The Evolution of the Modern International Trust: Developments and Challenges

Author:Rebecca Lee
Position:Faculty of Law, The University of Hong Kong
Pages:2069-2095
SUMMARY

As the first generation of wealthy entrepreneurs in Hong Kong begin to age, the issue of how best to transfer their family fortunes to the next generation has emerged. This Article first discusses the recent trends in financial planning for high-net-worth individuals in Hong Kong. It then addresses the growing use and evolution of trusts in wealth transfers from two perspectives, namely, (i) the... (see full summary)

 
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2069
The Evolution of the Modern
International Trust: Developments and
Challenges
Rebecca Lee*
ABSTRACT: As the first generation of wealthy entrepre neurs in Hong Kong
begin to age, the issue of how best to transfer their fa mily fortunes to the next
generation has emerged. This Article first d iscusses the recent trends in
financial planning for high-net-worth ind ividuals in Hong Kong. It then
addresses the growing use and evo lution of trusts in wealth transfers from two
perspectives, namely, (i) the innova tive features of the modern interna tional
trust that render the use of a trust more palatable to Hong Kong settlors and
(ii) the challenges posed by those features fo r both the validity of the trust and
integrity of the trust concept. As the d iscussions show, the Hong Kong
experience is indeed shared by most trust jurisdic tions worldwide and provides
the latter useful reference in confronting the controversies arising from the
evolution of the trust.
I. INTRODUCTION ......................................................................... 2070
II. TRENDS IN FINANCIAL PLANNING: WILLS AND
WILL-SUBSTITUTES .................................................................... 2071
A. WILLS: THE NINA WANG SAGA ........................................... 2071
B. TRUSTS AS WILL-SUBSTITUTES ............................................ 2074
III. EVOLUTION OF THE MODERN INTERNATIONAL TRUST .............. 2076
A. NEW PARTIES TO THE TRUST PARADIGM: RESERVED
POWERS OF SETTLOR AND PROTECTOR ................................. 2077
B. DISCRETIONARY POWERS WITHOUT LIABILITIES:
TRUSTEES POWERS, DUTIES AND LIABILITIES ........................ 2079
C. BENEFICIARIES DIMINISHING RIGHTS AND POWERS ................ 2081
* Faculty of Law, The University of Hong Kong. E-mail: rebeccalee@hku.hk. I am grateful
to Professor Thomas P. Gallanis for inviting me to the Iowa Law Review & ACTEC Fo undation
Symposium on “Wealth Transfer Law in Comparative and International Perspectives” where an earlier
version of this paper was presented. I also thank the Iowa Law Review editorial team for their
meticulous work. Research for this article was funded by the RGC General Research Fund
20172018 (project number: 17610217).
2070 IOWA LAW REVIEW [Vol. 103:2069
IV. CHALLENGES IN TRUST PLANNING ............................................ 2082
A. CHALLENGES TO THE VALIDITY OF THE TRUST ....................... 2082
1. Divorce and Bankruptcy Protection .......................... 2082
2. Sham Trusts ............................................................... 2085
B. CHALLENGES TO CONCEPTUAL NATURE OF THE TRUST ........... 2087
1. The Irreducible Core Content of Truste eship ......... 2087
i. Duty to Notify Discretionary Objec ts of Their
Beneficial Entitlements............................................ 2087
ii. Duty to Provide Access to Trust Information ............. 2090
2. Integrity of the Trust Concept .................................. 2091
V. CONCLUSION ............................................................................ 2094
I. INTRODUCTION
As the first generation of wealthy entrepreneurs in Hong Kong ages,1 the
issue of how best to transfer their family fortunes to the next generation has
emerged. In the past decade, the territory has witnessed a number of high-
profile family legal battles. Wherea s property used to be transferred
predominantly by the conventional method of a will, the last few decades have
seen an increase in the use of the trust as an asset protection device.2 The
trust is a long-established legal institution in the common law world. Despite
its versatility, the traditional concept of a trust as a form of property holding
by one party (trustee) for the benefit of another (beneficiary) has been held
largely constant. In recent decades, however, the boundaries of the trust have
evolved as it has become more widely utilized for a greater variety of
purposesincluding tax mitigation, asset protection, and wealth
management.3 In order to attract trust businesses, trust planners have
displayed little hesitation in catering to the wishes of potential settlors who do
not wish to lose control of their assets by manipulating certain trust features
1. “In Asia Paci fic excluding Japan, 31 percent of high net worth people are over 55.”
KPMG & HONG KONG TRU STEES ASSN, HONG KONG TRUST INDUSTRY: A CROSS-SECTOR
PERSPECTIVE 54 (2013). In fact, many of these fi rst-generation of wealthy entrepreneurs are post-
war baby boomers and are now reaching the age of 70 to 75.
2. This is especially true amongst the wealthy individuals in Hong Kong. For an overview
of the recent key developments of the trust industry in Hong Kong, see generally KPMG & HONG
KONG TRUSTEES ASSN, HONG KONG TRUST INDUSTRY SP OTLIGHT: ENHANCING ITS COMPETITIVE
EDGE (2017). In particular, it was note d that “[t]here is a growing demand for [tr ust] services
from [ultra-high-net -worth individuals] seeking to manage th e inter-generational transmission of
wealth and implement succession plans for family-owned businesses. ” Id. at 34.
3. See, e.g. , David Hayton, The Uses of Trusts in the Commercial Context in the UK, in MODERN
INTERNATIONAL DEVELOPMENTS IN TRUST LAW 14568 (David Hayton ed., 1999); Sarah
Worthington, The Commercial Utility of the Trust Vehicle, in EXTENDING THE BOUNDARIES OF TRUSTS
AND SIMILAR RING-FENCED FUNDS 135 (Davi d Hayton ed., 2002).

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