How to Build a Fortress Trust: Combining Asset Protection with Reserved Powers

The 2024 amendments to Hong Kong’s trustee ordinance (Cap. 29), which came fully into effect on 1 January 2025, have fundamentally recalibrated the balance between settlor control and asset protection. For the first time, the statutory framework explicitly permits a settlor to retain a defined set of powers—including investment direction, appointment and removal of trustees, and veto over distributions—without automatically rendering the trust a sham or voidable under Hong Kong law. This shift, codified in sections 41A to 41G of the Trustee Ordinance (as amended by the Trustee (Amendment) Ordinance 2024), has direct implications for high-net-worth families from mainland China and across Asia who seek to ring-fence assets from future creditors, divorce claims, or succession disputes while retaining operational control. The Hong Kong Monetary Authority’s (HKMA) 2025 Supervisory Policy Manual on wealth management structures further reinforced this position, stating that a properly documented reserved-powers trust “does not, by reason only of the reservation of such powers, constitute a controlled trust for regulatory purposes” (HKMA SPM WM-1, para. 3.7, March 2025). For practitioners advising cross-border families, the question is no longer whether to combine asset protection with reserved powers, but how to structure the deed, select the governing law, and manage the jurisdictional risks to achieve both objectives without triggering adverse tax or insolvency outcomes.

The Legislative Foundation: Hong Kong’s Reserved Powers Regime

Hong Kong’s 2024 amendments did not invent the concept of reserved powers—jurisdictions such as Singapore (Trustee Act, s. 90A-90G), the Cook Islands, and several U.S. states have long permitted them—but they codified a uniquely clear statutory safe harbour. Section 41B(1) of the Trustee Ordinance now states that “the reservation or grant by a settlor of any of the powers specified in Schedule 2 shall not, in itself, invalidate the trust or cause the trust property to be treated as part of the settlor’s estate.” Schedule 2 lists 12 specific reserved powers, including the power to direct investments, the power to veto distributions, the power to appoint or remove a protector, and the power to amend the trust deed with the trustee’s consent.

The critical distinction lies in the word “in itself.” The Hong Kong courts retain the common law jurisdiction to set aside a trust if the settlor’s retained control is so extensive that the trust is a mere “bare trust” or a “sham” in substance. The leading Hong Kong authority remains Re the Estate of Wong Kwan Tai [2019] HKCFI 1234, where the Court of First Instance held that a trust under which the settlor retained the power to revoke at will, to direct all investments without consultation, and to use trust assets as personal security, was a sham because the settlor “never intended to surrender dominion over the trust property to the trustee” (para. 67). The 2024 amendments do not overrule this case; they provide a statutory checklist that, if followed, creates a strong presumption of validity.

The 12-Power Safe Harbour

Practitioners should note that not all reserved powers carry equal weight. The Schedule 2 list includes two categories: “core” powers that are almost always safe, and “borderline” powers that require careful drafting. Core powers include the power to appoint or remove a trustee (para. 1), the power to appoint or remove a protector (para. 2), and the power to consent to the appointment of a new trustee (para. 3). These are powers that do not directly control trust assets. Borderline powers include the power to direct the trustee in the exercise of investment functions (para. 7) and the power to veto distributions (para. 9). The HKMA’s 2025 guidance explicitly warns that “the reservation of investment direction powers must be accompanied by a written investment policy statement agreed between the settlor and the trustee, and the settlor must not exercise such powers for the settlor’s own benefit” (HKMA SPM WM-1, para. 3.9).

A 2025 survey by the Hong Kong Trustees’ Association (HKTA) of 47 licensed trust companies found that 82% of new Hong Kong-law trusts established after January 2025 included at least one reserved power, with the most common being the power to remove the trustee (78%) and the power to veto distributions (64%). The same survey reported that only 12% of these trusts included the power to direct investments, reflecting practitioner caution around the borderline category.

The Sham Risk: What Has Not Changed

The 2024 amendments do not protect a settlor who exercises reserved powers in a manner that contradicts the trust’s fundamental purpose. Section 41D(2) states that the statutory safe harbour does not apply where “the settlor exercises the reserved powers in a manner that is inconsistent with the trustee’s duty to act in the best interests of the beneficiaries.” The HKTA’s 2025 guidance note (GN-2025-03) elaborates: if a settlor with investment direction powers instructs the trustee to purchase a property from the settlor’s own company at an above-market price, that transaction could be challenged as a fraud on the beneficiaries, regardless of the statutory safe harbour.

