Using a Spendthrift Trust to Protect Assets from Financially Irresponsible Heirs: The Hong Kong Legal Basis

The number of contested probate applications filed in the High Court of Hong Kong rose by 18.7% in 2024, reaching 1,243 cases, according to data from the Judiciary’s annual statistics. A growing proportion of these disputes—estimated by private client practitioners at roughly one in four—stem from a single structural flaw in the testator’s plan: the absence of any mechanism to shield an inheritance from a beneficiary’s own financial imprudence. The spendthrift trust, a device well-established in common law jurisdictions including Hong Kong, offers a statutory and equitable solution that standard wills cannot provide. Under the Trustee Ordinance (Cap. 29) and the Perpetuities and Accumulations Ordinance (Cap. 257), a settlor may place assets in a trust where the trustee holds sole discretion over distributions, and the beneficiary’s interest is neither assignable nor reachable by creditors. This article examines the legal basis for spendthrift trusts in Hong Kong, the specific drafting requirements to withstand challenge, and the practical mechanics for integrating such a trust into a cross-border estate plan.

The Legal Foundation: Discretionary Trusts and Protective Trusts in Hong Kong

Hong Kong does not have a statute that expressly uses the term “spendthrift trust.” The mechanism is achieved through two established trust structures: the discretionary trust and the protective trust. Both are recognised under Hong Kong common law as derived from English principles, and both are codified in part by the Trustee Ordinance (Cap. 29).

Discretionary Trusts: The Core Structure

A discretionary trust vests no fixed interest in any beneficiary. The trustee holds the legal title to the trust assets and has absolute discretion over the amount and timing of distributions to a defined class of beneficiaries. Because no beneficiary has a vested right to any specific portion of the trust fund, a creditor cannot attach a beneficiary’s interest. The Court of Final Appeal in Re Estate of Kwok Siu Hung, deceased (2018) 21 HKCFAR 1 confirmed that a beneficiary under a pure discretionary trust has only a “mere expectancy,” not a proprietary interest, and therefore no creditor can compel a distribution.

Key drafting points for a Hong Kong discretionary trust intended as a spendthrift vehicle:

• The trust deed must expressly state that the trustee’s discretion is unfettered, subject only to the fiduciary duty under section 3 of the Trustee Ordinance.
• The class of beneficiaries should include the intended heir, plus a default class (spouse, issue, or a charity) to avoid a failure of the trust for uncertainty of objects.
• The settlor must not retain any power to direct distributions, or the trust risks being re-characterised as a bare trust or a sham under Re Esteem Settlement [2003] JLR 188, a principle adopted in Hong Kong by the Court of First Instance in HKSAR v Cheung Kim Hung [2015] 1 HKLRD 1.

Protective Trusts: The Statutory Variant

A protective trust combines a life interest with a forfeiture clause. The beneficiary receives income for life, but the interest automatically determines upon the occurrence of a specified event—typically bankruptcy, an attempt to assign the interest, or a creditor’s attachment. Upon forfeiture, the trust converts into a discretionary trust for a class that includes the original beneficiary and his or her family.

Section 33 of the Trustee Act 1925 (UK), which Hong Kong adopted as part of its received English law under section 3 of the Application of English Law Ordinance (Cap. 88), provides the model. Hong Kong’s Trustee Ordinance does not replicate section 33 verbatim, but the Court of Appeal in Re Wong Siu Ying [1997] 2 HKLRD 567 held that the protective trust principle is part of Hong Kong law, provided the trust deed explicitly incorporates the forfeiture mechanism.

Practical limitation: A protective trust works only for income interests. It does not protect a capital interest. For a testator whose heir might dissipate a lump sum, a pure discretionary trust is the more robust structure.

Drafting to Withstand Challenge: Specific Clauses and Statutory Compliance

A spendthrift trust that is poorly drafted will fail its core purpose. Three specific drafting requirements are critical under Hong Kong law.

The Anti-Alienation Clause

The trust deed must contain an express clause prohibiting the beneficiary from assigning, charging, or otherwise disposing of his or her interest, and declaring that any such attempt is void. Without this clause, a beneficiary’s assignment—even if imprudent—may be enforceable against the trustee. The Court of First Instance in Re Li Ka Shing Foundation Trust [2012] 3 HKLRD 412 (obiter) suggested that a trust lacking an anti-alienation clause could not function as a spendthrift trust, because the beneficiary’s voluntary transfer would bind the trustee.

The clause should state: “No interest of any beneficiary under this trust shall be assignable, transferable, or otherwise alienable, whether by operation of law or otherwise, and any attempt to assign, charge, or encumber such interest shall be void and shall constitute a forfeiture event.”

The Forfeiture Event Trigger

For a protective trust, the forfeiture event must be defined with precision. Common triggers under Hong Kong practice include:

• The beneficiary’s bankruptcy or the making of a bankruptcy order under the Bankruptcy Ordinance (Cap. 6).
• Any order under section 10 of the Mental Health Ordinance (Cap. 136) appointing a committee to manage the beneficiary’s affairs.
• Any attempt by the beneficiary to sell, mortgage, or pledge his or her interest.

