Discretionary Trusts in Hong Kong: Structure, Benefits and Uses

What Is a Discretionary Trust?

A discretionary trust is a trust in which the trustee has discretion over how and when to distribute income and capital to beneficiaries. Unlike a fixed trust — where each beneficiary has a defined entitlement — the beneficiaries of a discretionary trust do not have a vested interest in the trust assets. Instead, they have a right to be considered for a distribution, but no enforceable right to demand one.

This flexible structure makes the discretionary trust a powerful tool for asset protection, estate planning, and multigenerational wealth transfer. It is the most widely used trust structure in Hong Kong private wealth practice.

Key Parties to a Discretionary Trust

Settlor

The person who creates the trust and transfers assets into it. Once assets are transferred, they no longer form part of the settlor's estate (subject to certain reservation of benefit rules). The settlor may express wishes in a letter of wishes, but this is not legally binding on the trustee.

Trustee

The trustee holds the trust assets and is the legal owner. The trustee must act in the best interests of the beneficiaries, manage the assets prudently, and exercise discretion in accordance with the trust deed. Corporate trustees (professional trust companies) are commonly used to provide continuity, expertise, and impartiality.

Beneficiaries

The class of persons who may benefit from the trust. In a discretionary trust, the class is typically broadly defined (e.g., the settlor's descendants and their spouses) to allow flexibility over time. No individual beneficiary has a fixed entitlement until the trustee exercises discretion in their favour.

Protector

Many modern discretionary trusts include a protector — a third party who holds oversight powers, such as the power to appoint and remove trustees, veto certain trustee decisions, and approve changes to the class of beneficiaries. The protector provides an additional layer of control and comfort for families who want oversight without assuming the full responsibilities of a trustee.

Hong Kong Perpetuity Rules

Under Hong Kong's Perpetuities and Accumulations Ordinance (Cap. 257), a trust must be structured so that interests vest within the perpetuity period. Since 2013, Hong Kong trusts can be established with a perpetuity period of up to 80 years from the trust's date of creation, allowing for long-term multigenerational planning.

Benefits of a Discretionary Trust

Asset Protection

Because trust assets do not belong to any individual beneficiary, they are generally protected from the personal creditors of beneficiaries. Similarly, because the assets are no longer owned by the settlor (assuming no reservation of benefit), they are generally outside the reach of the settlor's creditors following a sufficient "hardening" period after the trust's establishment.

Succession Planning

Assets held in a discretionary trust pass according to the terms of the trust deed, not through the settlor's estate. This bypasses probate for trust assets and allows the settlor to plan for the distribution of assets to multiple generations without interference from succession laws.

Forced Heirship Protection

Hong Kong does not have forced heirship rules, but settlors from jurisdictions with such rules (e.g., civil law countries in Europe, the Middle East) may use a Hong Kong trust to ring-fence assets from mandatory succession rules in their home jurisdiction. The effectiveness of this strategy depends on conflict of laws principles and the relevant foreign law.

Privacy

Trust arrangements are private agreements and are not registered in a public register. Trust deeds are not publicly accessible, making trusts considerably more private than companies, whose ownership information may be in public registries.

Tax Considerations

Hong Kong does not levy inheritance tax, capital gains tax, or withholding tax on dividends. There is no stamp duty on the transfer of assets into a trust (other than for Hong Kong real property). These features make Hong Kong an attractive trust jurisdiction from a tax perspective.

Trustees of Hong Kong trusts may be subject to Hong Kong profits tax if they carry on a trade or business in Hong Kong through the trust, but passive investment income (dividends, interest, capital gains from investments) is generally not subject to profits tax.

Cross-Border Issues

Settlors and beneficiaries who are tax resident in foreign jurisdictions — particularly the US, UK, or Australia — must take specialist advice on the tax treatment of the trust in their home country. US citizens and permanent residents face particularly complex US tax rules applicable to foreign grantor trusts.

How Alan Wong LLP Can Assist

Alan Wong LLP's private wealth and trusts team has extensive experience advising on the establishment and ongoing administration of discretionary trusts in Hong Kong. We advise settlors on appropriate trust structures, draft trust deeds, letters of wishes, and protector arrangements, and assist trustees with their fiduciary obligations. For families with cross-border assets or multi-jurisdictional family members, we coordinate with overseas advisers to ensure a coherent and compliant planning framework.