Selecting a Trustee: Due Diligence Criteria for Choosing Between Professional Institutions and Individuals

The selection of a trustee is arguably the single most consequential decision in any trust structure, yet it remains the most frequently delegated to convenience or personal relationship. For Hong Kong families, this decision has acquired new urgency following the Hong Kong Monetary Authority’s (HKMA) December 2024 circular on trust services, which explicitly requires licensed institutions to assess the “suitability and capability” of any appointed trustee, including individual trustees, under the new Guideline on the Supervision of Trust Business (effective 1 July 2025). Simultaneously, the Inland Revenue Department’s (IRD) increased scrutiny of trust residency and economic substance under the Inland Revenue Ordinance (Cap. 112) has made the trustee’s domicile and professional standing a tax compliance issue, not merely an administrative one. The 2023 Trusts (Amendment) Ordinance (Ord. No. 14 of 2023) further strengthened the statutory duties of trustees, codifying a duty of care and skill that applies equally to professional and individual trustees. Against this regulatory backdrop, the choice between a professional institutional trustee and a trusted individual—often a family member or long-serving professional advisor—demands a structured due diligence framework. This article provides that framework, grounded in Hong Kong’s legal and regulatory environment.

The Regulatory and Tax Landscape: Why Trustee Selection is Now a Compliance Decision

The regulatory environment for trustees in Hong Kong has shifted from a largely permissive regime to one with explicit statutory duties and supervisory expectations. The Trusts (Amendment) Ordinance 2023 introduced a statutory duty of care and skill (new Part VIIA, sections 91A–91G of Cap. 29), requiring all trustees—whether professional or individual—to “exercise such care and skill as is reasonable in the circumstances.” For a professional trustee, this standard is measured against the higher benchmark of a person “acting in the course of a business or profession” (section 91B(2)). For an individual trustee, the standard is that of a “prudent person of business” (section 91B(1)). This distinction is not academic: a family member acting as trustee who fails to diversify trust assets, for example, could face a claim for breach of duty that would not have existed under the pre-2023 common law.

The HKMA’s 2024 circular on trust services introduces a further layer of regulatory expectation. Licensed banks and trust companies are now required to conduct “enhanced due diligence” on any trustee appointed by a client, including individual trustees, under the Guideline on the Supervision of Trust Business. This means the institution cannot simply accept a client’s choice of trustee without verifying the trustee’s identity, background, professional qualifications, and ability to meet the trust’s obligations. For families considering a professional trustee, this circular effectively mandates the due diligence process we describe here.

Tax considerations compound the regulatory requirements. The IRD’s 2024 Departmental Interpretation and Practice Notes (DIPN) No. 60 on trust taxation clarified that the “place of central management and control” of a trust—which determines its tax residence—is the location where the trustee exercises its powers. A Hong Kong-resident individual trustee who manages trust assets from Hong Kong will render the trust Hong Kong-taxable on its worldwide income. Conversely, a professional trustee in a jurisdiction with a territorial tax system, such as Singapore, may preserve the trust’s non-Hong Kong tax status. The 2023 amendment to the Trusts (Amendment) Ordinance also introduced a statutory “firewall” for trusts governed by Hong Kong law, protecting trust assets from foreign forced-heirship claims (section 91H). This provision is only effective, however, if the trustee is resident in Hong Kong and the trust is administered in Hong Kong.

The core question for any family is therefore not simply “who is trustworthy?” but “who is legally and tax-efficiently capable of administering this trust in the relevant jurisdiction?” The answer depends on a structured comparison of professional institutions and individuals across five due diligence criteria.

