What Is a Family Trust?
A family trust is a wealth management tool. Put simply, the settlor transfers assets, such as cash, shares and insurance policies, into a trust, which are then held and managed by the trustee in accordance with the terms of the trust deed, with distributions made to the beneficiaries under specified conditions. This allows assets to be distributed in a more structured way, helps look after family members, and reduces the risk of disputes later on.
The trust terms can be tailored to the family’s needs. For example, they may specify that funds are to be used for education, medical care or living expenses, or provide that part of the capital may only be accessed once a beneficiary reaches a certain age. Distributions may also be made by instalments over time. In a family trust, the beneficiaries are usually a spouse, children, descendants or other designated family members.
The Three Core Roles in a Family Trust
- Settlor: The person who sets up the trust and specifies its purpose, terms and beneficiary arrangements.
- Trustee: The person who holds and manages the trust assets in accordance with the trust deed, and makes distributions to the beneficiaries when the relevant conditions are met.
- Beneficiary: The person who is entitled to benefit under the trust terms. This may be a family member, child or another designated person. When and how a beneficiary receives distributions will depend on the trust terms and the trustee’s administration arrangements.
Common trust structures include family trusts, testamentary trusts, insurance trusts and discretionary trusts. These differ in terms of when they take effect, how they are managed, how beneficiaries are arranged, and the threshold for setting them up:
Type of Trust |
Main Purpose |
Generally Suitable For |
Family trust |
Wealth succession, asset management, reducing family disputes |
High-net-worth families, business owners, and those planning intergenerational succession |
Testamentary trust |
Managing and distributing the estate after death |
People with minor children or those who wish to distribute assets in stages |
Insurance trust |
Managing and distributing insurance proceeds by instalments |
People with life cover who want greater control over how the proceeds are used |
Discretionary trust |
Flexible distribution of assets by the trustee according to circumstances |
People with larger families or uncertain future needs |
Passive trust |
Passing assets to beneficiaries in accordance with a fixed arrangement |
People with simpler asset structures and beneficiary arrangements |
Charitable trust |
Long-term charitable giving or public-benefit arrangements |
Individuals or families who wish to create a charitable legacy |
Real estate trust |
Managing property and real estate assets |
People who own multiple properties or overseas real estate |
Special needs trust |
Providing long-term care for a beneficiary with special needs |
Families with a family member who has special needs |
What are some common uses of a family trust?
A family trust can turn your assets into practical support, ensuring that wealth is directed to where it is most needed at different stages of your family members’ lives.
Supporting Children’s Growth in Stages
Through a trust, parents may set out in advance how funds are to be used and released, for example by paying school fees by academic year or providing one-off support when a child moves on to further study or relocates, so that the resources better match the child’s developmental needs.
Caring for Elderly Family Members or Those Who Need Long-Term Support
If someone in the family requires longer-term living or medical care, the trust can set out clearly the principles for meeting those expenses, with the trustee arranging payments regularly in accordance with the terms. This helps ease the financial planning burden on carers.
Passing On Shareholdings in a Family Business
By using a family trust to consolidate company shareholdings, later generations may enjoy dividend income while clear succession conditions can also be put in place. This helps prevent business disruption caused by inheritance issues and supports the long-term stability of the family enterprise.
Charitable Giving and the Continuation of Family Values
Many families regard a trust as a way to put family values into practice over the long term, by applying part of their assets to specific purposes such as making regular donations to charities, setting up scholarships or supporting social issues they care about. By setting out the direction of donations, approval procedures and implementation guidelines in the trust terms, a family can not only strengthen its social impact but also make it easier for the next generation to understand and carry forward the intentions of their elders.
What Are the Benefits of a Family Trust?
A family trust can provide protection that goes beyond the functions of a will. Through its legal structure, it helps shield assets from dissipation or erosion, while giving wealth management greater control and privacy.
Reducing the Risk of Inheritance Disputes Within the Family
A family trust can set out in advance how assets are to be managed and distributed, for example who is responsible for management and in what circumstances funds may be used. When the rules are clear and consistent, family members do not need to negotiate at a critical time or make their own assumptions, which helps reduce misunderstandings and disputes caused by uncertainty over distribution.
Protecting Against the Squandering of Assets
Beneficiaries cannot freely draw down large amounts of capital on their own, which helps reduce the risk of assets being exhausted within a short period. Through phased distributions, you can guide the next generation to use resources more responsibly and help safeguard their longer-term well-being.
Asset Protection
Subject to legal compliance, trust assets have a separate legal status. Even if the settlor later faces personal financial risk or debt claims, assets held within the trust can usually be protected and are not generally treated as part of the assets available for recovery.
Privacy Protection
Compared with arrangements that require public registration or disclosure during formal procedures, the terms of a family trust and its beneficiary arrangements are not usually made public automatically, which can to some extent reduce unnecessary attention and interference.
In addition, under Hong Kong’s Trust Law (Amendment) Ordinance 2013, the restriction on the duration of trusts has been abolished. This allows perpetual trusts to be established in Hong Kong, meaning that trust arrangements are no longer subject to the traditional maximum trust period and are better suited to long-term wealth planning and intergenerational succession.
What Is the Threshold for Setting Up a Family Trust?
Many people assume that a family trust can only be set up by those with substantial wealth. In fact, Hong Kong law does not prescribe any minimum asset value for establishing a trust. Even if your asset base is not especially large, a trust may still be established, but you should take into account the setup fee, trustee fees, legal documentation costs and administrative management expenses.
