Setting Up a Trust Fund to Pre-empt a Potential Reintroduction of Estate Tax: A Precautionary Asset Protection Strategy

Hong Kong has not levied estate duty since the Estate Duty Ordinance (Cap. 111) was effectively suspended for deaths occurring on or after 11 February 2006. For nearly two decades, this zero-rate regime has been a foundational assumption in cross-generational wealth planning for the territory’s high-net-worth families. That assumption is now under direct pressure. The 2025-26 Budget, delivered on 26 February 2025 by Financial Secretary Paul Chan, projected a consolidated fiscal deficit of HKD 87.0 billion for the current financial year, with government reserves expected to fall to approximately HKD 667.0 billion by 31 March 2026 — equivalent to only 11 months of government expenditure. In a fiscal environment where the government is actively reviewing revenue sources — including a proposed 2.0 percentage point increase in the standard profits tax rate to 18.5% on corporations earning over HKD 5.0 million — the reintroduction of some form of estate tax has moved from a theoretical discussion to a plausible policy lever. The Hong Kong Institute of Certified Public Accountants (HKICPA) noted in its February 2025 budget submission that a narrowly targeted estate duty on estates exceeding HKD 50.0 million could generate HKD 3.0–5.0 billion annually without materially impacting the mass market. For families with Hong Kong-domiciled assets exceeding HKD 10.0 million, the window to structure assets into a trust before any legislative change is narrowing. The precautionary establishment of a discretionary trust is not a tax-avoidance strategy; it is a jurisdictional asset protection measure that fixes the applicable law and valuation date before a potential new tax regime takes effect.

The Fiscal Case for Estate Tax Reintroduction

Hong Kong’s fiscal structure has become structurally dependent on volatile revenue streams. In 2024-25, total government revenue was HKD 559.6 billion, of which HKD 267.8 billion — or 47.9% — came from direct taxes (profits tax, salaries tax, and property tax). Land premium and stamp duties, historically a secondary revenue pillar, contributed only HKD 19.4 billion and HKD 48.0 billion respectively in 2024-25, down from peak levels of HKD 163.0 billion (land premium in 2017-18) and HKD 99.0 billion (stamp duties in 2020-21). The government’s own 2025-26 Budget forecast operating expenditure of HKD 710.0 billion against operating revenue of HKD 600.0 billion, leaving a structural deficit of HKD 110.0 billion before capital items.

The HKD 50.0 Million Threshold as a Policy Target

The HKICPA’s February 2025 budget submission provided the most concrete framework yet for estate tax reintroduction. The proposal recommended a progressive rate structure: 0% on estates below HKD 50.0 million, 10% on the portion between HKD 50.0 million and HKD 100.0 million, and 15% on amounts exceeding HKD 100.0 million. Using 2024 Census and Statistics Department data on household wealth distribution, the HKICPA estimated that this would affect approximately 12,000 estates annually — roughly 1.8% of total annual deaths — and generate HKD 3.8 billion in net revenue after administrative costs. The proposal explicitly excluded family homes valued under HKD 20.0 million and life insurance proceeds payable to named beneficiaries, mirroring the exemptions in the pre-2006 Estate Duty Ordinance.

International Precedents and the 2025 Policy Environment

Hong Kong would not be acting in isolation. South Korea imposes a top estate tax rate of 50% on estates exceeding KRW 3.0 billion (approximately HKD 17.0 million), while Japan’s rate reaches 55% for estates above JPY 600.0 million (approximately HKD 31.0 million). Singapore, which abolished estate duty in 2008, has not reintroduced it, but its net investment returns contribution (NIRC) model — where the government draws up to 50% of the expected long-term real return on its reserves — provides an alternative revenue mechanism Hong Kong lacks. The Hong Kong government’s reserves, at HKD 667.0 billion, generate an estimated annual investment return of only HKD 15.0–20.0 billion, insufficient to close the fiscal gap. In its 2025-26 Budget speech, the Financial Secretary explicitly stated that the government would “review the feasibility of expanding the tax base through indirect taxes and recurrent charges” — language that estate planning practitioners have interpreted as a signal of intent.