Criterion 1: Regulatory Standing and Licensing

Professional Trustees: A Regulated Universe

A professional trustee in Hong Kong is typically a licensed trust company regulated by the HKMA under the Banking Ordinance (Cap. 155) or the Trust Companies Ordinance (Cap. 77). As of 31 December 2024, the HKMA’s register of authorized institutions listed 157 licensed banks and 23 restricted licence banks, of which 42 hold trust licences under the Trust Companies Ordinance. These entities are subject to the HKMA’s Supervisory Policy Manual on trust business, including capital adequacy requirements (minimum paid-up capital of HKD 3 million for a trust company under section 15 of Cap. 77), ongoing reporting, and on-site examinations.

The SFC also regulates trustees of collective investment schemes (CIS) under the Securities and Futures Ordinance (Cap. 571). A trustee of an SFC-authorized fund must be a licensed corporation (Type 13 regulated activity) and must meet the SFC’s Code of Conduct for Trustees of Collective Investment Schemes. This regulatory overlay provides a baseline of professional standards, insurance coverage, and continuity.

Individual Trustees: The Unregulated Gap

An individual trustee in Hong Kong is not subject to any specific licensing regime. The Trusts (Amendment) Ordinance 2023 imposes a statutory duty of care, but there is no regulator to enforce it proactively. The individual trustee is answerable only to the beneficiaries through civil litigation—a costly and slow remedy. The absence of a regulatory safety net means that a family’s due diligence must substitute for the regulator’s oversight.

Practical implication: For a trust holding substantial assets (e.g., HKD 50 million or more), the regulatory gap alone may justify a professional trustee. For smaller trusts where the individual trustee is a trusted family member with proven financial acumen, the risk may be acceptable, but only if the family conducts the same level of due diligence that a regulator would.

Criterion 2: Continuity and Succession Risk

The Institutional Advantage: Perpetual Succession

A professional trust company has perpetual succession. The company does not die, retire, or become incapacitated. Its board of directors and management team provide institutional memory and professional continuity. The HKMA’s Supervisory Policy Manual requires authorized institutions to maintain “business continuity plans” (BCP) that cover succession of key personnel and systems. For a trust company, this means that the departure of a senior trust officer does not disrupt the administration of the trust.

The Individual Risk: A Single Point of Failure

An individual trustee is a single point of failure. If the trustee dies, becomes mentally incapacitated, or simply loses interest, the trust may be left without a legal administrator. The Trusts (Amendment) Ordinance 2023 provides for the appointment of a replacement trustee by the court under section 42 of the Trustee Ordinance (Cap. 29), but this process requires a court application, which is time-consuming and costly. The family can mitigate this risk by naming a successor trustee in the trust deed, but the successor must be willing and able to serve at the time of the vacancy.

Data point: The Hong Kong Judiciary’s 2023 annual report recorded 1,247 applications under the Trustee Ordinance, of which 312 were for the appointment of a new trustee. The average time from application to order was 8.4 months. During this period, the trust’s assets may be effectively frozen.

Practical implication: For trusts intended to last beyond the lifetime of the initial trustee—such as dynasty trusts or trusts for minor children—a professional trustee is the only reliable option. For a short-term trust (e.g., a testamentary trust for a specific purpose), an individual trustee with a named successor may be acceptable.

Criterion 3: Investment Capability and Risk Management

Professional Trustees: Institutional Investment Platforms

A professional trust company typically has access to institutional-grade investment platforms, including multi-asset class portfolios, direct private equity and real estate investments, and currency hedging. The HKMA’s Supervisory Policy Manual on trust business requires trust companies to have “appropriate systems and controls” for investment management, including a written investment policy and risk management framework. The trust company’s investment team is staffed by professionals who hold relevant qualifications (e.g., CFA, CPA) and are subject to the SFC’s Code of Conduct for licensed persons.

Individual Trustees: Limited Resources and Expertise

An individual trustee, even one with a finance background, typically lacks the institutional infrastructure for sophisticated investment management. The individual may rely on external advisors, but this introduces additional costs and coordination risks. The Trusts (Amendment) Ordinance 2023’s duty of care requires the individual trustee to “take reasonable steps” to invest trust assets prudently. If the trustee lacks the expertise to do so, the duty may be breached.

