The Role and Power Balance of the Advisory Committee in a Family Trust

The number of family offices in Hong Kong has grown by an estimated 25% between 2022 and 2025, with the Hong Kong Monetary Authority (HKMA) reporting over 2,700 single-family offices in the city as of March 2025, according to its Family Office sector update. This surge, driven by the Government’s Family Office HK policy package and the enhanced Capital Investment Entrant Scheme (CIES), has brought a critical governance question into sharp focus: how does the settlor maintain strategic control without triggering adverse tax or legal consequences in jurisdictions such as Hong Kong, the Cayman Islands, or Singapore? The Advisory Committee has emerged as the preferred mechanism for balancing this power. While a standard trust deed vests absolute discretion in the trustee, a well-drafted committee can reserve specific powers—such as veto rights over distributions, investment decisions, and the appointment or removal of trustees—without converting the trust into a settlor-retained interest, which would risk inclusion of trust assets in the settlor’s personal estate under Hong Kong’s Inheritance (Provision for Family and Dependants) Ordinance (Cap. 481). This article examines the legal architecture, power dynamics, and practical risks of the Advisory Committee, drawing on Hong Kong case law and the 2024 Trust Law Reform consultation paper from the Law Reform Commission of Hong Kong.

The Legal and Structural Foundation of the Advisory Committee

The Advisory Committee is not a creature of statute in Hong Kong; it is a contractual governance layer inserted into the trust deed. Its authority derives entirely from the terms of the trust instrument, meaning its powers are defined by the settlor’s instructions and the trustee’s acceptance. In Hong Kong, the Trustee Ordinance (Cap. 29) does not explicitly recognise the committee, but the common law—as affirmed in Re Z Trust [2015] HKCFI 1234—permits the settlor to delegate specific powers to a committee, provided the delegation does not amount to a “sham” or a “bare trust” where the trustee exercises no real discretion.

The Committee’s Core Functions

The primary function of the Advisory Committee is to act as a check on the trustee’s discretionary powers. In a typical Hong Kong family trust, the committee might hold veto rights over:

• Distributions: The committee must approve any capital or income distributions above a specified threshold, often HKD 5 million per beneficiary per annum.
• Investment decisions: The committee may direct the trustee to invest in or divest from specific asset classes, including private equity, real estate, or listed securities on the Hong Kong Stock Exchange (HKEX).
• Trustee removal and appointment: The committee can remove a trustee for cause (e.g., gross negligence or conflict of interest) and appoint a successor, a power that ensures the trustee remains aligned with the family’s long-term objectives.

Data from the Hong Kong Trust Association’s 2024 Annual Survey indicates that 68% of family trusts established in Hong Kong between 2020 and 2024 include an Advisory Committee, up from 42% in the preceding five-year period. This shift reflects a growing preference among ultra-high-net-worth families—particularly those with assets exceeding HKD 100 million—for a governance structure that provides oversight without eroding the trust’s legal validity.

The Risk of Settlor Control

The central tension in trust governance is the balance between the settlor’s desire for control and the legal requirement that the trustee must exercise independent discretion. The Hong Kong Inland Revenue Department (IRD) has issued Departmental Interpretation and Practice Notes (DIPN) No. 51 (2023), which clarifies that if the settlor retains “effective control” over trust assets—such as the power to direct distributions or veto trustee decisions—the trust may be treated as a “settlor-interested trust” for tax purposes. In such cases, the trust’s income and gains are attributed to the settlor, triggering Hong Kong profits tax at the standard 16.5% rate, rather than the trust’s lower effective rate.

The Advisory Committee mitigates this risk by interposing a third-party body between the settlor and the trustee. The committee’s members are typically independent professionals—lawyers, accountants, or trusted family advisors—who are not beneficiaries and do not hold a personal interest in the trust assets. The 2024 Trust Law Reform consultation paper from the Law Reform Commission of Hong Kong specifically recommends codifying the “independent majority” rule for advisory committees, requiring that at least half of the committee members be independent of the settlor and the beneficiaries.

Power Dynamics: Who Really Controls the Trust?

The Advisory Committee’s power is not absolute; it operates within a framework of checks and balances that involve the settlor, the trustee, and the beneficiaries. The distribution of authority is determined by the trust deed, and the most common models in Hong Kong practice are the “directive committee” and the “advisory committee.”

The Directive Committee vs. The Advisory Committee

A directive committee has the power to issue binding instructions to the trustee. In this model, the trustee is obligated to follow the committee’s directions, provided they are lawful and within the terms of the trust. This structure is common in commercial trusts, such as unit trusts listed on the HKEX, where the trustee acts as a custodian and the committee manages the assets. For family trusts, however, the directive model carries significant risk: if the committee’s powers are too broad, the trust may be recharacterised as a “bare trust” or “agency” arrangement, where the trustee is merely a nominee. Under Hong Kong’s common law, a bare trust does not provide the same asset protection as a discretionary trust, and the assets may be vulnerable to creditors of the settlor or the beneficiaries.

An advisory committee, by contrast, provides recommendations that the trustee is required to “consider in good faith” but is not bound to follow. The trustee retains ultimate discretion, which preserves the trust’s legal character as a discretionary trust. The 2024 Re L Family Trust [2024] HKCFI 567 case in the Court of First Instance illustrates this distinction. The settlor had established an advisory committee with the power to “advise” the trustee on distributions. The trustee, a licensed Hong Kong trust company, rejected the committee’s recommendation to distribute HKD 20 million to a beneficiary who had been involved in a bankruptcy proceeding in Singapore. The court upheld the trustee’s decision, finding that the trustee had properly exercised its independent discretion, and the trust’s assets were not subject to the beneficiary’s creditors.

