningful independent judgment. The use of a protector, an independent third party with the power to oversee the trustee and, in some cases, veto cer - tain trustee decisions, provides an additional layer of governance and accountability. Asset protection planning in Hong Kong is primar - ily achieved using trust structures, often combined with corporate holding vehicles. The most common arrangement involves an offshore or Hong Kong discretionary trust holding shares in a British Virgin Islands or Hong Kong company, which in turn holds the family business assets or investment portfolio. By vesting legal ownership in the trustee, the assets are separated from the settlor’s personal estate and are therefore not directly available to the settlor’s personal creditors or to claims arising from the matrimonial dis - putes of beneficiaries. 4. Family Business Planning 4.1 Asset Protection A crucial limitation is the rule against fraudulent dis - positions. Under Section 60 of the Law Amendment and Reform (Consolidation) Ordinance (Cap. 23), any disposition of property made with intent to defraud creditors is voidable at the instance of any person
prejudiced by the disposition. Transfers into a trust made when the settlor was already insolvent, or which rendered the settlor insolvent, are particularly vulnerable to challenge. Accordingly, asset protection planning must be undertaken well in advance of any anticipated financial difficulty, and the settlor must be solvent at the time of the transfer. As discussed in 3.4 Tax Consequences of Fiduciary and Beneficiary Roles , the risk of a trust being chal - lenged as a sham or illusory trust is a primary concern. Practitioners must ensure that the trust is genuinely constituted, that the trustee exercises real and inde - pendent discretion, and that the trust documentation accurately reflects the parties’ true intentions. For a detailed discussion of the use of trusts in the context of divorce proceedings, see Trusts and the Impact of Divorce Proceedings. 4.2 Succession Planning Effective family business succession planning in Hong Kong requires the integration of legal structures, gov - ernance frameworks, and open communication within the family. The legal architecture typically involves a trust holding the business, with a shareholders’ agree - ment or articles of association governing the rights and obligations of shareholders within the underlying corporate vehicle. Correctly administered, the trust can ensure the seamless transfer of economic value across generations without the delays and publicity of probate, whilst the shareholders’ agreement provides binding rules for dividend policy, board representa - tion, share transfer restrictions and dispute resolution mechanisms. At the governance level, families are increasingly adopting family constitutions, also known as fam - ily charters, to articulate the family’s shared values, vision, and rules for engagement with the business. Whilst a family constitution is not strictly legally bind - ing, it serves as a powerful tool for aligning expecta - tions, preventing disputes, and providing a framework for decision-making that transcends individual gen - erations. The constitution typically addresses matters such as employment criteria for family members, the role of the family council, the process for resolving disagreements and the family’s approach to philan - thropy and social responsibility.
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