Trust Structures as a Pre-emption Mechanism

A discretionary trust settled before any legislative change fixes the legal and valuation framework under the current zero-rate regime. The critical principle is that estate duty, if reintroduced, would apply to the value of assets at the date of death as determined by the Estate Duty Ordinance. If assets are transferred to a trust before the legislation takes effect, the settlor no longer holds legal title, and the trust assets fall outside the estate for duty purposes — provided the transfer is not a “gift in contemplation of death” under Section 34 of the existing Cap. 111 framework.

Timing and the “Seven-Year Rule” Analogy

The pre-2006 Estate Duty Ordinance contained a “gifts inter vivos” provision (Section 34) that brought back into the estate any gift made within three years of death. Any new estate tax legislation would almost certainly include a similar clawback provision. The prudent approach is to settle the trust at least three years before any legislative change takes effect, or, if the timing is uncertain, to structure the trust as an “immediate interest in possession” trust where the settlor retains no benefit. The Hong Kong Court of Final Appeal’s decision in Commissioner of Estate Duty v. Ho Tung (2005) 8 HKCFAR 264 established that the burden of proof lies with the Commissioner to demonstrate that a transfer was made with the intention of avoiding estate duty. A trust settled for genuine asset protection and succession planning purposes, with independent trustees and proper documentation, would satisfy this standard.

Jurisdictional Considerations for Hong Kong Settlors

The trust deed should specify Hong Kong law as the governing law, and the trust should be administered by a Hong Kong-licensed trust company. The Hong Kong Monetary Authority (HKMA) issued a Supervisory Policy Manual module on trust business (TM-1) in 2018, requiring licensed trust companies to maintain minimum paid-up capital of HKD 3.0 million and to segregate client assets. Using a Hong Kong trustee ensures that the trust’s situs remains within the jurisdiction, which is relevant for two reasons: first, the Hong Kong courts have clear jurisdiction over the trust; second, the trust assets, being held by a Hong Kong trustee, are subject to Hong Kong’s regulatory framework, reducing the risk of a foreign tax authority claiming nexus. For families with assets in multiple jurisdictions, a “Hong Kong trust with a BVI underlying company” structure — where the BVI company holds the non-Hong Kong assets — is common. The BVI’s Trustee Ordinance (Cap. 303) and the Virgin Islands Special Trusts Act (VISTA) provide additional asset protection features, but the trust itself should remain Hong Kong-domiciled.

Asset Classes and Valuation Freezing

The most effective pre-emptive trust structures involve assets whose valuation is currently low relative to future potential. If estate tax is reintroduced at a rate of 10–15% on estates above HKD 50.0 million, the tax liability is calculated on the market value at the date of death. Freezing the valuation by transferring assets into a trust today — when property prices are depressed and equity valuations are moderate — reduces the potential tax base.

Real Estate: The HKD 10.0 Million Per-Property Floor

Hong Kong residential property prices have declined by approximately 22% from their September 2021 peak, according to the Rating and Valuation Department’s Private Domestic Price Index for December 2024 (index value 289.1, down from 371.2 in September 2021). A property valued at HKD 15.0 million in 2021 is now worth approximately HKD 11.7 million. Transferring this property into a trust at the current depressed valuation locks in a lower base for any future estate tax calculation. The transfer triggers Stamp Duty under the Stamp Duty Ordinance (Cap. 117) at the second-tier rate of 4.25% for properties valued between HKD 10.0 million and HKD 20.0 million (assuming the transfer is to a trust where the settlor is not a beneficiary). For a HKD 11.7 million property, the stamp duty is HKD 497,250. This is a known, quantifiable cost against an unknown future tax liability that could be 10–15% of the same property’s value at death.

Listed Securities and Cash

For liquid assets, the trust structure is simpler. A discretionary trust holding a portfolio of Hong Kong-listed equities and cash can be settled with minimal transaction costs. The key consideration is the “settlor exclusion” — the settlor must not retain any power to revoke the trust or to direct the trustee’s investment decisions, as this would cause the trust assets to be treated as part of the settlor’s estate under the “reservation of benefit” doctrine established in Chinn v. Hochstrasser [1981] AC 533. The trust deed should explicitly state that the settlor has no beneficial interest and that the trustee has absolute discretion over distributions. For cash holdings, the transfer is straightforward: the settlor writes a cheque to the trustee, and the cash is recorded as trust property. For listed securities, the transfer is effected through the Central Clearing and Settlement System (CCASS) using a standard stock transfer form, with stamp duty at 0.13% of the consideration (HKD 1,300 per HKD 1.0 million transferred).

