Gone are the days when private trust was a means of financial management exclusive to the wealthy few. In today's society, more people are turning to private trust as an assurance of wealth protection, as the setup and administration fees are relatively lower.

Recent Trend of Private Trust

"While in the past, the reason for setting up a private trust was to avoid estate duty, people nowadays set up a private trust for the purposes of avoidance of probate and succession planning," said Felix Fung, Head of Trusts & Fiduciary Services of The Bank of East Asia (BEA).

There are reasons why we're seeing an increasing number of people establishing private trusts. "Now that people are living longer, they feel the need to plan their finance ahead. Also, with the improved standard of living and people getting married at a later age, they want to ensure financial security for their offspring after they pass away," continued Fung. With an increase in the number of knowledgeable and experienced service providers, the private trust setup fee is now also more standardised and economical, therefore making private trust more widely available a wealth protection option.

"The past five years has seen an increase in clients in the 40s age group who want to protect the financial interest of their children, as well as more senior clients to ensure adequate disposable income for their retirement," said Evon Chiu, Head of Marketing of the Trusts & Fiduciary Services Department at BEA.

Functions of a Private Trust

While there are specific needs such as a business owner's need for capital protection, a private trust is usually set up for multiple purposes. "Confidentiality is particularly important when it comes to succession planning for families that run a business together," said Fung. "Naturally, they would want the family business to stay within the family and protect their own stakes, without potential contentions."

On top of succession planning, a private trust can also effectively protect and address the financial needs of the settlor's offspring upon his/her death. Likewise, the trust can be used to pay for necessary expenses in the settlor's retirement years, as well as to support charity organisations of the settlor's choice.

When setting up a private trust, it is important to note that the amount you put into a trust should yield a reasonable return after the deduction of administration fee. The administration fee is calculated according to the degree of responsibility of the trustee and the value of the assets held in trust, so a minimum of HKD15million is advised.

Financial Protection for Offspring

Among the couples who set up a private trust, most are looking to ensure financial protection for their children, especially after the couples themselves pass away. Through the establishment of a private trust, the settlors can be assured of enhancement of wealth, tax minimisation, and that their beneficiaries will be given the greatest benefits.

For instance, the settlors may arrange for their inheritance to be distributed only when the beneficiaries, such as their children, are old enough to take responsibility for the inheritance. The settlors may also request the establishment of a standby trust, which distributes the settlors' estate to their offspring in installments over different periods of time, to ensure their financial sustenance is protected in case of financial distress or family disputes.

Worry-free Retirement

Incidentally, private trust is a reliable tool to provide regular income in the retirement years, especially for spouseless senior citizens and senior couples without children.

A spouseless senior citizen can benefit from a private trust when it pays for his/her daily retirement expenses or costs for the elderly home. On the other hand, a senior couple without children can use the private trust to pay for possible medical expenses such as hospitalisation, if one of the two is inflicted with illnesses.

In both cases, the trustee, entrusted with discretional power, ensures the settlor's wishes are carried out as intended. The upsides of a private trust is that through the appointment of a trustee, you can ease the burden of the administration falling on individual members of the family, avoid probate procedure, and carry out the settlor's wishes to protect and benefit his/her designated beneficiaries (e.g. family members and specific charitable organisations/purposes) after his/her demise.

Special Thanks:
Felix T Y Fung, Head of Trusts & Fiduciary Services Department, The Bank of East Asia, Limited
Evon F Y Chiu, Head of Marketing, Trusts & Fiduciary Services Department, The Bank of East Asia, Limited

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Nuts and Bolts of Private Trust