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Trust & Probate
October 2008
Why Should You Set Up a Trust
Just because estate duty is abolished doesn’t mean trust planning is any less important. With proper planning one can better manage his/her hard-earned fortune and provide greater financial security to one’s family. A probate fight within the family can also be avoided.
What is a Trust? A trust is a legal arrangement whereby one person (the settlor) transfers his/her assets to another person or a body corporate (the trustee) who holds and manages the assets for the benefit of other persons (the beneficiaries). The trust assets may include anything such as real property, money, shares, bonds, etc. Family trusts are often set up to protect the interest of one’s family members from any circumstantial changes.
Why is a Family Trust Needed? In the past, as estates in Hong Kong might attract estate duty at a rate up to 15%, setting up a family trust was a tax-saving solution. With the abolition of estate duty in Hong Kong in respect of deaths occurring on or after 11 February 2006, the importance of trust planning is not diminished. Today, family trusts remain a popular tool for wealth management and succession planning for various reasons:
Flexibility A family trust is usually structured as a fully discretionary trust suited to a group of potential beneficiaries. Wide powers and discretion are granted to the trustee to deal with matters including determination of beneficiaries’ entitlement, distribution of income and/or capital, and the making of investment decisions. In exercising these powers and discretion, the trustee would have to give due regard to the settlor’s wishes, needs and interests of the beneficiaries and other factors which the trustee may consider prudent or relevant.
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A settlor may change his/her wishes from time to time. There may be a need to add or remove beneficiaries when family or other circumstances change. A well-drafted trust document may cope with changes without the need of redrafting.
Less Likely to be Challenged Imagine if a testator fails to execute another Will upon remarriage, his or her former spouse and children may be deprived of reasonable financial provision because of the revocation of the old Will. In this case, the distressed family members may challenge the Will. (For more information, please read http://www.onc.hk/pub/oncfile/publication/probate/0808_EN_Challenging_a_Will.pdf
Since a discretionary trust provides high degree of flexibility to cater for changes, it is less likely to be challenged by family members. This helps maintain harmony within the family.
Protection of Assets A family trust is an excellent vehicle to protect one’s assets against future claims by creditors. A person cannot set up a trust simply to defeat existing creditors’ claims. However, it would be wise to plan against possible future claims by setting up a trust. If in later years the settlor is faced with adverse financial events, the interest of his/her family members would be protected in most cases.
Similarly, by vesting the family assets in a family trust, the settlor can protect his/her children’s inheritance against possible future matrimonial claims from the spouse of the children.
Succession Planning Assets in the estate of a deceased are generally frozen on death. Without proper planning,
surviving members of the family may not have sufficient cash to maintain their living and pay for the legal costs incurred in the probate application process. In contrast, since assets in a
discretionary trust do not pass through the estate, probate formalities can be avoided. This ensures a smooth succession and saves considerable costs.
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Confidentiality Although a Will is a confidential document, probate proceedings will go into the public record. In contrast, there is no requirement for the registration or publication of a family trust with any public authority. Since the creation of a family trust is a confidential
For enquiries:
Please contact members of our Trust & Probate Practice Group
Francis Chan Partner +(852) 2521 3969
francis.chan@onc.hk
arrangement between the settlor and the trustee, the trustee is bound by its duty of confidentiality not to disclose the identities and interests of the beneficiaries to any third parties, save in limited exceptions. A family trust is therefore afforded enhanced anonymity.
Julie Leung Senior Associate +(852) 2107 0344
julie.leung@onc.hk
Assets Management Globalization furthers the worldwide spread of individual assets, which could be better managed by a trust. Tax liabilities can also be minimized with proper trust planning.
Jenny Wong Senior Associate +(852) 2107 0378
jenny.wong@onc.hk
This article is not intended to provide an exhaustive list of benefits of setting up a family trust. Given the intricacies involved in trust planning, readers are recommended to take professional advice.
Contacts:
http://www.onc.hk onc@onc.hk Tel : 2810 1212 Fax : 2804 6311 15/F, The Bank of East Asia Building, 10 Des Voeux Road Central, Hong Kong Branch Office: Unit 1510, No. 9 Queen’s Road Central, Hong Kong
IMPORTANT:
The law and procedure on this subject are very specialized and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers ? 2008
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