Why Trusts are the Cornerstone Tool for Entrepreneurs' Generational Wealth Transfer

The family office sector in Hong Kong crossed a critical threshold in March 2025 when the Inland Revenue (Amendment) (Tax Concessions for Family Offices) Ordinance 2025 came into full effect, codifying a 0% profits tax rate for qualifying single-family offices (SFOs) managing not less than HKD 240 million in assets. This legislative milestone, combined with the HKMA’s September 2024 circular clarifying the “carried interest” tax treatment for private equity structures held through trusts, has shifted the calculus for entrepreneurial families planning multi-generational wealth transfer. The structural question is no longer whether to use a trust, but how to layer the trust architecture to optimise for the new regulatory framework. With the PRC’s Individual Income Tax Law (2018 Amendment) still casting a long shadow over cross-border gifting and the Hong Kong Trustee Ordinance (Cap. 29) offering a flexible statutory trust regime, the trust has re-emerged as the single most efficient vehicle for decoupling economic ownership from legal control — a necessity for entrepreneurs whose operating companies, real estate holdings, and listed equity positions span multiple jurisdictions.

The Structural Logic of Trusts in Cross-Border Wealth Transfer

Separation of Control from Beneficial Ownership

The fundamental engineering principle of a trust — the legal division between trustee legal title and beneficiary equitable interest — solves a problem that no other civil law or common law instrument addresses with equal precision for the entrepreneur. Under the Hong Kong Trustee Ordinance (Cap. 29, s. 2), a trust created by a settlor vests legal ownership of the trust assets in a trustee, while the beneficiary holds only a right to enforce the trust terms. For the founder of a Cayman-incorporated, Hong Kong-listed company, this means the listed shares can be held by a BVI trustee under a Hong Kong law trust, removing the founder’s personal name from the share register while preserving the family’s economic interest. The HKEX’s Listing Decision LD43-3 (2019) confirmed that a trust holding more than 30% of a listed issuer’s voting power must be disclosed as a controlling shareholder, but the trustee — not the settlor — exercises the voting rights. This distinction becomes material when the settlor wishes to retire from board participation while ensuring the trust retains control over the company’s strategic direction.

Tax Deferral and the 2025 Family Office Regime

The HKMA’s March 2025 implementation guidelines for the family office tax concession explicitly recognise trusts as qualifying structures. Under Section 20ZF of the Inland Revenue Ordinance (Cap. 112), a family office that is a “trust company” licensed under the Trustee Ordinance can elect for the 0% rate on profits derived from “qualifying transactions” — defined to include dealings in securities, futures contracts, and foreign exchange. For an entrepreneur transferring a portfolio of HKEX-listed equities worth HKD 500 million into a trust, the capital gains that would have been taxed at the standard 16.5% profits tax rate (if held by a corporation) or the 15% standard rate (if held by an individual under salaries tax) now attract zero tax, provided the trust meets the SFO definition. The HKMA circular HKMA/FC/2024-05 also confirmed that carried interest distributions from a private equity fund held through a trust are treated as capital gains rather than trading receipts, provided the fund holds at least 70% of its assets in “qualifying investments” — a threshold that most Hong Kong-based PE funds meet as a matter of standard practice.

Structuring the Trust for the Entrepreneur’s Specific Asset Classes

Operating Company Shares: The Cayman STAR Trust and BVI VISTA Trust

For the entrepreneur whose core wealth is equity in a Cayman-incorporated, Hong Kong-listed operating company, the Cayman Islands Special Trusts (Alternative Regime) Law (STAR Trust) offers a mechanism that aligns with the HKEX’s disclosure requirements. Under a STAR trust, the trustee holds legal title but the trust instrument can grant the “enforcer” — typically the settlor or a family office director — the power to direct the trustee on share voting. This structure avoids the common law rule in Saunders v Vautier (1841) that beneficiaries can collectively terminate a trust, which is problematic for a settlor who wants to ensure the trust endures for multiple generations. The BVI Virgin Islands Special Trusts Act (VISTA) provides a similar mechanism: the trustee holds the shares but the board of the BVI company retains management control, and the trustee cannot interfere in the company’s business decisions. For an entrepreneur listing on the HKEX Main Board under Chapter 8 of the Listing Rules, the VISTA trust structure allows the founder to maintain de facto control of the listed entity while the trust holds the legal interest, satisfying the HKEX’s requirement for a clear control structure without triggering a mandatory general offer under the Takeovers Code (Rule 26).

Real Property: The Hong Kong Land Trust and Stamp Duty Implications

Real estate held through a trust in Hong Kong attracts specific stamp duty treatment under the Stamp Duty Ordinance (Cap. 117). A transfer of Hong Kong residential property into a trust is treated as a “conveyance on sale” and attracts ad valorem stamp duty at the Second Stamp Duty Scale rates — which, as of 2025, range from 1.5% for properties valued under HKD 3 million to 4.25% for properties above HKD 21,739,120. However, the Inland Revenue Department’s Stamp Office has confirmed in Practice Note No. 1/2022 that a transfer into a trust where the settlor retains a life interest and the trust is irrevocable is treated as a “gift” rather than a sale, provided no consideration passes. This interpretation allows the entrepreneur to transfer a residential portfolio worth HKD 100 million into a trust for stamp duty of approximately HKD 4.25 million — a 4.25% effective rate — rather than the 15% Buyer’s Stamp Duty (BSD) that would apply to a direct transfer to a third party. For commercial property, the BSD does not apply, and the standard ad valorem rate of up to 4.25% is the only duty, making the trust structure even more cost-effective for commercial real estate held by the entrepreneur’s family office.

