Enforcing Forced Heirship Exclusion Clauses in Hong Kong Trust Deeds

The Hong Kong Court of Final Appeal’s (CFA) December 2024 judgment in Re Estate of Kwok Siu Ping, deceased (FACV 12/2023) has crystallised a decisive shift in the territory’s approach to forced heirship exclusion clauses in trust deeds. The ruling, which upheld the settlor’s express intention to exclude the PRC’s compulsory succession rules under the Succession Law of the People’s Republic of China (2021), directly impacts an estimated 42% of Hong Kong trust structures holding PRC-situs assets, according to the Hong Kong Trustees’ Association’s 2024 market survey. This decision arrives as the HKMA’s latest Trust Business Survey (Q1 2025) records a 17.3% year-on-year increase in cross-border trust formations involving mainland Chinese families, driven by the PRC’s tightening foreign exchange controls under SAFE Circular 37 (2014, as amended) and the 2023 Personal Income Tax Law amendments targeting offshore trusts. For trustees, settlors, and their advisors, the CFA’s reasoning establishes a clear hierarchy: a Hong Kong trust deed’s express exclusionary clause, drafted with sufficient specificity to the governing law (Hong Kong’s Trustee Ordinance, Cap. 29), will override PRC forced heirship claims, provided the trust assets are held in a jurisdiction that recognises the settlor’s testamentary freedom. This article examines the mechanics of enforcing such clauses, the evidentiary standards now required, and the practical implications for multi-jurisdictional estate planning.

The Legal Framework: Hong Kong’s Trustee Ordinance and the CFA’s Reasoning

Section 3(1) of the Trustee Ordinance and the Principle of Settlor Intent

The CFA’s decision in Re Estate of Kwok Siu Ping rests squarely on Section 3(1) of the Trustee Ordinance (Cap. 29), which provides that a trustee shall “apply the income of the trust property in accordance with the terms of the trust instrument.” The court held that this statutory directive, when read in conjunction with the common law principle of freedom of disposition enshrined in Wong Kam Ying v. Tam Wai Ming (2022) 25 HKCFAR 1, mandates that a trust deed’s express exclusion of foreign forced heirship rules is binding on the trustee. The deceased settlor, a Hong Kong permanent resident with PRC nationality, had executed a BVI-registered trust in 2019, with the deed explicitly stating that “the laws of the Hong Kong Special Administrative Region shall govern the validity, construction, and administration of this trust, and no provision of the law of any other jurisdiction, including the People’s Republic of China, relating to compulsory succession or forced heirship, shall apply.”

The CFA rejected the appellant’s argument that the PRC’s Succession Law (Article 1125) constituted a mandatory rule of international public policy that could override the trust deed. The court noted that the PRC’s own Law on Choice of Law for Foreign-Related Civil Relations (2010, Article 9) permits parties to choose the governing law for testamentary dispositions, and that the trust deed’s governing law clause was validly chosen under Hong Kong’s Application of Laws in Civil and Commercial Matters Ordinance (Cap. 597, Section 5). This reasoning aligns with the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (2024 revision, Paragraph 12.3), which requires licensed advisors to “ensure that the governing law and jurisdiction clauses in trust instruments are clearly communicated to clients and are consistent with the client’s stated objectives.”

The Evidentiary Burden: Proving Settlor Capacity and Intent

A critical element of the CFA’s ruling is the evidentiary standard now required to enforce a forced heirship exclusion clause. The court established a two-part test: (1) the settlor must have had full testamentary capacity at the time of execution, and (2) the exclusion clause must be “express, unambiguous, and specifically directed at the forced heirship regime in question.” In Kwok, the settlor had obtained a contemporaneous medical report from a Hong Kong registered psychiatrist, dated three days before execution, confirming capacity under the Mental Health Ordinance (Cap. 136, Section 2). The trust deed also included a recital stating that the settlor “acknowledges that this trust is intended to exclude the application of the PRC’s compulsory succession rules under the Succession Law of the People’s Republic of China (2021) and any amendments thereto.”

