Introduction
In an attempt to modernize the position of trust law in Hong Kong, consultations regarding amendments to the Trustee Ordinance (Chapter 29 of the Laws of Hong Kong) (the “Ordinance”) were made in 2009 and 2012 respectively. Such amendments finally came into effect on 1 December 2013. Different amendments were made, including, among others, the enactment of Section 41X of the Ordinance in relation to the reservation of powers by the settlor in investment or asset management functions under the trust. This provision provides, among other things, the following:
“(1) A trust is not invalid only because of the person creating the trust (the settlor) reserving to the settlor any or all powers of investment or asset management functions under the trust.
(2) If a power or function referred to in subsection (1) has been reserved by the settlor, a trustee who acts in accordance with the exercise of the power or function is not in breach of the trust.”
Section 41X only deals with the reservation of power (“Reserve Power”) by the settlor in investment or asset management functions, and no other powers or persons are provided for in the provision. While the legislative intent has made it clear that the amendment is only to put it beyond doubt that a trust would not be invalidated because of the mere fact that the settlor has reserved the settlor’s power of investment or asset management functions, questions have arisen as to whether only the settlor is allowed to reserve them?
Delegation of Reserve Power by Settlor
Position as to Trustee:
For trustees, at common law, the fundamental rule was that a trustee could not delegate a power given to him if the power reposed a personal trust and confidence in him. However, the Ordinance now expressly provides for the power of appointment of agents and the delegation of functions by a trustee. Under Section 41B of the Ordinance, the trustee may delegate to another person as his agent certain functions other than the distribution of assets, the decision on payment out of income or capital, the appointment of trustees and the power of delegation. A trustee still cannot delegate the fundamental duties and functions which should be exercised at its discretion.
Position as to Settlor:
There is no equivalent provision for the Reserve Power of the settlor. Unlike the trustee, traditionally the settlor should have dropped out of the picture when the trust is properly constituted, there is nothing which must be reserved at the discretion and control of the settlor in order for the settlor to fulfil any duty under the law, and there is no power which the settlor has to delegate in general. Accordingly, the delegation of power by a settlor (as opposed to a trustee) is not a common feature and may not be necessary in a trust.
Unlike trustees who are in the position of trust and confidence, the settlor may not have such onerous duties. Where the Reserve Power of the settlors is merely a personal right, the settlors should be able to exercise such power at their own discretion for their own benefits. We submit a settlor may delegate the exercise of power to others as it will not affect any fulfilment of duties owed to the beneficiaries. Moreover, if Section 41B of the Ordinance has specifically allowed the trustees to authorize a person to exercise one or more of their delegable functions as their agent, the settlors, who do not owe any onerous duty to the beneficiaries in general, should be subject to a lesser degree of control and they should also be able to delegate their Reserve Power as they deem necessary or desirable.
Structuring the Reserve Power and Delegation Framework:
As part of the arrangement of a trust, the Reserve Power should be expressly specified in the trust deed, which is the basic document constituting the trust. The reservation of power may also be contained in some other documents and the trustee may give effect to these documents, such as a letter of wishes, but such documents may not be legally binding themselves. Alternatively, as can be seen from the case of Zhang Hong Li v DBS Bank (Hong Kong) Limited [2019] HKCU 4372, where the Reserve Power was made by appointing a settlor as the investment advisor to the private investment company of the trust and allowing her to make the decisions, the trust arrangement may also be designed in a way that a settlor will have effective control of investment and asset management functions.
If the settlor of a trust also desires to delegate the Reserve Power, such power of delegation should also be specified in a trust instrument in order to provide for clarity. If the trustees can delegate their power through other documents, such as a management agreement, we submit settlors should also be able to delegate the Reserve Power through other documents. Since the settlors are in general able to exercise Reserve Power for their own benefits, they will naturally be able to delegate the power without being subject to constraints.
Delegation of Reserve Power of the Settlor in case of Disability
Will an Enduring Power of Attorney (“EPOA”) help in case the settlor is mentally disabled:
An EPOA enables an individual (the donor) to appoint a trusted person (the attorney) to manage their property and financial affairs should they become mentally incapacitated, thereby providing a straightforward and cost-effective way of managing property and financial affairs. Unlike a conventional power of attorney, which becomes invalid if the donor loses mental capacity, an EPOA "survives" through that transition, provided it is executed according to prescribed statutory requirements while the donor is still of sound mind and is registered. The EPOA respects the donors’ autonomy by allowing them to choose who will act on their behalf, ensures a smooth transition in the management of their affairs, and helps avoid the distress, delay, and expense associated with court applications. However, the EPOA is limited to property and financial matters, and does not extend to decisions such as those about personal care or medical treatment.