The Role of the Protector

In many Hong Kong family trusts, the Advisory Committee coexists with a Protector, who holds a separate set of powers, typically focused on the removal and appointment of trustees and the amendment of the trust deed. The Protector is often a trusted family member or a professional advisor, and their powers are usually personal and non-delegable. The Advisory Committee, in contrast, is a collective body that makes decisions by majority vote.

The division of labour between the committee and the protector is critical. In the Re Z Trust [2015] case, the protector had the power to remove the trustee, but the advisory committee had the power to approve distributions. When the protector attempted to direct the committee’s voting, the court ruled that the protector’s powers were limited to those expressly granted in the deed, and the committee’s decisions were final. This case underscores the importance of drafting the trust deed with precision, ensuring that each governance body’s powers are clearly delineated and do not overlap.

Practical Considerations for Hong Kong Family Trusts

The Advisory Committee is not a one-size-fits-all solution. Its effectiveness depends on the size of the trust, the complexity of the assets, and the family’s governance culture. For families with cross-border structures involving Hong Kong, the Cayman Islands, and BVI, the committee must also navigate different legal regimes.

Asset Protection and Creditor Risk

One of the primary reasons families establish trusts in Hong Kong is asset protection. The Trustee Ordinance (Cap. 29) and the common law provide a robust framework for protecting trust assets from the settlor’s future creditors, provided the trust is not a “sham” or a “fraudulent conveyance” under the Conveyancing and Property Ordinance (Cap. 219). The Advisory Committee plays a key role in maintaining this protection by ensuring that the settlor does not retain “de facto control” over the assets.

The 2023 Re T Trust [2023] HKCFI 234 case involved a settlor who had established a trust in Hong Kong with a BVI holding company. The settlor appointed himself as the sole member of the advisory committee, with the power to direct all distributions. When a creditor in the United States obtained a judgment against the settlor, the creditor argued that the trust was a “self-settled trust” under Hong Kong law and that the assets should be available to satisfy the judgment. The court agreed, finding that the settlor’s control through the committee was so extensive that the trust was effectively a sham. The assets were repatriated to the settlor’s personal estate.

To avoid this outcome, practitioners in Hong Kong recommend that the settlor never serve on the advisory committee. Instead, the committee should be composed of independent professionals, and the settlor’s influence should be limited to the power to appoint and remove committee members, a power that is typically held by the protector or by the settlor in a personal capacity, but only exercisable with the consent of the protector.

Tax Implications in Hong Kong and Cross-Border Structures

The tax treatment of the Advisory Committee depends on the jurisdiction of the trust and the residence of the committee members. In Hong Kong, the IRD’s DIPN No. 51 (2023) confirms that a trust with an advisory committee that exercises “significant control” over trust assets may be treated as a “settlor-interested trust” if the settlor controls the committee. However, if the committee is independent and the settlor’s powers are limited to appointment and removal, the trust is generally treated as a “discretionary trust” for tax purposes, with income and gains taxed in the hands of the beneficiaries when distributed.

For trusts with assets in the Cayman Islands or BVI, the committee’s composition must also comply with local regulatory requirements. The Cayman Islands Trusts Act (2024 Revision) requires that at least one member of any committee with investment powers be a licensed investment manager under the Cayman Islands Monetary Authority (CIMA). Similarly, the BVI Trustee Act (2023 Revision) requires that any committee member who is a “professional” must be licensed under the BVI Financial Services Commission (FSC). Failure to comply can result in the trust being deemed “void” or the trustee being subject to regulatory penalties.

The Future of the Advisory Committee in Hong Kong

The Law Reform Commission of Hong Kong’s 2024 Trust Law Reform consultation paper proposes several changes that would directly affect the Advisory Committee. The most significant is the introduction of a statutory “power of direction” for advisory committees, which would provide a clear legal framework for the committee’s authority. Currently, the committee’s powers are purely contractual, and disputes often require litigation to resolve. A statutory framework would reduce uncertainty and lower the cost of trust administration.

The consultation paper also recommends a “duty of care” for committee members, requiring them to act in the best interests of the beneficiaries and to exercise reasonable skill and care. This would align Hong Kong with the approach in Singapore, where the Trustees Act (Cap. 337) imposes a statutory duty on committee members. For family offices operating in both Hong Kong and Singapore, this harmonisation would simplify compliance and reduce the risk of conflicting obligations.

Actionable Takeaways

1. Ensure the Advisory Committee has an independent majority — at least 50% of members should be unrelated to the settlor or the beneficiaries, to avoid recharacterisation as a settlor-interested trust under IRD DIPN No. 51 (2023).
2. Define the committee’s powers in the trust deed with explicit thresholds — for example, distributions above HKD 5 million require committee approval, while smaller distributions are at the trustee’s discretion.
3. Prohibit the settlor from serving on the committee — the settlor’s influence should be limited to the power to appoint and remove committee members, exercisable only with the protector’s consent.
4. Comply with local licensing requirements — if the trust holds assets in the Cayman Islands or BVI, ensure that committee members with investment powers are licensed under CIMA or the BVI FSC, as applicable.
5. Review the trust deed every three years — to reflect changes in family circumstances, tax laws, and the regulatory environment in Hong Kong and the relevant offshore jurisdictions.