Fortune rookie

Succession legislation in Hong Kong is not a complicated area of law. There are no elaborate forced heirship and community of property regimes. Estate duty has been abolished for deaths occurring on or after 11 February 2006.

Testamentary freedom and intestacy

Full testamentary freedom is available in Hong Kong, subject to a limited number of restrictions. With a valid will, the estate will be distributed accordingly. However, the court may approve an application made to direct payment of money or transfer of property from the net estate to certain persons who have been maintained by the deceased, but for whom the will, the intestacy rules or a combination of both, have not made reasonable financial provision.

The law applies to a deceased domiciled in Hong Kong or ordinarily resident in Hong Kong at any time in the three years immediately prior to death. The law also provides for a specific list of people who can make such an application, including the deceased's spouse, former spouse not remarried, cohabitant, parent, children, sibling, or any other person wholly or substantially maintained by the deceased. The deadline for making such an application is, unless extended, six months from the date on which a grant of representation relating to the estate was first taken out.

If the deceased has no will, the local intestacy rule will apply to his or her immovable properties in Hong Kong and, if the deceased is domiciled in Hong Kong, also his or her movable properties. If the deceased is survived by a spouse without issue (children), parent or full sibling, or issue of full sibling, the entire estate goes to the spouse. If there is issue, then the spouse receives all personal chattels, a legacy of HK$500,000 and half of the remainder. The other half of the remainder will be go to the issue. If there is a spouse but no issue, then the spouse's legacy increases to HK$1m. The remainder passes to the parent(s) or, if there is no parent, to full sibling(s).

If the intestate leaves an issue but no spouse, then the issue will take the entire estate. If the intestate is survived by parent(s), but not spouse and issue, then the parent(s) will receive the entire estate. If the intestate leaves no spouse, issue, or parent, then the entire estate will be distributed in the following order: full sibling(s), half sibling(s), grandparent(s), and uncles or aunts who are full sibling(s) of a parent of the intestate. If there is no such relative, then the entire estate goes to the government.

Tools in the trunk

For wealthy families, intestacy is obviously not the preferred situation. High-net-worth or ultra-high-net-worth families that are well-advised usually use Hong Kong wills, foreign wills (if required) and offshore trusts as the key tools for succession planning. Hong Kong wills are used for immovable properties in Hong Kong and movable properties worldwide, while foreign wills deal with overseas real estate.

It is a widely adopted practice to use offshore companies to hold assets, especially in the British Virgin Islands and the Cayman Islands, whether or not the family has a trust. Therefore, testamentary transfer of properties would often involve the transfer of the shares in the offshore companies, rather than the underlying assets directly.

Succession planning has not been a key focus of the affluent in Hong Kong, but the tide is changing. High-profile family cases following divorce or the passing of the patriarch or matriarch have played an important role in raising awareness of the benefits of having plans in advance. Another reason is the large number of family-owned businesses in Hong Kong, whether private or listed.

Many patriarchs are approaching the age where they consider how the enterprises and assets can be best handed down to the next generation. They feel that measures should be taken to prevent fragmentation of interest in the family business, and ensure a smooth transition and continuity.

Offshore trusts have always been popular, but after the reform of Hong Kong's trust law, there has been a surge in the number of locally registered trust companies and the use of Hong Kong trusts, which are now much more flexible. They can last forever. They will remain valid even if the settlor chooses to reserve certain powers to manage or invest the trust assets.

Beneficiaries are better protected as the trustees cannot exclude their liabilities in case of fraud, willful misconduct or gross negligence. Besides trusts, other solutions adopted by sophisticated families include offshore foundations and family limited partnerships, as well as premium-financed universal life insurance policies.

Family offices

Another succession planning trend noted in Hong Kong is the increasing popularity of the family office. Thanks to the rich supply of high-quality private client talent, territorial taxation system and favourable tax rates, Hong Kong is an ideal single- and multi-family office hub for not only local, but also regional and international families.

Ultra-high-net-worth families might have different priorities, but typically they want to set up either an investment-centric family office that focuses on creating wealth, and is run by ex-private bankers and asset managers. Alternatively they may go for a service-centric family office, concentrating on preserving and passing down wealth and family governance, and are usually operated by trust professionals.

Many Hong Kong family offices are driven by family members in the second or third generation, who have studied abroad or worked in major banks. Therefore, the family offices tend to be investment-centric to begin with. Such family offices will mimic the structure and compensation pattern of a hedge fund or private equity fund, and have documentations such as internal investment policies and compliance and operation manuals. The activities of the family office are overseen by an investment committee with members from both the family and the office, and independent advisers.

Evolving with the family

It has been observed that, as time goes by, the family offices would see the need or are requested by the families to expand to service-centric functionalities. They will take on such additional tasks as creating trusts and foundations, tax planning, philanthropy, formulating family constitutions, and organising family councils and committees. No matter where a family office starts, as it matures, it is likely that it will eventually become a value-centric family office, which takes care of all facets of the life of members in an ultra-high-net-worth family.

Family offices in Hong Kong are perhaps more prevalent that commonly thought. Many of them are 'hidden' in the family business, with an exclusive team of trusted advisers and staff providing services to the family of the business owner, from dealing with private bankers and securities houses to organising family meetings. They might not be an independent unit under a separate root, but they perform many family office functionalities and are equally valuable. Some are considering a spin-off, while some will remain to be a part of the family business until the family is completely ready for an institutionalised family office.

In additional to single family offices, multi-family offices that cater for more than single wealth families are becoming active in Hong Kong. Some asset managers are diversifying the business model to offer specialised services to family clients, and some independent trustees are broadening the scope or services to provide administration and other services to family offices. 

Patricia Woo is a lawyer at Squire Patton Boggs' Hong Kong office