After coming to grips with the publication of China's new trust law in October 2003, trust practitioners in Asia are now attempting to get their heads around a fresh new regulatory proposal in Hong Kong; the abolition of estate duties.
The Hong Kong Financial Secretary announced plans to repeal this tax in his budget speech on 16 March. Besides the obvious de-regulatory effect of this move, which now means that stamp duty is the only tax on wealth, the proposed abolition of estate duty will also have a major impact on the structure of trusts in Hong Kong.
Asian trust specialists hope this move will see an end to the need for often complicated trust structures involving discretionary and private unit trusts set-up to avoid paying estate duty on holdings of Hong Kong property and listed company shares. It should also take away the advantage that inter vivos, or living trusts have over other trusts, including fixed interest trusts, life interest and will trusts, and trusts set up for philanthropic purposes.
Baker & Mckenzie partner Michael Olesnicky says that the market in Hong Kong is "in a state of flux" over the proposal. "I wonder what the motivation of the government is in proposing this move," Olesnicky says. "Do they just want this tax to disappear or are they looking to promote Hong Kong as the place to invest in Asia? Because if they are, they will need to reform Hong Kong's tax, trusts and company laws as well."
Mees Pierson Intertrust Asia managing director, Alan Johnson, who leads a team of 104 tax and trustee specialists, welcomes this proposal, although he believes it will only have a negligible effect on the market. "Our research indicates that less than 20% of trusts for Hong Kong clients are set up for estate duty purposes. Instead, most people are setting up trusts to reserve assets throughout generational change," he says. "I was speaking to a client recently who wanted to set up a trust solely for his children's education; that has nothing to do with estate duty."
Why Singapore is different to Hong Kong
Alex van der Zwaard, Mees Pierson's Singapore director, says there is currently a debate taking place in the market regarding whether Singapore should follow Hong Kong's lead and also abolish estate duties.
"The difference between the situation in Singapore and Hong Kong is that persons domiciled in Singapore are taxable on all their worldwide moveable assets, while even before their abolition assets offshore were not subject to Hong Kong estate duty," van der Zwaard says. "If the Singapore government wants to further strengthen Singapore's position as a global financial center, it may wish to consider abolishing estate duty, just as Hong Kong has done."
Despite the regulatory differences between the two countries, Baker & McKenzie Singapore principal Edmund Leow says the trust market in Singapore is strong and is able to differentiate itself from the Hong Kong market.
"The trust industry has been flourishing in Singapore and has greatly expanded over the last few years," Leow says. "The industry differs from Hong Kong in that banks are not merely selling trusts, but also setting up trust companies to offer Singapore trusts. The target is not only Asian clients, but also clients from Europe and Latin America who are fleeing the traditional offshore centres. In the last few years we have seen substantial trust business coming into Singapore from the offshore centres, and this is expected to continue."
Philanthropic trusts
Analysts and tax practitioners across Asia have noticed the growing trend in investors setting up trusts for philanthropic reasons.
Bryan Cave partner Mimi Hutton, who has worked in Hong Kong for over 25 years, says the increasing interest in setting up trusts for philanthropic reasons has been the biggest recent development on the client side. "A lot of clients are establishing these types of trusts through a simple structure that is part of an overall generational shift of wealth creation," she says. "As clients are getting older, they want to help provide for future generations, but also leave something aside for charitable causes."
Alex van der Zwaard has also noted this trend in the Singapore market and in other relatively developed Asian markets such as Taiwan, Malaysia and Hong Kong. "The demand for these type of trusts have been significant in developed economies in the last few years," he says. "The market for providing trust structures for philanthropic services is becoming increasingly competitive, and this is an area where we believe we can position ourselves ahead of rivals, as our ranking by Euromoney as the number one provider of philanthropic trusts in Asia attests."
While these recent developments have certainly had an impact on the Asian market, the basics of building relationships with clients and knowing their needs are still viewed as being the most important factor in establishing a trust.
Succession is the key
Managing director for Asia of HSBC Private Bank's Global Wealth Solutions, Bernard Rennell, says that the three main reasons why people set up trusts is for succession, tax and philanthropy.
"The key is to know where family assets are, and where they are likely to be in 10 years time," he says. "The most important thing to remember is that trusts are set up as a long term investment strategy, and the role of the advisor is to ensure the circumstances of each family are looked after and taken into consideration. You then design a structure to address those specific needs."
In planning a family structure, Michael Olesnicky says that succession is paramount. "You don't want to set up a trust just for the sake of it. Make sure your objectives are straightforward, the structure is straightforward and that the wealth stays in the family."
Bernard Rennell also says that while the demand for trust services is growing, the private client base is still largely the preserve of the upper class. "While you don't need to be rich to set up a trust, the ongoing administration fees are upwards of US$10,000 per annum, which counts a lot of people out of the market."
"While many middle class families can see the benefit in a trust, particularly in terms of providing for your spouse and children, it is still taken up mostly by wealthy families."