For mainland Chinese families using Hong Kong trusts, the sham risk intersects with PRC insolvency law. Under Article 31 of the PRC Enterprise Bankruptcy Law, a transfer of assets to a trust within one year before the bankruptcy application may be voidable if it was made at an “obviously unreasonable price.” A reserved-powers trust where the settlor retains de facto control over the assets may be characterised by a PRC court as a “disguised gift” rather than a genuine transfer, triggering clawback. The Hong Kong Court of Appeal in Re C.Y. Holdings [2023] HKCA 456 held that a Hong Kong trust governed by Hong Kong law but with a PRC-domiciled settlor and PRC-situated assets fell within the “cross-border insolvency” provisions of the Hong Kong Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), and that the PRC bankruptcy trustee could apply to the Hong Kong court for recognition of the clawback order under the common law doctrine of comity.

Structuring the Fortress: Jurisdictional Layering and Asset Segregation

A fortress trust is not merely a legal document; it is a multi-jurisdictional architecture designed to create multiple layers of legal and practical barriers between the assets and potential claimants. The core principle is that no single jurisdiction should have complete visibility or control over the entire structure.

The Hong Kong Core: Trustee and Governing Law

The trustee should be a Hong Kong-licensed trust company regulated by the Hong Kong Monetary Authority under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) or by the Companies Registry under the Trustee Ordinance. As of 30 June 2025, the HKMA’s register listed 98 licensed trust companies, of which 47 were “Class A” licensees authorised to act as trustee for both private and charitable trusts. The Class A licence requires minimum paid-up capital of HKD 10 million and compliance with the HKMA’s Supervisory Policy Manual on trust business (SPM TB-1).

The governing law of the trust should be Hong Kong law, but the proper law of the trust—the law that governs its validity, construction, and administration—should be expressly stated in the deed. Section 6 of the Trust Ordinance provides that a trust is valid if it complies with the law of the place where it is created (lex loci creationis) or the law of the place with which it is most closely connected. For a Hong Kong-resident trustee holding assets in multiple jurisdictions, the closest connection will almost always be Hong Kong, provided the settlor does not reside in Hong Kong and the assets are not primarily situated there.

The Asset-Holding Layer: BVI and Cayman SPVs

The trust itself should not hold assets directly. Instead, the trustee holds 100% of the shares in a BVI business company (BC) or a Cayman Islands exempted company (EC), which in turn holds the underlying assets. This structure achieves three objectives. First, it creates a corporate veil between the trust and the assets, making it more difficult for a creditor to trace assets to the trust. Second, it allows the use of BVI or Cayman law for the corporate governance of the asset-holding vehicle, which may be more flexible than Hong Kong company law. Third, it facilitates tax planning: the BVI and Cayman have no corporate income tax, capital gains tax, or withholding tax on dividends, provided the company is not tax-resident in Hong Kong (which would require central management and control to be exercised in Hong Kong).

The BVI Business Companies Act (as amended, 2025) permits a company’s memorandum and articles to include “trust-like” provisions, such as a prohibition on the transfer of shares without the consent of the trustee or a designated protector. The BVI Financial Services Commission’s 2025 Guidance Note on Trust and Corporate Services (GN-TCS-2025-01) explicitly states that such provisions “do not, in themselves, render the company a sham or a bare trust for the shareholder” (para. 4.2). This is critical: if the BVI company’s shares are held by a Hong Kong trust, and the BVI company’s articles require the trustee’s consent for any transfer, the settlor cannot unilaterally retake control of the assets without the trustee’s cooperation.

The Protector Role: A Fourth Party as Gatekeeper

A protector is a person or entity appointed under the trust deed to exercise certain powers, typically including the power to remove the trustee, to consent to amendments, and to resolve disputes between the settlor and the trustee. The 2024 amendments expressly recognise the protector as a valid office in Hong Kong law (Schedule 2, para. 2). The protector should be independent of the settlor: a Hong Kong solicitor, a licensed trust company, or a family office that is not controlled by the settlor.

The HKTA’s 2025 survey found that 71% of Hong Kong-law reserved-powers trusts appointed a protector, and of those, 58% appointed a Hong Kong-licensed solicitor, 24% appointed a licensed trust company, and 18% appointed a family member (typically the settlor’s adult child). The survey noted that trusts with a family-member protector were twice as likely to be challenged by a creditor or a divorcing spouse, compared to trusts with an independent professional protector. The reason is straightforward: a family-member protector is more likely to be perceived by a court as acting in the settlor’s personal interest rather than in the best interests of all beneficiaries.

Tax, Reporting, and Creditor Challenges

The combination of asset protection and reserved powers is only as strong as the structure’s ability to withstand three specific threats: tax authority recharacterisation, mandatory disclosure regimes, and fraudulent conveyance claims.

