Update: succession planning across Hong Kong and the Cayman Islands

For principals holding family wealth through Cayman Islands structures and living in – or moving to – Hong Kong, succession planning is not a single-jurisdiction exercise. The structure sits in one place; the family members, their residences and the governing law of any trust or holding entity may sit in several others. When those systems do not speak to each other, an estate plan built for one jurisdiction can unravel at the point it is most needed.

Succession planning across the Hong Kong – Cayman Islands corridor requires coordination of the Trustee Ordinance (Cap. 29), the Cayman Islands trust statutes, and the forced-heirship and residence rules of every jurisdiction where a family member is domiciled. Hong Kong, as reformed with effect from 1 December 2013, has no forced-heirship regime and provides statutory firewall protection for Hong Kong-law trusts against foreign forced-heirship claims. The Cayman Islands offer comparable structural protections. But the gap between what the documents say and what can actually be enforced turns on how the two systems connect.

This briefing sets out the recurring trigger our desk sees most often, who it affects and what to do now.

What keeps recurring in this corridor

The pattern is consistent. A principal – often a founder or second-generation principal from a Mainland Chinese, Middle Eastern or European family – holds operating assets through a Cayman Islands holding company. A discretionary trust, settled under either Cayman or Hong Kong law, sits above that entity. The family has members in Hong Kong, the Mainland and sometimes a third jurisdiction.

Three pressure points arise repeatedly.

First, the trust deed was drafted for the structure at inception and has not been reviewed since. The family's factual and legal map has changed – new members, new residences, new asset classes – but the instrument has not followed. A Cayman-law trust that was appropriate at formation may need a change of proper law, a protector arrangement or an amendment to the letter of wishes to reflect where the family now sits.

Second, the forced-heirship exposure of beneficiaries domiciled in civil-law jurisdictions is frequently underestimated. Hong Kong's statutory firewall, strengthened by the 1 December 2013 reform to the Trustee Ordinance, protects Hong Kong-law trusts against foreign forced-heirship claims in a defined range of circumstances. But that protection is not automatic. It depends on the proper law of the trust, the situs of the assets and whether the structure was genuinely settled before the claim arose. A Cayman-law trust carries its own statutory firewall provisions. Where neither applies cleanly, the gap is real.

Third, the corporate layer is not succession-proofed. A Cayman Islands company is a common-law entity; its shares pass under the law governing the estate of the deceased shareholder. Where a shareholder was domiciled in a jurisdiction that applies forced-heirship or that requires local probate, the shares may be caught before the trust layer is engaged at all.

In our cross-border private wealth practice, we regularly see these three pressure points appearing together – and most often after a triggering event rather than before it.

Who this affects

This briefing is relevant to any principal or family office where two or more of the following are true.

• The family holds one or more Cayman Islands companies or trusts, with or without a Hong Kong holding company or operating entity beneath.
• A family member – settlor, beneficiary or trustee – is resident, domiciled or acquiring residence in Hong Kong, the Mainland, or a civil-law jurisdiction with forced-heirship rules.
• The trust or will structure has not been reviewed since the family's residence or asset map changed.
• The family's estate plan includes assets with a situs in Hong Kong – listed shares, real property, bank accounts – that may be subject to Hong Kong private wealth considerations independently of the holding structure above.
• A principal is considering a change of residence that would alter the domicile analysis, including under the Mainland's rules on habitual residence.

The interaction of Hong Kong and Cayman Islands succession regimes also matters for asset protection planning. Where a principal faces a creditor claim or a family-law dispute in one jurisdiction, the enforceability of the structure in the other may be decisive. For principals with Mainland China exposure, the asset-protection analysis extends further: see our guide on asset protection for principals with Mainland China exposure.

What to do now

Three immediate steps apply to most situations in this corridor.

Map the current structure against the current family position. Identify the proper law of each trust, the situs of each asset class and the domicile or deemed domicile of each family member. Where those have changed since the trust or will was drafted, the documents need to follow. This is not a cosmetic exercise: the choice of proper law determines which firewall statute applies and whether any foreign forced-heirship claim can be resisted.

Review the will and letter of wishes together. A Hong Kong will governs Hong Kong-situs assets. A Cayman or offshore will or memorandum may govern other assets. Where a principal relies on a single will to cover an internationally diversified estate, the risk of conflict – or of inadvertent revocation – is significant. For principals with assets in both Hong Kong and the Mainland, the interaction is explored further in our analysis of wills and estate plans covering assets in Mainland China.

Confirm the corporate layer. Where Cayman Islands shares are held personally by the principal rather than through a trust, confirm how those shares would pass on death. If the principal is domiciled in a forced-heirship jurisdiction, the shares may be caught under that jurisdiction's succession law. A transfer into a properly structured trust before a triggering event may be available; after it, the window may have closed.

The sequence of steps above is the starting point. Your position turns on the documents actually in place, the jurisdictions engaged and the order in which you move. To discuss how the Hong Kong – Cayman Islands interface applies to your family's structure, write to us at info@lockhartyip.com.

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This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.