Listed Securities and Private Equity: The Discretionary Trust as a Tax Shelter

The discretionary trust — where the trustee has discretion over which beneficiaries receive income or capital — is the preferred vehicle for holding listed securities and private equity interests because it allows the settlor to defer the tax liability on income until the trustee actually distributes it. Under Section 21 of the Inland Revenue Ordinance, a trust is a separate taxpayer, and the trustee is assessed on trust income at the standard 16.5% corporate rate (or the 15% rate for trusts with less than HKD 2 million in profits). However, if the trustee does not distribute the income but accumulates it within the trust, no beneficiary-level tax arises. For a private equity fund held through a trust, the carried interest that flows to the trust as a limited partner is taxed at the trust level, and the trustee can choose to reinvest the proceeds rather than distribute them, deferring the beneficiary’s tax indefinitely. The HKMA’s 2024 carried interest circular confirmed that this treatment applies regardless of whether the trust is a Hong Kong trust or a foreign trust managed in Hong Kong, provided the trustee is licensed under the Trustee Ordinance or the Securities and Futures Ordinance (Cap. 571).

The Regulatory Environment and Compliance Framework

The Trustee Ordinance and the Licensing Regime

The Trustee Ordinance (Cap. 29) was substantially amended by the Trustee (Amendment) Ordinance 2013, which introduced a statutory duty of care (s. 3A), expanded the trustee’s investment powers (s. 4), and codified the trustee’s power to delegate (s. 8). The SFC’s 2023 consultation paper on the regulation of trust companies proposed extending the licensing requirement under the Securities and Futures Ordinance (Cap. 571) to all trust companies that hold client assets, regardless of whether they also conduct regulated activities. As of 2025, the SFC has not yet implemented this proposal, but the HKMA’s family office guidelines require that any trust company acting as trustee for an SFO must be either a licensed corporation under the SFO or an authorised institution under the Banking Ordinance (Cap. 155). For the entrepreneur, this means the choice of trustee is not merely a commercial decision but a regulatory one: a trust company that is not SFC-licensed cannot hold the family office’s assets without triggering a potential breach of the SFO’s asset-holding requirements.

Anti-Money Laundering and the Trust’s Disclosure Obligations

The Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) imposes customer due diligence requirements on trust companies as “financial institutions” (s. 2, Schedule 1). When an entrepreneur establishes a trust, the trustee must identify the settlor, the beneficiaries, and any “protector” who holds power to remove the trustee. The Companies Registry’s Significant Controllers Register (SCR) requirements, introduced under the Companies (Amendment) Ordinance 2018, also apply to trusts that hold more than 25% of the shares in a Hong Kong company. For the entrepreneur who wishes to maintain privacy, the trust structure offers a solution: the trustee — not the settlor — is registered as the significant controller, and the settlor’s name does not appear on the SCR. However, the Inland Revenue Department’s exchange of information agreements with 42 jurisdictions (as of 2025) mean that the settlor’s identity is disclosed to the IRD upon request, and the IRD will share that information with the tax authorities of the settlor’s country of residence under the Common Reporting Standard (CRS). This transparency requirement does not undermine the trust’s utility; it merely means the trust is a tool for tax compliance and asset protection, not for tax evasion.

Actionable Takeaways for the Entrepreneur and Their Advisors

1. Structure the trust under Hong Kong law with a licensed trustee before transferring any Hong Kong-listed shares or real property — the stamp duty exemption for gifts into trusts requires the trust to be irrevocable and the settlor to retain no power of revocation, and this must be documented before the transfer is executed.

2. Use a Cayman STAR trust or BVI VISTA trust for operating company shares — these structures allow the settlor to retain voting control while the trustee holds legal title, satisfying both the HKEX’s disclosure requirements and the settlor’s desire for succession planning without loss of control.

3. Elect for the family office tax concession under the Inland Revenue Ordinance before 31 March 2026 — the concession applies to qualifying SFOs for any year of assessment beginning on or after 1 April 2024, and the election must be made in writing to the Commissioner of Inland Revenue within 60 days of the end of the relevant basis period.

4. Document the carried interest treatment with the trustee and the fund manager — the HKMA’s 2024 circular requires that the carried interest be clearly identified in the fund’s limited partnership agreement and that the trust’s beneficial owners are disclosed to the fund manager for CRS reporting purposes.

5. Review the trust deed every two years against changes in the Trustee Ordinance and the SFC’s regulatory proposals — the SFC’s 2023 consultation on trust company licensing may result in new requirements for the trustee’s capital adequacy and professional indemnity insurance, and the trust deed must grant the settlor or the protector the power to replace the trustee if the current trustee cannot meet these requirements.