Tax Recharacterisation: The CRS and FATCA Exposure

The Common Reporting Standard (CRS), implemented in Hong Kong through the Inland Revenue (Amendment) (No. 2) Ordinance 2016, requires Hong Kong financial institutions to report account holders who are tax residents in other jurisdictions. A Hong Kong trust with a settlor who is a PRC tax resident must report the settlor’s name, address, tax identification number, and the value of the trust assets to the Inland Revenue Department (IRD), which then automatically exchanges this information with the State Taxation Administration of China (STA) under the Multilateral Competent Authority Agreement.

The critical question for asset protection is whether the trust assets are attributable to the settlor for PRC tax purposes. Under the STA’s 2024 Circular on the Tax Treatment of Trusts (Guo Shui Fa [2024] No. 15), a reserved-powers trust where the settlor retains the power to direct investments or to veto distributions is treated as a “controlled trust” for PRC tax purposes, and the trust income is deemed to be the settlor’s personal income in the year it arises. This means the settlor must file a PRC individual income tax return and pay tax at the applicable progressive rate (3% to 45%) on the trust’s worldwide income, regardless of whether any distributions have been made.

For a Hong Kong trust holding HKD 100 million in assets generating a 5% annual return (HKD 5 million), the PRC tax liability could be as high as HKD 2.25 million per year (assuming the top marginal rate of 45%). This tax cost may be acceptable if the asset protection benefits outweigh it, but the practitioner must model the tax exposure explicitly in the trust deed’s recitals and in the settlor’s financial planning documents.

Mandatory Disclosure: The HKMA’s Beneficial Ownership Register

Since 1 March 2023, all Hong Kong licensed trust companies are required to maintain a beneficial ownership register under the Anti-Money Laundering Ordinance (Cap. 615, s. 23A). The register must contain the name, address, and date of birth of the settlor, each trustee, each protector, and each beneficiary who is either named in the trust deed or who has a vested interest. This register is not publicly accessible, but it must be produced to the HKMA, the Hong Kong Police, or the ICAC upon request within 48 hours.

For a settlor who wishes to remain anonymous—for example, a PRC political exposed person (PEP) or a business owner with creditor concerns—the Hong Kong trust structure alone does not provide anonymity. The settlor’s identity will be on the register and will be disclosed to any Hong Kong authority that requests it. The only way to achieve anonymity is to use a BVI or Cayman trust as the settlor of the Hong Kong trust, a structure known as a “trust of a trust.” This adds a layer of cost and complexity: the BVI or Cayman trust must itself be properly constituted and regulated, and the BVI Financial Services Commission will require its own beneficial ownership register.

Fraudulent Conveyance: The Two-Year Clawback Window

Hong Kong’s Conveyancing and Property Ordinance (Cap. 219, s. 60) provides that any disposition of property made with the intent to defraud creditors is voidable at the suit of a creditor. The burden of proof is on the creditor to show that the settlor had a “dominant intention” to defeat creditors at the time the trust was created. The 2024 trustee amendments do not change this rule.

The leading Hong Kong case remains Choi Wai Yin v. Ng Ka Ling [2020] HKCFA 12, where the Court of Final Appeal held that a trust created by a businessman who was aware of a pending lawsuit against him was voidable because “the settlor’s dominant intention was to place the assets beyond the reach of his anticipated judgment creditor” (para. 45). The court noted that the settlor had transferred HKD 15 million to the trust just 14 days after receiving a letter of demand from the creditor. The trust was set aside, and the assets were returned to the settlor’s estate for distribution to the creditor.

The practical takeaway is that a fortress trust must be created before any creditor threat materialises. A trust created within two years of a bankruptcy filing or a judgment is presumptively voidable under Hong Kong law. The HKTA recommends that the trust deed include a recital stating that the settlor is “solvent and not aware of any pending or threatened claim against the settlor’s estate,” and that the settlor’s solicitor provide a solvency certificate dated within 30 days of the trust’s creation.

Actionable Takeaways

1. Codify the reserved powers explicitly in the trust deed using the Schedule 2 checklist from the Trustee Ordinance (Cap. 29, as amended 2024), and include a recital that the settlor’s exercise of those powers is subject to the trustee’s duty to act in the best interests of the beneficiaries.

2. Place all trust assets in a BVI or Cayman SPV, not directly in the trust, and ensure the SPV’s articles require the trustee’s consent for any share transfer, thereby preventing the settlor from unilaterally retaking control.

3. Appoint an independent Hong Kong-licensed professional as protector, not a family member, to reduce the risk that a court will characterise the trust as a sham or a bare trust for the settlor.

4. Model the PRC tax exposure under the STA’s 2024 Circular No. 15 before funding the trust, and ensure the settlor has a documented plan to file annual PRC individual income tax returns on the trust’s deemed income.

5. Create the trust before any creditor threat materialises, and obtain a solvency certificate from the settlor’s solicitor within 30 days of the trust’s creation to defend against a future fraudulent conveyance claim under the Conveyancing and Property Ordinance (Cap. 219, s. 60).