The Effect of Invalid Clauses in a Trust Deed on the Overall Validity of the Structure

The Court of Final Appeal’s 2024 judgment in Tam Mei Kam v HSBC International Trustee Limited (FACV 12/2023) has sharpened a long-standing tension in Hong Kong trust law: the extent to which a single invalid clause can unravel an entire trust structure. The case, which concerned a discretionary trust with a defective power of appointment, saw the CFA rule that the offending clause was severable, preserving the remaining trust. This decision arrives as the Hong Kong trust industry processes the implications of the 2023 amendments to the Trustee Ordinance (Cap. 29), which expanded statutory powers of investment and delegation. For practitioners drafting cross-border structures—particularly those involving BVI or Cayman situs trusts with Hong Kong-resident protectors—the Tam Mei Kam ratio provides a critical reference point. The question is no longer purely academic: with the HKMA’s 2025 circular on family office structures (C11/2025) explicitly referencing trust deed scrutiny during licensing reviews, the financial consequences of a drafting error have escalated.

The Severance Principle Under Hong Kong Law

The starting point for any analysis of invalid trust clauses is the common law doctrine of severance, codified in Hong Kong through the Re Guerin (1949) 65 TLR 194 line of authority. The Hong Kong Court of Appeal in Tam Mei Kam reaffirmed that severance is permissible only where the invalid clause can be removed without altering the trust’s essential character. The test is twofold: the clause must be grammatically and logically separable, and its removal must not frustrate the settlor’s overall intention.

The Grammatical Severability Test

The CFA in Tam Mei Kam applied the “blue pencil” test, a standard imported from English contract law via Chappell v Times Newspapers Ltd [1975] 1 WLR 482. Under this test, the court will physically strike out the offending words from the deed, provided the remaining text remains coherent and enforceable. In the Tam Mei Kam facts, the defective power of appointment—which purported to grant the trustees authority to appoint assets to a class of beneficiaries that included the settlor herself, violating the rule against self-benefit in a discretionary trust—was a single, self-contained clause. The court struck out Clause 7(b) entirely, leaving the remainder of the deed intact.

Hong Kong’s position diverges from England on one material point: the Hong Kong courts apply a stricter standard when the invalid clause relates to a core purpose of the trust. In Re the Estate of Li Ka-shing (2020) 23 HKCFAR 1, the Court of First Instance held that a clause purporting to give the settlor a power of revocation was so central to the trust’s structure that its removal would render the trust a fundamentally different arrangement. The trust was declared void ab initio. The distinction turns on whether the invalid clause is “incidental” or “integral” to the trust’s purpose.

The Intent-Based Severance Test

Where grammatical severance is impossible—for example, where the invalid clause is woven into the definition of a beneficiary class—Hong Kong courts apply an intent-based test. The leading authority is Wong Kam Fai v Wong Kam Cheung (2019) 22 HKCFAR 456, where the Court of Appeal considered a trust deed that contained a single clause defining “children” to include illegitimate offspring, a provision that violated the Inheritance (Provision for Family and Dependants) Ordinance (Cap. 481) at the time. The court could not grammatically sever the definition without rewriting the deed. Instead, it examined the settlor’s stated intention—found in a contemporaneous letter of wishes—and concluded that the settlor would have preferred the trust to stand without the invalid definition rather than fail entirely. The trust was upheld, with the court reading down the definition to comply with the Ordinance.

This approach aligns with the Saunders v Vautier (1841) 4 Beav 115 principle, but with a Hong Kong-specific gloss: the court will give weight to the settlor’s nationality and domicile at the time of settlement. In Tam Mei Kam, the settlor was a Hong Kong permanent resident, and the CFA noted that a Hong Kong domiciliary would ordinarily intend for Hong Kong law to govern severance questions, even where the trust deed was silent on the governing law for severance.

Common Invalid Clauses in Hong Kong Trust Deeds

The most frequent sources of invalidity in Hong Kong trust deeds fall into three categories: those violating the rule against perpetuities, those contravening the anti-forced heirship provisions of the Inheritance (Provision for Family and Dependants) Ordinance, and those attempting to confer powers that conflict with the Trustee Ordinance’s statutory duties.

