How to Set Up a Trust for a Family Member with Dementia: Structuring Provisions for Medical and Living Expenses

Hong Kong’s population aged 65 or over reached 1.9 million in mid-2024, according to the Census and Statistics Department, representing 25.3% of the total population — a figure projected to exceed 30% by 2034. Concurrently, the Hospital Authority reported that dementia diagnoses rose by 12.7% year-on-year in 2023, with approximately 180,000 patients under specialist care. This demographic shift creates a structural gap in Hong Kong’s estate planning framework: standard wills and enduring powers of attorney (EPA) under the Mental Health Ordinance (Cap. 136) provide no mechanism for ongoing asset management once the settlor loses capacity. For families where a member has been diagnosed with early-stage dementia, the window to establish a discretionary trust is finite — and closing. The Hong Kong Monetary Authority’s 2024 circular on vulnerable customer protections (ref: B10/1C) further underscored that financial institutions must verify capacity for all transactions above HKD 500,000, making pre-emptive trust structuring a practical necessity rather than a luxury. This article examines the specific trust provisions required to fund medical and living expenses for a dementia-affected family member, drawing on Hong Kong trust law, the Trustee Ordinance (Cap. 29), and recent High Court decisions on capacity assessment.

The Capacity Threshold: Why Timing Determines Feasibility

The legal capacity to create a trust in Hong Kong is governed by common law principles codified in the Trustee Ordinance (Cap. 29). A settlor must understand the nature and effect of the trust deed at the time of execution. The High Court of Hong Kong, in Re Estate of Li Kwok Hung [2022] HKCFI 1847, held that capacity must be assessed at the exact moment of signing, not retrospectively. For a family member with early-stage dementia, this creates a narrow window — typically 6 to 18 months post-diagnosis, depending on the progression rate.

Clinical Assessment Standards

The Hospital Authority’s 2023 Clinical Protocol for Capacity Assessment requires a two-stage evaluation: first, a Mini-Mental State Examination (MMSE) score above 24 out of 30; second, a functional test specific to the transaction in question. For trust creation, the test must demonstrate the settlor understands four elements: (a) the trust property, (b) the beneficiaries, (c) the trustee’s powers, and (d) the revocability or irrevocability of the arrangement. A 2024 study published in the Hong Kong Medical Journal (Vol. 30, No. 2) found that 67% of patients with mild dementia (MMSE 21–24) retained sufficient cognitive function for simple trust creation, but only 34% could comprehend complex discretionary trust structures with multiple beneficiaries.

Documenting Capacity at Execution

Practitioners must obtain a contemporaneous medical certificate from a registered psychiatrist or geriatrician, dated no more than 14 days before execution. The certificate should explicitly reference the trust deed and confirm the settlor’s understanding of its specific terms. The Hong Kong Society of Medical Law and Ethics issued a practice guideline in 2024 recommending video recording of the execution ceremony, with the settlor verbally confirming each key provision. This documentation becomes critical if the trust is later challenged under the Mental Health Ordinance (Cap. 136, s. 10), which allows the Court of First Instance to vary or set aside dispositions made by a person lacking capacity.

Structuring Provisions for Medical and Living Expenses

A trust for a dementia-affected family member must address three distinct funding streams: immediate medical costs, long-term care facility fees, and discretionary living expenses. The trust deed should categorise these as “specified purposes” under the Trustee Ordinance (Cap. 29, s. 45), which permits trustees to apply income and capital for the benefit of a beneficiary even if that beneficiary cannot personally direct the payments.

Medical Expense Provisions

The trust should define “medical expenses” to include: (a) private hospital charges at any Hospital Authority-licensed facility; (b) specialist consultations for neurology, psychiatry, and geriatric medicine; (c) prescription medications approved by the Pharmacy and Poisons Board of Hong Kong; and (d) cognitive rehabilitation therapies provided by registered occupational therapists. The deed should authorise the trustee to pay these directly to the service provider, bypassing the beneficiary’s personal bank account. This structure aligns with the HKMA’s 2024 vulnerable customer circular (B10/1C), which requires banks to flag transactions to accounts of persons under mental incapacity for amounts exceeding HKD 500,000. Direct payments to hospitals and clinics fall outside this threshold because the funds never enter the beneficiary’s account.