Practical implication: For a trust holding a diversified portfolio of listed equities, bonds, and alternative assets, a professional trustee’s investment platform is a significant advantage. For a trust holding a single asset (e.g., a family business or a property), an individual trustee may be adequate, provided the trustee has the relevant business or property management experience.

Criterion 4: Cost Transparency and Fee Structure

Professional Trustees: Predictable but Higher Fees

Professional trust companies charge fees based on a percentage of assets under administration (usually 0.5% to 1.5% per annum for a standard trust, with a minimum annual fee of HKD 20,000 to HKD 50,000). Additional fees apply for investment management, tax compliance, and special projects (e.g., property sales). The HKMA’s Code of Banking Practice requires disclosure of all fees and charges in the trust agreement, but the cumulative cost can be significant for smaller trusts.

Individual Trustees: Lower Direct Cost, Higher Hidden Risk

An individual trustee typically charges a lower fee—often a fixed annual amount (e.g., HKD 10,000 to HKD 30,000) or no fee at all if the trustee is a family member. However, the indirect costs can be substantial. The individual trustee may need to engage external professionals (lawyers, accountants, investment advisors) to fulfill their duties, and these costs are borne by the trust. The Trustee Ordinance (Cap. 29, section 85) allows a trustee to be reimbursed for “all expenses properly incurred,” but the trustee must justify these expenses to the beneficiaries.

Practical implication: The total cost of an individual trustee, including external professional fees, may exceed that of a professional trustee for a complex trust. A family should model the total cost over the trust’s expected duration (e.g., 10 years) before deciding.

Criterion 5: Jurisdictional Fit and Tax Planning

Professional Trustees: Multi-Jurisdictional Expertise

A professional trust company with a presence in multiple jurisdictions (e.g., Hong Kong, Singapore, Cayman Islands) can administer trusts under different governing laws and tax regimes. For a Hong Kong family with assets in multiple jurisdictions, a professional trustee can ensure that the trust’s administration complies with local laws and tax requirements. The HKMA’s Guideline on the Supervision of Trust Business requires trust companies to have “adequate knowledge of the laws and regulations of the jurisdictions in which the trust operates.”

Individual Trustees: Single-Jurisdiction Limitations

An individual trustee is typically resident in a single jurisdiction and has expertise only in that jurisdiction’s laws. If the trust holds assets in another jurisdiction, the individual trustee may need to appoint a local agent or co-trustee, adding complexity and cost. The Trusts (Amendment) Ordinance 2023’s firewall provision (section 91H) applies only to trusts governed by Hong Kong law and administered in Hong Kong. If the individual trustee moves to another jurisdiction, the trust’s tax and legal status may be compromised.

Practical implication: For a family with assets in Hong Kong, Singapore, and the PRC, a professional trustee with offices in all three jurisdictions is the only practical option. For a family with assets solely in Hong Kong, an individual trustee resident in Hong Kong may be sufficient.

Actionable Takeaways

1. For trusts holding assets exceeding HKD 10 million, a professional institutional trustee is the default recommendation — the regulatory oversight, investment platform, and continuity risk mitigation outweigh the higher fee structure.

2. If an individual trustee is preferred, the family must conduct a formal due diligence process — including a written assessment of the individual’s financial literacy, investment experience, and willingness to serve, documented in the trust deed.

3. The trust deed should name a successor trustee — ideally a professional institution — to mitigate the single-point-of-failure risk inherent in individual trustees.

4. The trustee’s jurisdiction of residence must align with the family’s tax planning objectives — a Hong Kong-resident individual trustee will make the trust Hong Kong-taxable on worldwide income, which may be undesirable for families with non-Hong Kong assets.

5. The cost comparison should include all external professional fees — not just the trustee’s direct fee — and should be modelled over the trust’s expected duration, not just the first year.