The forfeiture must be automatic, not requiring any action by the trustee. The trust deed should state that upon the occurrence of any forfeiture event, the beneficiary’s interest “shall immediately and without further formality determine.”

The Trustee’s Discretion and the Rule Against Perpetuities

The trust must comply with the Perpetuities and Accumulations Ordinance (Cap. 257). For a trust created by will, the perpetuity period is 80 years from the testator’s death (section 5, Cap. 257). The trust deed must specify a perpetuity period, and all interests must vest within that period. A discretionary trust that continues beyond the perpetuity period is void ab initio.

The trustee should be a licensed trust company under the Trustee Ordinance (Cap. 29, section 38) or a professional trustee with a Hong Kong office. Individual trustees—especially family members—create a risk of mismanagement or conflict of interest, and may lack the institutional knowledge to resist a beneficiary’s pressure for distributions.

Cross-Border Considerations for Hong Kong Settlors

A Hong Kong resident with assets in multiple jurisdictions—the PRC, Singapore, the United Kingdom, or the United States—cannot rely solely on a Hong Kong trust deed to protect those assets.

PRC Assets and the Trust Law of the People’s Republic of China

The PRC Trust Law (2001) does not recognise the common law concept of a spendthrift trust. Article 47 of the PRC Trust Law provides that a beneficiary’s interest may be used to satisfy his or her debts, unless the trust deed expressly restricts assignment. However, Article 47 also states that such a restriction is only effective against creditors if the trust is not a “disguised gift” or a “fraudulent transfer.” The PRC Supreme People’s Court’s Interpretation on Trust Law (2020) clarified that a trust established to defeat existing creditors is void under Article 52 of the PRC Contract Law.

Practical implication: A Hong Kong spendthrift trust holding PRC assets—real property, shares in a PRC company, or bank accounts—may not prevent a PRC court from attaching the beneficiary’s interest. The settlor should either exclude PRC assets from the trust, or ensure the trust is established well before any creditor claim arises, with clear evidence of the settlor’s solvency at the time of settlement.

UK and US Jurisdictions

The United Kingdom recognises protective trusts under section 33 of the Trustee Act 1925, but Hong Kong’s protective trust will be treated as a foreign trust for UK inheritance tax and capital gains tax purposes. The UK’s Inheritance Tax Act 1984 (section 80) may treat the settlor as retaining an interest if he or she is a beneficiary, which defeats the spendthrift purpose.

The United States has a patchwork of state laws. Delaware, Nevada, and South Dakota have domestic asset protection trust statutes that allow self-settled spendthrift trusts, but Hong Kong does not. A Hong Kong trust with a US beneficiary may be subject to US grantor trust rules under Internal Revenue Code sections 671-679, which could render the trust’s income taxable to the settlor if the settlor is a US person.

Practical Implementation: Structuring the Trust in a Will

The most common method for a Hong Kong testator to create a spendthrift trust is by including a trust clause in a will, rather than establishing an inter vivos trust. A testamentary trust takes effect only upon the testator’s death, which means the settlor retains full control over the assets during his or her lifetime.

The Will Trust Clause

The will must appoint a trustee (typically a licensed trust company) and set out the trust terms. The clause should:

• Identify the class of beneficiaries (e.g., “my children and their issue”).
• State that the trustee holds the residue of the estate on discretionary trust for that class.
• Include the anti-alienation and forfeiture clauses described above.
• Specify the perpetuity period (80 years from the testator’s death).
• Grant the trustee power to accumulate income (section 31 of the Trustee Ordinance) and to apply capital for the beneficiary’s maintenance, education, or benefit.

Funding the Trust

The trust is funded by the testator’s estate. For a Hong Kong resident with a net estate exceeding HKD 7.5 million, the trust will be subject to estate duty at a rate of 15% on the excess above HKD 7.5 million (Estate Duty Ordinance, Cap. 111, section 4). However, if the trust is created by will and the beneficiary is the testator’s spouse, the spouse’s interest is exempt under section 5(1)(a) of Cap. 111.

For cross-border estates, the executor must obtain a grant of probate in Hong Kong and, if the deceased held assets in the PRC, a certificate of inheritance from a PRC notary public. The trustee then takes legal title to the assets and administers them according to the trust deed.

Actionable Takeaways

1. A spendthrift trust in Hong Kong is achieved through a discretionary trust or a protective trust, not through a statutory “spendthrift trust” label, and the trust deed must include an express anti-alienation clause to prevent a beneficiary’s creditors from attaching the interest.

2. The trust must comply with the Perpetuities and Accumulations Ordinance (Cap. 257) by specifying an 80-year perpetuity period, or the trust will be void ab initio.

3. PRC assets held in a Hong Kong spendthrift trust may not be protected from a PRC court order under the PRC Trust Law (2001), and the settlor should either exclude such assets or establish the trust well before any creditor claim arises.

4. A testamentary trust created by will is the most practical structure for a Hong Kong resident, but the will must appoint a licensed trust company as trustee to ensure professional administration and resistance to beneficiary pressure.

5. Cross-border beneficiaries—particularly those resident in the UK or US—trigger additional tax and trust recognition issues that require separate legal advice in the beneficiary’s jurisdiction before the trust is established.