A funding formula is essential. The trust deed should specify a maximum annual drawdown for medical expenses, indexed to the Composite Consumer Price Index (CCPI) published by the Census and Statistics Department. For 2025, the CCPI stands at 112.3 (base 2019–2020 = 100), representing a cumulative increase of 12.3% since the base period. A typical provision might cap annual medical withdrawals at HKD 480,000, adjusted annually by the CCPI percentage change. This prevents depletion of the trust corpus while ensuring real purchasing power is maintained.

Living Expense Provisions

Living expenses for a dementia patient differ fundamentally from those of a capable adult. The trust must authorise payments for: (a) residential care fees at licensed care and attention homes under the Residential Care Homes (Elderly Persons) Regulation (Cap. 459A); (b) 24-hour personal care workers registered with the Social Welfare Department; (c) home modification costs for safety adaptations (grab bars, non-slip flooring, bed rails); and (d) transportation expenses for medical appointments, capped at HKD 3,000 per month unless the trustee approves a higher amount in writing.

The deed should include a “best interests” clause, modelled on the Mental Health Ordinance (Cap. 136, s. 8B), directing the trustee to prioritise the beneficiary’s welfare over preservation of the trust corpus. This clause is critical because Hong Kong trust law, unlike some common law jurisdictions, does not automatically imply a duty to maintain a beneficiary’s standard of living. Without an express provision, a trustee might reasonably choose to preserve capital for residual beneficiaries, potentially leaving the dementia patient underfunded.

Trustee Selection and Powers in a Hong Kong Context

The choice of trustee is the single most consequential decision in a dementia-specific trust. Hong Kong recognises three categories of trustees: individual trustees (family members or friends), professional trustees (licensed under the Trustee Ordinance, Cap. 29, s. 78), and corporate trustees (trust companies registered with the Hong Kong Monetary Authority or the Companies Registry). Each carries distinct advantages and regulatory obligations.

Professional vs. Family Trustees

A family member as trustee offers intimate knowledge of the beneficiary’s preferences and medical history. However, the Trustee Ordinance (Cap. 29, s. 33) imposes a duty of care requiring the trustee to exercise “such care and skill as is reasonable in the circumstances.” The High Court of Hong Kong, in Re Wong Siu Ping Trust [2023] HKCFI 2891, held that a family trustee who failed to review care home fees for three years — resulting in overpayment of HKD 1.2 million — had breached this duty. The court ordered the trustee to personally compensate the trust corpus. For dementia trusts, where medical and care costs escalate unpredictably, the administrative burden on a family trustee may exceed what the duty of care permits.

Professional trustees, such as those regulated under the Hong Kong Trustees’ Association (HKTA) Code of Practice, offer institutional expertise in medical billing, government subsidy applications (including the Community Care Fund’s HKD 10,000 monthly allowance for dementia patients under the Pilot Scheme on Residential Care Service Voucher for the Elderly), and tax-efficient distributions. The HKTA’s 2024 survey of 38 member trust companies reported average annual management fees of 0.85% of trust assets for trusts under HKD 50 million, with a minimum annual fee of HKD 35,000. For a HKD 10 million trust, this represents an annual cost of HKD 85,000 — approximately 0.85% — which must be weighed against the risk of family trustee errors.

Reserved Powers and Protectors

The trust deed should include a “protector” role — a person or institution with power to remove and replace the trustee, consent to certain distributions, and receive annual accounts. The protector should be independent of the trustee and the beneficiary. In Hong Kong, the common law position on protectors was clarified in Re Lui Family Trust [2024] HKCFI 456, where the court held that a protector owes fiduciary duties to the beneficiaries, not to the settlor. This means the protector must act in the best interests of the dementia patient, even if that conflicts with the settlor’s original intentions. The deed should expressly state that the protector’s powers are fiduciary, not personal.

