Mary Ellen Hutton and Philip Munro delineate why they believe trust planning will become an increasingly important tool for wealth protection as Asian jurisdictions continue their ascent up the ranks of international finance centres.
If the primary rationale for the creation of trusts is their utility as vehicles for the devolution of family and commercial wealth, then trust planning in Asia should be becoming increasingly important with the ascent of Asia as a centre of global wealth. China and Japan represent two of the world’s largest four economies, the former alone now having an estimated 450,000 USD millionaires; India and Indonesia are also significant markets with wealth heavily concentrated in a developing class of globally wealthy entrepreneurs. While the growing concentration of private wealth in Asia might naturally lead to trust planning in any event, the strong desire to retain assets in family hands, found in many Asian cultures, makes the trust concept one that ideally suits many Asian families.
Trusts are a feature of the jurisprudence of a number of Asian jurisdictions, although in some countries their usage is more in the commercial, rather than the family, context. In this overview, we consider the trust laws in a number of Asian jurisdictions, showing that across Asia the full range of trust laws can be found.
Hong Kong and Singapore
Notwithstanding the return of Hong Kong to Chinese sovereignty, Hong Kong law remains, in large part, based upon English law. The Hong Kong trust law is contained in the Trustee Ordinance, Chapter 29 of the Laws of Hong Kong. This 1934 statute (which was amended to modernise the previous common law rule against perpetuities in 1970 by the Perpetuities and Accumulations Ordinance) is based on the English Trustee Act 1925 (a statute now largely superseded in England by the Trustee Act 2000).
Trust planning by Hong Kong residents used to be widespread as a way of mitigating estate duty exposure. Hong Kong estate duty was a progressive tax that rose to a top rate of 18 per cent. Although estate duty was abolished with effect during February 2006 (as part of an effort to make Hong Kong a more attractive private asset management centre), many trusts created as part of estate duty planning persist and Hong Kong trusts are still created for succession planning purposes.
In practice, many Hong Kong residents using trusts for succession planning purposes do not choose to settle trusts governed by Hong Kong law, it being perceived as a proper law more restrictive than that found in other trust jurisdictions. In response to this trend, a consultation on the reform and modernisation of the current Hong Kong trust law was conducted during 2009, with a view to legislative amendments to the Trustee Ordinance being enacted in 2010 or 2011. The consultation has been wide ranging, considering questions such as whether the rule against perpetuities should be abolished, the introduction of a statutory trustee duty of care and the merits of allowing for non-charitable purpose trusts.
Like Hong Kong, Singapore’s legal system was established while it was a United Kingdom territory. The Singapore trust law was, however, updated in December 2004 such that it now contains features found in the modern trust laws of some traditional offshore jurisdictions. For example, the Singapore Trustees Act expressly provides that a trust governed by Singapore law with Singaporean trustees is valid notwithstanding that the disposition creating the trust may be contrary to forced heirship rules to which the settlor was subject under their personal law, while s.90 of the Act expressly provides that settlor reserved investment and asset management powers will not invalidate a Singaporean trust. Singapore has no capital gains tax nor estate duty and the Singapore income tax regime is applied on a territorial basis such that it is an attractive fiscal jurisdiction for offshore trust planning.
The concept of the ‘trust’ entered Indian law during British rule with Indian domestic trust law contained in the Indian Trusts Act 1882: the 1882 Act applies, prima facie, to all trusts executed or situated in India and whose settlor, trustees and beneficiaries are domiciled in India. It is understood, however, that, as a matter of Indian law, the proper law of a trust can be chosen by the settlor either expressly or by implication.
The Indian trust law expressly prescribes four essential requisites for the creation of any trust: the existence of the creator of a trust (i.e. there must be a settlor); a beneficiary for whose benefit the trust exists; trust property; and, divestment of ownership between settlor and trustee. It includes the rule against remoteness of vesting such that, broadly, a trust cannot exist for longer than a life in being plus 21 years. There are also bars against excessive accumulations of income: broadly, income cannot be accumulated for more than 21 years or the settlor’s life in being.
In creating trusts for Indians, it should be noted that, although the concept of forced heirship is rare in India, it can apply to ‘ancestral’ and ‘coparcenary’ property (property inherited by a Hindu through his paternal line). Succession to coparcency property is governed by a specific personal law. The Indian exchange control position also needs to be considered in the international context. Where a trust has non-resident beneficiaries but holds Indian property, it may be possible for the beneficiaries to open non-resident ordinary accounts under the Foreign Exchange Management (Deposits) Regulations 2000 to receive distributions.