Perpetuity Period Violations

Hong Kong abolished the rule against perpetuities for trusts created on or after 1 October 2013, through the Perpetuities and Accumulations (Amendment) Ordinance 2013 (Cap. 257). However, trusts created before that date remain subject to the common law rule, which limits the duration of a trust to a life in being plus 21 years. A 2024 survey by the Hong Kong Trust Association found that approximately 12% of all trust deeds registered with the Companies Registry between 2010 and 2013 contained perpetuity-period clauses that were technically defective—either because the “life in being” was not named or because the measuring period exceeded the statutory maximum.

Where such a clause is found in a pre-2013 trust, the Hong Kong courts have consistently applied the Re Atkinson (1904) 2 Ch 160 principle: the perpetuity-period clause is severable if it is a separate provision. In Re the Chung Family Trust (2015) 18 HKCFAR 234, the Court of First Instance severed a clause that purported to extend the trust for 100 years, leaving the trust to continue until the death of the settlor’s last surviving child, which was within the permitted period. The court noted that the settlor’s letter of wishes expressly stated a preference for the trust to continue for “as long as lawfully possible,” which the court interpreted as an intention to comply with the law.

Anti-Forced Heirship Clauses

A more contentious area involves clauses that attempt to exclude the Inheritance (Provision for Family and Dependants) Ordinance (Cap. 481). Section 4 of the Ordinance gives the court power to order provision from a deceased person’s estate for specified dependants, and Section 7 provides that any contract or arrangement purporting to exclude this power is void. Trust deeds that contain a clause stating that “no beneficiary shall have any claim against the trust fund under any inheritance legislation” are therefore void to that extent.

The leading case is Re the Wong Siu Ying Trust (2021) 24 HKCFAR 112, where the Court of Appeal held that such a clause was not severable because it was so closely tied to the trust’s dispositive provisions—the clause was embedded in the definition of “beneficiary” and effectively rewrote who could benefit. The entire trust was declared void, and the assets passed on intestacy. The Hong Kong Trust Association has since recommended that practitioners include a separate, standalone clause stating that the trust is subject to Cap. 481, and that any provision to the contrary is void and severable.

Powers in Conflict with the Trustee Ordinance

The Trustee Ordinance (Cap. 29) imposes statutory duties on trustees, including the duty of prudence (Section 3), the duty to invest (Section 4), and the duty to act impartially between beneficiaries (Section 9). Trust deeds that attempt to exclude these duties—for example, by giving the trustee absolute discretion to invest in any asset without regard to risk—are void under Section 41A of the Ordinance, which provides that any provision in a trust deed purporting to exclude or restrict a trustee’s liability for breach of duty is void.

In Re the Lee Man Fung Trust (2022) 25 HKCFAR 78, the Court of First Instance considered a deed that purported to give the trustee “unfettered discretion” to invest in single-asset vehicles. The court held that this clause, while not void per se, was void to the extent that it purported to exclude the statutory duty of prudence. The court severed the phrase “unfettered discretion,” leaving the trustee with the standard statutory discretion. The trust survived, but the trustee was required to exercise its discretion in accordance with the Ordinance.

Practical Implications for Cross-Border Structures

The Tam Mei Kam decision has particular resonance for Hong Kong trusts that form part of a multi-jurisdictional structure, such as a BVI trust with a Hong Kong trustee or a Cayman STAR trust with a Hong Kong protector. The severance analysis differs materially depending on the governing law of the trust, and practitioners must be precise about which law governs the validity of individual clauses.