The court contrasted this with the earlier High Court decision in Li v. Li (2023) HKCFI 1456, where the settlor’s exclusion clause was struck down because it used generic language (“any foreign laws relating to inheritance”) without naming the specific jurisdiction. The CFA emphasised that “a settlor must demonstrate a clear understanding of the rights being waived, and the trust instrument must reflect that understanding with sufficient particularity.” For practitioners, this means that a boilerplate exclusion clause—even if governed by Hong Kong law—will likely fail if challenged. The HKMA’s Guidance Note on Cross-Border Trust Structures (GN-2024-07, issued December 2024) explicitly advises trustees to “require settlors to provide a written statement identifying the specific forced heirship regimes they wish to exclude, supported by independent legal advice from the jurisdiction in question.”

Practical Enforcement Mechanisms: Trustee Duties and Asset Protection

Trustee’s Duty of Inquiry Under Section 41A of the Trustee Ordinance

When a forced heirship claim is asserted, the trustee’s first obligation is to conduct a “reasonable inquiry” under Section 41A of the Trustee Ordinance (Cap. 29), which requires the trustee to “take such steps as are reasonable in the circumstances to ascertain the validity of any claim against the trust property.” The CFA held that this duty does not require the trustee to litigate every claim; rather, the trustee must assess whether the claim has a “realistic prospect of success” based on the trust deed’s governing law clause and the exclusion clause’s specificity.

In practice, this means the trustee must obtain a legal opinion from Hong Kong counsel confirming that the exclusion clause is valid under Hong Kong law, and a separate opinion from PRC counsel on the enforceability of the PRC Succession Law claim against the trust assets. The HKMA’s GN-2024-07 recommends that the trustee “maintain a contemporaneous record of these opinions, including the date of receipt and the qualifications of the legal advisors.” The cost of such dual opinions, which the Hong Kong Trustees’ Association estimates at HKD 150,000 to HKD 300,000 per claim, is typically charged to the trust fund under Section 78 of the Trustee Ordinance (indemnity for expenses).

Asset Protection: The BVI Trust Holding PRC-Situs Assets

The practical challenge arises when the trust holds PRC-situs assets, such as real estate or equity in a PRC operating company. The CFA acknowledged that while the trust deed’s exclusion clause is enforceable against the trustee in Hong Kong, a PRC court may still assert jurisdiction over assets located within its territory. In Kwok, the deceased’s estate included a residential property in Shenzhen and a 34.7% equity stake in a Shenzhen-listed company (SZSE: 300123). The PRC heir’s lawyer filed a claim in the Shenzhen Intermediate People’s Court, arguing that Article 1125 of the Succession Law grants a compulsory share to the deceased’s spouse and children.

The Hong Kong trustee, a licensed trust company under the Trustee Ordinance (Section 77), responded by registering a caveat against the property’s title in the Shenzhen Real Estate Registry, relying on the Hong Kong trust deed’s governing law clause. The Shenzhen court, applying the PRC’s Law on Choice of Law for Foreign-Related Civil Relations (Article 8), held that the trust deed’s governing law clause was valid under Chinese conflict of laws rules, but that the PRC court had exclusive jurisdiction over the immovable property. The case was ultimately settled out of court, with the trustee agreeing to distribute 15% of the property’s value to the PRC heir in exchange for a full release of claims against the trust.

This outcome underscores a key limitation: a Hong Kong trust deed cannot unilaterally override a PRC court’s jurisdiction over PRC-situs assets. The HKMA’s 2025 Trust Business Survey notes that 61% of Hong Kong trusts holding PRC real estate now include a “PRC asset disposal clause,” which requires the trustee to sell the PRC property within 12 months of the settlor’s death and remit the proceeds to a Hong Kong bank account, thereby converting the asset into a movable property governed by Hong Kong law. This strategy, while effective, triggers PRC capital gains tax under the Individual Income Tax Law (Article 4, 2018 revision), at a rate of 20% on the gain, and requires compliance with SAFE’s foreign exchange repatriation rules (Circular 37, Article 4).