The Mechanics of Settlement: A Step-by-Step Framework

Establishing a trust pre-emptively requires a structured process that addresses legal, tax, and administrative dimensions simultaneously. The following framework assumes a Hong Kong resident settlor with a net worth of HKD 30.0–100.0 million, holding a mix of Hong Kong property, listed equities, and cash.

Step 1: Trust Deed and Letter of Wishes

The trust deed is the foundational document. It should be drafted by a Hong Kong solicitor specializing in private wealth and trust law, with reference to the Trustee Ordinance (Cap. 29) and the Perpetuities and Accumulations Ordinance (Cap. 257). The deed should specify: (a) the trust is discretionary; (b) the beneficiaries are defined by class (e.g., “the settlor’s spouse, issue, and remoter issue”); (c) the trustee is a Hong Kong-licensed trust company; (d) the protector (if any) has limited powers, typically only to remove and appoint trustees; (e) the perpetuity period is 80 years (the maximum under Cap. 257). The letter of wishes, which is not legally binding but guides the trustee, should state the settlor’s intention that the trust is for long-term family wealth preservation and that the settlor does not expect to receive any benefit from the trust.

Step 2: Trustee Appointment and Due Diligence

The settlor appoints a Hong Kong-licensed trust company as trustee. The trustee will conduct customer due diligence (CDD) under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), requiring: proof of identity (HKID card or passport), proof of address (utility bill or bank statement dated within three months), source of wealth documentation (tax returns, property sale agreements, inheritance documents), and a statement of assets. The trustee will also assess the settlor’s risk profile and the nature of the assets. For a pre-emptive trust, the trustee may require the settlor to sign a declaration that the trust is not being settled for the purpose of defrauding creditors or avoiding existing tax liabilities.

Step 3: Asset Transfer and Stamp Duty

Each asset class requires a specific transfer mechanism. For Hong Kong property: the settlor executes a deed of assignment in favor of the trustee, which is then presented to the Land Registry for registration. Stamp duty is payable at the applicable rate (4.25% for properties HKD 10.0–20.0 million). For listed securities: the settlor instructs their broker to transfer the shares to the trustee’s CCASS account, with stamp duty of 0.13% of the market value. For cash: the settlor transfers funds by telegraphic transfer to the trustee’s client account. For insurance policies: the settlor assigns the policy to the trustee by executing a deed of assignment and notifying the insurer.

Step 4: Ongoing Administration and Reporting

The trustee is responsible for the ongoing administration of the trust, including: maintaining trust accounts, preparing annual financial statements, filing tax returns (the trust is a separate taxpayer for Hong Kong profits tax purposes), and making distributions to beneficiaries as directed by the letter of wishes. The trustee must also comply with the HKMA’s Supervisory Policy Manual module TM-1, which requires annual reviews of the trust’s risk profile and the trustee’s compliance with the Code of Practice for Trust Companies. The settlor should receive an annual report from the trustee summarizing the trust’s assets, income, and distributions.

Closing: Five Actionable Takeaways

1. Settle the trust at least three years before any legislative change — the pre-2006 “gifts inter vivos” clawback period of three years will almost certainly be replicated in any new estate tax legislation, making early settlement critical.
2. Use a Hong Kong-licensed trust company as trustee — this ensures the trust’s situs is Hong Kong, the governing law is Hong Kong, and the trust is subject to HKMA supervision under Supervisory Policy Manual TM-1.
3. Transfer property at current depressed valuations — with residential property prices 22% below their 2021 peak, transferring now locks in a lower base for any future estate tax calculation, even after accounting for stamp duty at 4.25%.
4. Ensure the settlor retains no benefit — the trust deed must explicitly exclude the settlor from the class of beneficiaries and grant the trustee absolute discretion over distributions, to avoid the “reservation of benefit” doctrine bringing the trust assets back into the estate.
5. Document the purpose of the trust — a contemporaneous letter of wishes stating that the trust is for long-term family wealth preservation and succession planning, not for tax avoidance, provides critical evidence if the Inland Revenue Department challenges the transfer under Section 34 of the Estate Duty Ordinance.