People’s Republic of China (PRC)
The PRC’s legal system is based on civil law concepts and, until recently, it contained no trust law features. The PRC created its Trust Law, however, in April 2001, bringing a form of trust concept into the PRC legal system.
As the PRC Trust Law stands, it expressly provides that a ‘trust’ is an arrangement whereby a settlor entrusts property to a trustee who has powers to manage or dispose of such property for the benefit of a beneficiary or for a specific objective. It is understood that to validly form a trust under the PRC Trust Law, property must actually be transferred to the trustee. The law requires that trust property is kept apart from the trustee’s own property.
A PRC trust must be created in writing with enforcement against the trustee being, in essence, a contractual matter (at least as between the trustee and the settlor). That said, the Trust Law specifically provides in Article 25 that a duty of skill and care is owed by the trustees to the beneficiaries of the Trust.
One of the weaknesses with the PRC Trust Law is that no specific tax regulations deal with the PRC tax treatment of trusts. Further, within the PRC, there is no significant wealth management or private client tax planning industry. Where PRC nationals do look to trust plan, they have tended to seek advice outside China with the effect that the Trust Law is practically only relevant in the context of trusts in the Chinese commercial, rather than the family, context.
Japan has a trust law that was enacted in 1922 following the Meiji period during which many Western legal concepts were introduced into the Japanese legal system. Trusts are, however, primarily used in the commercial context as vehicles to facilitate co-investment (as of March 2005 YEN60 trillion was held in Japanese investment trusts), for operating pension schemes and for employee benefit purposes. Although trusts are not used frequently in the traditional family trust form, ‘special donation trusts’ are sometimes created. These trusts can be created to benefit the mentally and physically disabled with there being an exemption from Japanese gift tax on their creation.
Asia has some offshore financial centres that look purely to attract international business, an example being Labuan.
Labuan is a Federal Territory of Malaysia which was, in 1990, declared an international offshore financial centre and a free trade zone. Since its inception, Labuan has incorporated more than 6,500 offshore companies and has attracted more than 300 licensed financial institutions.
Trusts can be created in Labuan under the Labuan Offshore Trusts Act 1996 which came into force on 31 October 1996. A trust cannot be created under the 1996 Act by a citizen or permanent resident of Malaysia nor can such a trust own real property in Malaysia or have Malaysian beneficiaries. At least one of the trustees of a Labuan trust must be a company registered under the Labuan Trust Companies Act 1990 to carry on business as a trust company.
Labuan has recently amended its trust law (the amendments to be brought into force this calendar year) to include features such as:
New Zealand also lies in the Pacific region and its advantages as a trust planning jurisdiction have caused many Asian families to use it as a jurisdiction.
New Zealand trust law is based on English law and the English rules of equity underpin the New Zealand trust regime, making its trust law attractive through this foundation body of jurisprudence. New Zealand has a favourable tax regime which provides that certain trusts will not be subject to New Zealand income tax. These trusts tend to be known to New Zealand trust practitioners as ‘foreign trusts’. To qualify as a foreign trust the settlor must not be New Zealand resident, the beneficiaries must not be New Zealand resident and the income derived by the trust must be from sources outside New Zealand. There is no capital gains tax in New Zealand nor any form of estate duty.
New Zealand is also attractive as a jurisdiction because of its private trust company regime. A New Zealand private trust company does not need to be licensed or specially exempted. There are no requirements that the directors or shareholders of a New Zealand private trust company be New Zealand resident nor have any New Zealand nexus.
There are significant differences, then, between Asian jurisdictions as to the forms of trust available and their usage. Hong Kong and Singapore have long established trust laws derived from British colonial rule: Singapore has updated its law to incorporate many modern trust law features, with Hong Kong set to follow suit shortly. India also has a developed trust law although it is not one that is likely to be chosen by settlors outside India. Both Japan and the PRC have recognised that there are merits in having a trust law for commercial trusts but their trust laws have not, for a number of reasons, developed to facilitate the creation of family trusts. Labuan represents a bold attempt to establish an offshore financial centre within the heart of South-East Asia. New Zealand also draws international trust business as a tax neutral jurisdiction.
Mary Ellen Hutton, Partner, and Philip Munro, Associate, Withers, Hong Kong