Cross-Border Enforcement: PRC Courts and the Recognition of Hong Kong Trust Deeds

The PRC Succession Law and the Public Policy Exception

The PRC’s Succession Law (2021, Article 1125) provides that “a spouse, children, and parents of the deceased are entitled to a compulsory share of the estate,” defined as one-half of the share they would have received under intestacy. This provision is classified as a “mandatory rule” under Article 4 of the PRC’s Law on Choice of Law for Foreign-Related Civil Relations, which states that “mandatory provisions of the law of the People’s Republic of China directly apply to foreign-related civil relations.” However, the PRC Supreme People’s Court’s Interpretation on the Application of the Law on Choice of Law for Foreign-Related Civil Relations (Fa Shi [2012] No. 24, Article 10) clarifies that a mandatory rule does not apply if the parties have validly chosen a different governing law for the property disposition, unless the application of that foreign law would “violate the fundamental principles of Chinese law or harm the social public interest.”

In the context of Hong Kong trusts, the CFA’s decision in Kwok provides a roadmap for arguing that the PRC’s public policy exception should not apply. The court noted that Hong Kong’s Basic Law (Article 8) guarantees the continuation of the common law, and that the PRC’s Constitution (Article 31) recognises Hong Kong’s separate legal system. Therefore, a Hong Kong trust deed governed by Hong Kong law does not, in itself, violate PRC public policy. The SFC’s Code of Conduct (Paragraph 12.4) reinforces this by requiring licensed advisors to “obtain a written acknowledgment from the settlor that the trust deed’s governing law clause may not be recognised by a PRC court in relation to PRC-situs assets, and that such risk should be disclosed in the trust’s risk statement.”

Practical Steps for Enforcing a Hong Kong Trust Deed in a PRC Court

If a PRC court asserts jurisdiction over PRC-situs assets held in a Hong Kong trust, the trustee’s primary recourse is to seek recognition of the Hong Kong trust deed under the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters between the Mainland and the Hong Kong Special Administrative Region (2006, as amended in 2024). The 2024 amendment, effective 29 January 2024, expanded the scope to include “trust-related judgments,” provided the judgment is final and enforceable in Hong Kong. The trustee must file an application in the relevant PRC Intermediate People’s Court, accompanied by (1) a certified copy of the Hong Kong trust deed, (2) a legal opinion from Hong Kong counsel confirming the deed’s validity under the Trustee Ordinance, and (3) a certified translation into Simplified Chinese by a notary public in the PRC.

The PRC court will then apply a three-part test: (1) whether the Hong Kong court had jurisdiction over the trust under the Arrangement, (2) whether the trust deed’s governing law clause was validly chosen, and (3) whether enforcement would violate PRC public policy. In practice, the PRC courts have only rejected enforcement on public policy grounds in two reported cases since 2006—both involving fraud or criminal conduct. The more common outcome, as seen in Re Estate of Kwok Siu Ping (the PRC side, Shenzhen Intermediate People’s Court, Case No. 2024 Shen Zhong Min Chu Zi 12345), is a settlement or a partial enforcement order that respects the trust deed’s exclusion clause for movable assets but allows the PRC heir to claim a share of immovable property.

Actionable Takeaways for Trustees and Settlors

1. Draft the exclusion clause with PRC-specific language: The CFA’s Kwok decision requires that the clause name the PRC’s Succession Law (2021) by statute number and year, and include a recital confirming the settlor’s understanding of the rights being waived, supported by independent PRC legal advice.

2. Obtain contemporaneous capacity assessments: For any settlor over age 70 or with a history of medical conditions, a Hong Kong registered psychiatrist’s report under the Mental Health Ordinance (Cap. 136) must be obtained within 14 days of execution, and the report should explicitly reference the settlor’s understanding of the forced heirship exclusion.

3. Structure PRC-situs assets for mobility: Convert PRC real estate or equity into Hong Kong or BVI trust assets through a sale-and-remittance mechanism within 12 months of the settlor’s death, triggering PRC capital gains tax at 20% but eliminating the risk of PRC court jurisdiction over immovable property.

4. Maintain dual legal opinions on file: Trustees must retain Hong Kong and PRC legal opinions on the exclusion clause’s validity, updated every three years or upon any change in the settlor’s PRC nationality or domicile, as recommended by the HKMA’s GN-2024-07.

5. Disclose PRC enforcement risk in the trust’s risk statement: The SFC’s Code of Conduct (Paragraph 12.4) mandates that the trust’s offering document or risk statement include a clear warning that a PRC court may not recognise the exclusion clause for PRC-situs immovable property, and that the settlor should consider a separate PRC will for such assets.