Under Section 8(1) of the Enduring Powers of Attorney Ordinance (Chapter 501 of the Laws of Hong Kong) (“EPOAO”), the EPOA only empowers the attorney to deal with the property and financial affairs of the power donor, as opposed to the health and welfare and other matters, of the donor. Clear definitions of “property” and “financial affairs” are not provided in the EPOAO. The attorney may administer and apply the property of the donor to maintain the donor and other people for whom the donor might be expected to provide for or meet their needs. However, an EPOA which attempts to confer upon the attorney wider powers and authority than permitted in the EPOAO may be considered invalid.
Effects on Reserve Power:
Since once a trust is properly constituted, the settlor of the trust ceases to have any legal or beneficial interest in the trust property, unless the settlor is also one of the beneficiaries. In the situation where the settlor has reserved only investment and asset management functions and has no other interest in the trust property, arguably, matters in relation to trust assets are no longer the property and financial affairs of the settlor, as opposed to those of the trustee and the beneficiaries. Even when the Reserve Power is substantial such that the settlor may exercise effective control of the trust property, the benefits arising from such exercise of powers are only received by the beneficiaries of the trust. Accordingly, the investment and asset management functions are not part of the property and financial affairs of the settlor and the EPOA is unlikely to be able to save the situation.
However, the situation may be different when the settlor is also one of the beneficiaries. The investment and asset management functions may concern the property and financial interests of the settlor. In any event, for the purposes of certainty, the trust deed may be drafted in a way to cater for the situation when a settlor becomes mentally incapacitated and to provide directions on the subsequent exercise of the powers of investment or asset management functions.
Will
Reserve Power in respect of investment and asset management functions is not real or personal property per se. It is a mere power and function created by the trust instrument. Section 41X of the Ordinance also only addresses the reservation of such powers to the settlor and it does not mention his or her successors. If the trust instrument does not specifically allow the powers to survive upon the death of the settlor or be exercisable by the executors or assigns, it is likely the Reserve Power naturally dies with the settlor and cannot be bequeathed by a will.?
As a general proposition, a testator can by law dispose by will of all real and personal estate to which he or she is beneficially entitled for an interest not ceasing at his or her death and which if not so disposed of would have devolved upon his or her executor or administrator. Although certain choses in action, for example, rights of action for damages or other matters which devolve on the personal representative, copyrights and other intellectual property rights can be disposed of by will, a Reserve Power in respect of investment and asset management functions does not belong to the above class of personal rights and properties conferring an interest. It is unlikely that such Reserve Power can be bequeathed by a will.
Nevertheless, there is no harm to include in the settlor’s will a testamentary wish devolving the Reserve Power to a power holder and let the trustee decide on whether or not to follow that power holder’s directions. The trust instrument may also expressly allow a successor power holder to be designated by the settlor.
Conclusion
As Hong Kong positions itself as a leading hub for trusts and family offices, modernizing its trust law to accommodate Reserve Powers will enhance flexibility for settlors and other persons whom the settlors trust, align with international practice, and strengthen its competitiveness against offshore jurisdictions. By validating Reserve Powers such as investment directions, the appointment and removal of trustees or protectors, and the variation of trust terms, Hong Kong can provide settlors with greater confidence in structuring family wealth while ensuring that trusts remain legally robust. The Ordinance may also provide for clarity on the validity of the delegation of powers of the settlors and the limit of liability of the trustees. This can enhance certainty and confidence in the trust regime in Hong Kong. Moreover, this reform will further support the growth of family office services, attract high‑net‑worth individuals seeking sophisticated succession planning, and reinforce Hong Kong’s role as a premier jurisdiction for private wealth management.
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Sit, Fung, Kwong & Shum is a Hong Kong Special Administrative Region law firm and does not practice nor provide legal advice on the laws of other jurisdictions. References to the laws position of any other jurisdictions (including but not limited to the British Virgin Islands, the Cayman Islands, Jersey, Bermuda, and Singapore) in this material are provided for general reference and comparative purposes only and do not constitute any advice, opinion or representation on the law or practice in those jurisdictions.