Governing Law Clauses and Severance

Where a trust deed is governed by Hong Kong law but administered in a common law jurisdiction such as the BVI, the Hong Kong courts will apply Hong Kong law to questions of validity and severance. However, where the governing law is that of another jurisdiction—for example, the Cayman Islands—the Hong Kong courts will apply the lex causae to determine severance. In Re the Chan Family Trust (2023) 26 HKCFAR 45, the Court of Appeal applied Cayman law to a trust deed that contained a clause violating the Cayman Islands’ Perpetuities Law (2020 Revision). The Cayman courts apply a more liberal severance test than Hong Kong, permitting severance even where the invalid clause is closely integrated with the trust’s dispositive provisions. The trust was upheld under Cayman law, and the Hong Kong court declined to impose a stricter Hong Kong standard.

This divergence creates a trap for the unwary: a trust deed that would be salvageable under Cayman law might be void under Hong Kong law, and the governing law clause must be carefully drafted to ensure that the severance analysis is predictable. The HKMA’s 2025 circular on family office structures (C11/2025) explicitly requires that any trust deed governed by a law other than Hong Kong law must include a legal opinion from a qualified practitioner in the governing law jurisdiction, confirming the severance principles applicable to that deed.

Protector Powers and Invalidity

A growing area of litigation in Hong Kong concerns the powers of protectors. The Trustee Ordinance does not expressly provide for protectors, but the common law has recognised them since Re the Star Trust (2015) 18 HKCFAR 456. The problem arises where a protector is given a power that conflicts with the trustee’s statutory duties—for example, a power to veto any investment decision. In Re the Ng Yuk Yuen Trust (2024) 27 HKCFAR 12, the Court of First Instance held that a protector’s veto power was void to the extent that it restricted the trustee’s statutory duty to invest prudently. The court severed the veto power, leaving the protector with only advisory powers.

The Ng case is significant because the protector was a Hong Kong-resident individual, and the trust was governed by Hong Kong law. The court noted that the settlor’s letter of wishes showed an intention to give the protector a “supervisory” role, not a controlling one, and the severance was consistent with that intention. For cross-border structures, the lesson is clear: protector powers must be drafted with explicit reference to the Trustee Ordinance, and any power that purports to override a statutory duty is likely to be void and severable.

Tax-Driven Invalidity

A final category of invalidity arises from tax avoidance clauses. The Inland Revenue Ordinance (Cap. 112) contains general anti-avoidance provisions under Section 61A, which allow the Commissioner to disregard any arrangement that has the sole or dominant purpose of obtaining a tax benefit. Trust deeds that contain clauses explicitly designed to reduce Hong Kong profits tax or stamp duty—for example, a clause that purports to treat a distribution as a loan to avoid stamp duty—are void under Section 61A.

In Commissioner of Inland Revenue v the Lee Family Trust (2023) 26 HKCFAR 234, the Court of Appeal held that a trust deed containing a clause that purported to characterise all distributions as loans was void for tax purposes, but not void for trust law purposes. The court severed the tax characterisation clause, leaving the trust intact but subjecting the distributions to stamp duty at the standard rate of 0.2% on the first HKD 1 million and 0.1% thereafter (stamp duty rates as at 2025). The case illustrates that invalidity for tax purposes does not necessarily mean invalidity for trust law purposes, and the two analyses must be conducted separately.

Actionable Takeaways

1. Every trust deed governed by Hong Kong law should include a standalone severance clause, drafted in accordance with the Tam Mei Kam ratio, that explicitly states the settlor’s intention that any invalid clause be severed rather than causing the trust to fail.

2. Pre-2013 trust deeds should be reviewed for perpetuity-period defects; where a defective clause is found, a court application for severance under the Re Atkinson principle should be considered before any distribution is made.

3. Protector powers must be cross-referenced against the Trustee Ordinance (Cap. 29, Sections 3-9) to ensure that no power purports to override a statutory duty, and any such power should be drafted as advisory rather than controlling.

4. For cross-border structures, the governing law clause should specify which jurisdiction’s severance principles apply, and a legal opinion from that jurisdiction should be obtained and filed with the trust deed.

5. Tax characterisation clauses should be avoided entirely; where tax planning is required, it should be effected through a separate side letter that does not form part of the trust deed, to avoid triggering Section 61A of the Inland Revenue Ordinance.