A traditional family trust is generally more suitable for those with a larger asset base or a more complex family or asset structure. If the main objective is to manage insurance proceeds, care for minor children or distribute assets in stages, an insurance trust or testamentary trust, which may involve a lower threshold, could also be considered.
What Costs Are Involved in a Family Trust?
The costs of a family trust generally fall into two main categories: the trust setup fee and the annual management fee. They are explained below:
1. Setup Costs (One-Off)
Setup costs are the one-off expenses payable when establishing a family trust. They usually include:
- Trust structure design fee: Designing a suitable trust structure based on the settlor’s family circumstances, types of assets and succession objectives.
- Legal drafting fee: Covering the trust deed, letter of wishes, asset transfer documents and other related legal documentation.
- Trust establishment handling fee: Covering the opening of the trust, the processing of administrative documents and arrangements for the trustee to receive the trust assets.
- Asset transfer costs: If cash, shares, funds, insurance policies, company shares or property are transferred into the trust, bank charges, transfer fees, stamp duty or other administrative costs may apply.
2. Annual Management Fee
The annual management fee is an ongoing yearly charge payable after the trust has been established. It is usually charged by the trustee or trust company to support the trust’s day-to-day operation, including:
- Trustee management fee: The trustee’s fee for holding, managing and distributing the trust assets in accordance with the trust deed.
- Asset management and administration fee: Covering records of trust assets, beneficiary information, distribution arrangements and routine administration.
- Reporting and record-keeping fee: Covering the regular provision of asset reports, distribution records and trust operation documents.
- Compliance review fee: Covering anti-money laundering procedures, customer due diligence, regulatory compliance and related document updates.
- Beneficiary communication and distribution handling fee: If payments need to be made regularly to beneficiaries or arrangements need to be handled for education, living or medical expenses, extra administrative work may be involved.
Generally speaking, the annual management fee for a family trust is about 0.5% to 2% of the net asset value of the trust. Under some lower-cost or simplified models, the management fee may be around 0.2% to 0.3%. The actual fee will depend on factors such as the size of the trust assets, the types of assets, the number of beneficiaries, the distribution arrangements and the scope of services provided by the trustee.
Key Considerations When Planning a Family Trust
Before deciding whether to set up a family trust, it helps to return to the most fundamental question: what do you want the trust to achieve? Is it to provide long-term financial support for your family, set aside an education fund for your children, pass assets on in stages, or enable the rights and interests in a family business to be handed down in a more orderly way? The clearer your objectives are, the easier it will be to design terms that suit your needs.
- Define the Purpose of the Trust and the Principles for Distribution Clearly
If you first set out clearly whom you want to look after, when you want support to be provided, and in what circumstances funds may be used, you can greatly reduce future disputes in administration. For example, you may specify uses such as education, medical care or a property deposit, and provide for payments by instalments or only once a beneficiary reaches a certain age.
- Define the Scope of Assets to Be Placed Into the Trust and How They Will Be Managed
A trust may cover different types of assets, such as cash, investments, insurance policies, property or shareholdings, but different assets may vary in terms of transfer into the trust, valuation, management and future realisation. It is advisable to list your assets first and consider which are suitable to be placed into the trust and which are more conveniently kept in your own name for day-to-day use.
- Plan the Beneficiaries, Method of Distribution and Conditions
In addition to naming the beneficiaries, you should also think about when and how distributions are to be made — for example, by providing living expenses monthly, releasing start-up funds after completion of studies, or paying out capital in stages at particular life milestones.
- Choose a Suitable Trustee
The trustee is responsible for managing the trust assets and making distribution decisions in accordance with the terms, so the role is crucial. You may wish to consider the trustee’s professional ability, independence and practical ability to perform the role over the long term. Some trusts also appoint a protector or include an oversight mechanism to approve major decisions in specified circumstances and create checks and balances.
- Guard Against Cross-Border Legal and Tax Pitfalls
If assets or beneficiaries are located overseas, such as in the UK, the US or Canada, local inheritance tax or gift tax issues may arise. Before establishing the trust, you should obtain professional tax advice to avoid taking on a heavy tax burden.
Prudential Can Help You Plan for Wealth Succession
Traditional family trusts often involve establishment costs of hundreds of thousands of Hong Kong dollars, together with annual management and administration fees, which can discourage many ordinary families who would otherwise like to plan early. However, with innovation across financial products, some insurance products now include a range of legacy planning tools, allowing ordinary families to arrange certain wealth succession functions at a relatively lower threshold.
Prudential Entrust Multi-Currency Plan not only provides life protection, but also goes beyond the conventional framework of savings insurance, allowing ordinary families to enjoy wealth succession functions similar to those of a elements that resemble a trust. It can also be paired with Prudential’s “PruNextGen” ^ value-added service platform, which offers all-round support such as talent development, education consultation, and physical and mental wellness support. Helping parents equip their children for the future, the plan’s key features are as follows:
- Potential Returns growth and flexible cash flow to build a stronger financial foundation: By paying premiums for only 3 or 5 years, you can grow your wealth through guaranteed cash value and non-guaranteed bonuses. You can also choose from six currencies and switch flexibly to suit different life plans, while the FlexIncome Option helps establish a stable income stream for your family.
- Precise wealth succession and distribution: Flexible “Wealth-Split Option” and “enhanced FlexLegacy” features allow you to split the policy or tailor death benefit2 arrangements according to the different needs of different children.
- All-round intergenerational protection to carry forward family values: You may appoint an interim owner and succeeding owner in advance, and through the “Incapacity Option” to set up a backup plan, to ensure that your family’s protection is not interrupted if you become incapacitated due to unexpected events or a Covered Disease.