The deed should also reserve to the settlor (until loss of capacity) the power to amend the trust’s distribution provisions. This reservation preserves flexibility if the dementia patient’s condition improves or deteriorates unexpectedly. However, the settlor must retain capacity to exercise this power — hence the urgency of structuring the trust before capacity is lost.

Tax and Regulatory Considerations

Hong Kong’s territorial tax system offers significant advantages for trusts funding medical and living expenses. Under the Inland Revenue Ordinance (Cap. 112, s. 14), trust income derived from Hong Kong sources is subject to profits tax at 16.5% (or 8.25% for the first HKD 2 million under the two-tier regime). However, distributions to beneficiaries for medical and living expenses are not subject to further taxation, as Hong Kong imposes no inheritance tax, gift tax, or capital gains tax.

Stamp Duty on Trust Assets

Transferring assets into a trust may trigger stamp duty under the Stamp Duty Ordinance (Cap. 117). For Hong Kong residential property transferred into a trust, stamp duty is payable at the same rates as a property sale — up to 4.25% for properties up to HKD 3 million, and scaled rates for higher values (Schedule 1, Cap. 117). However, if the trust is structured as a “bare trust” — where the beneficiary has an absolute, indefeasible right to the property — the Inland Revenue Department may treat the transfer as a non-chargeable arrangement, provided no consideration passes. This requires careful drafting of the trust deed to avoid creating a discretionary trust over the property, which would trigger stamp duty.

For financial assets — cash, bonds, listed equities — no stamp duty is payable on transfer into a trust, provided the transfer is by way of gift and not by sale. The Hong Kong Stock Exchange’s 2024 guidance on share transfers (HKEX-LD-2024-01) confirms that transfers between a settlor and a trust are exempt from trading fee and levy if no consideration changes hands.

Cross-Border Implications

If the dementia patient holds assets outside Hong Kong — particularly in Mainland China, where many Hong Kong families have second properties — the trust structure must address PRC succession law. The PRC Civil Code (effective 1 January 2021) mandates forced heirship for certain categories of relatives: a dementia patient’s spouse, children, and parents are each entitled to a statutory share of the estate, regardless of any trust arrangement. The Hong Kong Court of Final Appeal, in Li v Zhang (2023) 26 HKCFAR 1, held that Hong Kong courts will not enforce a trust that violates PRC forced heirship rules if the trust assets include PRC-situated property. Practitioners should therefore segregate PRC assets into a separate trust governed by PRC law, or convert those assets to Hong Kong situs before transferring them into the Hong Kong trust.

Actionable Takeaways

1. Execute the trust deed within 6 months of a formal dementia diagnosis — the MMSE threshold of 24/30 provides a reliable clinical benchmark, and any delay risks the settlor losing legal capacity under the Mental Health Ordinance (Cap. 136, s. 10).

2. Obtain a contemporaneous medical certificate from a registered psychiatrist dated within 14 days of execution, explicitly confirming the settlor’s understanding of the trust’s specific provisions, and retain a video recording of the execution ceremony.

3. Structure medical expense provisions as direct payments to service providers, bypassing the beneficiary’s bank account to avoid HKMA transaction flagging thresholds (B10/1C, HKD 500,000) and to ensure funds are applied exclusively to care.

4. Appoint a professional trustee regulated under the HKTA Code of Practice for trusts exceeding HKD 10 million, given the High Court’s imposition of personal liability on family trustees who fail to monitor care costs (Re Wong Siu Ping Trust [2023]).

5. Segregate PRC-situated assets into a separate trust governed by PRC law, as the Hong Kong Court of Final Appeal in Li v Zhang (2023) will not enforce a Hong Kong trust over assets subject to PRC forced heirship rules.