Matter note: holding a family business interest in trust

A family business interest is rarely just an asset. It is a relationship – between capital and control, between generations, and between jurisdictions that may not agree on what succession means. When a principal approaches this question, the structural problem is almost always the same: how do you hold a business interest in a way that survives the founder, protects against forced-heirship claims from a foreign home jurisdiction, and does not accidentally trigger a tax or enforcement exposure in the process?

Holding a family business interest in trust is governed in Hong Kong by the Trustee Ordinance (Cap. 29), substantially reformed with effect from 1 December 2013. The reform abolished the rule against perpetuities for Hong Kong trusts, introduced statutory protection for settlor reserved powers, and strengthened the position of a Hong Kong-law trust against foreign forced-heirship claims. For a cross-border family, those three features – combined with Hong Kong's common-law system and absence of forced-heirship – make the jurisdiction a structurally coherent holding platform.

This note describes an anonymised matter that reached our desk in the context of a mid-market family group with operating interests spanning Mainland China and a European home jurisdiction. The names, figures and identifying details have been removed. What remains is the structure of the problem, the route chosen, and the lesson that transfers to similar situations.

The situation and the constraint

The principals were the founders of a regional manufacturing and distribution group. The operating entities sat in Mainland China. The group's offshore holding structure ran through a mid-tier common-law jurisdiction, with the principals holding their respective interests directly. Neither principal had a settled plan for succession. Both held residence and assets in a European jurisdiction whose domestic law imposed mandatory inheritance shares on certain heirs.

The constraint had two dimensions. First, the European jurisdiction's forced-heirship rules applied to moveable property under the domicile of the deceased at the date of death. The principals were not yet domiciled in Hong Kong; their exposure remained live. Second, the group's operating layer was in Mainland China, where the enforcement of a foreign succession instrument is not automatic. A trust structure holding a beneficial interest in an offshore holdco does not itself operate on the Mainland assets directly – but the holdco layer, and the continuity of control through it, would determine whether the business remained governable across a succession event.

What the principals could not afford was a post-death dispute among heirs in multiple forums simultaneously – European forced-heirship litigation, a Mainland probate or recognition question, and a challenge to the offshore holding structure. Any of those, run in parallel, would have disrupted operating control.

The issue and the route chosen

The core issue was not which trust form to use. It was whether a Hong Kong-law trust, holding an interest in the offshore holdco, could insulate the beneficial interest from the European forced-heirship claim at the point of death – and whether that insulation would hold up under the law the European court would apply.

Hong Kong law does not have forced heirship. The 2013 reforms to the Trustee Ordinance strengthened the position of a Hong Kong-law trust against precisely this category of foreign claim. The governing principle is that, once an asset is settled into a valid Hong Kong-law trust, it is no longer beneficially owned by the settlor in a sense that the foreign heirship rule can reach. The 2013 reform made that firewall explicit in statute.

The route chosen was a discretionary trust governed by Hong Kong law, settled by each principal separately, holding their respective interests in the offshore holdco. The trustee was a professional trustee entity. A letter of wishes addressed succession intent without creating a fixed entitlement. A protector mechanism preserved a degree of family oversight over the exercise of trustee discretion.

The logic of a discretionary structure, as against a fixed-interest trust, was deliberate. Under a discretionary trust, no beneficiary holds a vested, assignable interest before distribution. That position limits the surface area available to a foreign forced-heirship claimant seeking to characterise the beneficial interest as part of the estate.

The offshore holdco layer was reviewed alongside the trust documentation. The business itself – the shares in the Mainland operating entities – sat below that holdco. The trust documents therefore held an interest in a common-law holding entity, not directly in Mainland assets. That separation mattered for the question of Mainland recognition: what would come before a Mainland court in a succession dispute was not a foreign trust over Mainland assets but, at most, a question about who controlled a foreign company.

Our desk advises on the private-wealth dimension of these structures. The Mainland corporate compliance and registry work was coordinated with locally licensed firms in the relevant jurisdictions.

The sequence and the turning point

The matter ran in three phases.

The first phase was a mapping exercise. We documented the family's jurisdictional footprint – residence, domicile, assets and the governing law of each layer of the existing structure. The European forced-heirship exposure was assessed against the specific rules of that jurisdiction's private international law: which law did the European court apply to moveable property held through an offshore holding chain? The answer was not straightforward. The European jurisdiction had adopted the EU Succession Regulation framework for its own nationals; the interaction with an offshore holding structure settled into a Hong Kong trust was precisely the gap the structure needed to address.

The second phase was the structural design. Trust documentation was drafted to Hong Kong-law standards. The protector mechanism was negotiated carefully: the principals wanted influence over distributions without retaining a reserved power that would, under Hong Kong's Trustee Ordinance, be treated as relinquishing too little control to sustain the trust's validity. The 2013 reform provides statutory protection for certain reserved powers – but that protection does not extend to unlimited retained control. The boundary was worked through in detail before execution.

The turning point in the matter came during the third phase: the review of the settlement step itself. The transfer of the holdco interests into the trust triggered a question the principals had not initially identified. Under the stamp duty rules of the mid-tier holding jurisdiction, a transfer of shares in a company holding no Hong Kong-situated assets is generally outside Hong Kong stamp duty – but the holding jurisdiction had its own transfer tax position. That position had to be mapped before execution. The settlement was structured in a sequence that addressed this.

A further turning point arose from the residence trajectory. Both principals were in the process of relocating their principal residence. Their domicile – separate from residence under most common-law analyses – remained tied to their birth jurisdiction for the time being. The trust was executed before the domicile position crystallised, which was significant: the European forced-heirship analysis applies at the date of death, and the domicile at that point governs which law applies to moveables. Settling assets into a valid Hong Kong-law trust before death, and before the domicile question was resolved, preserved the firewall even under the less favourable domicile assumption.

For the succession dimension of holding interests in Mainland China, our guide on will and estate planning for assets in Mainland China addresses the applicable regime in further detail. The interface between a foreign trust and Mainland succession law is an area where the structural separation – the trust holds a foreign company, not directly a Mainland asset – is where the sequencing matters most.

The qualitative outcome and the transferable lesson

The structures were executed. Both principals had discretionary trusts in place, each holding their respective interest in the offshore holdco. The trustee held the shares. The letter of wishes set out the principals' intentions for distribution without creating a fixed entitlement. The protector mechanism was documented. The Mainland operating entities remained unchanged below the holdco layer.

The qualitative outcome was structural. The principals moved from a position of direct, personal ownership – where a death event would have triggered probate in multiple jurisdictions simultaneously and a potential heirship claim over the beneficial interest – to a position where the ownership of the holdco interest was vested in a trust governed by Hong Kong law, with the statutory firewall in place and the trustee positioned to manage continuity of control.

No litigation followed. That is qualitatively significant: the purpose of the structure was to prevent a forced-heirship dispute from arising, not to win one after the fact.

The transferable lesson has four parts.

First, the cross-border map matters before the structural choice. The analysis of which forced-heirship regime applies – and under which private international law rule – has to precede the drafting of the trust instrument. A trust executed without that analysis may not achieve the firewall it is intended to provide.

Second, discretionary structures limit the surface area available to a foreign claimant. A fixed-interest trust still gives each beneficiary a defined property right. A discretionary trust, properly constituted, does not. For forced-heirship purposes, that distinction is material.

Third, the settlement step itself carries execution risk. Transfer taxes, stamp duties and the mechanics of transferring a holding-company interest into trust are often treated as administrative. In a cross-border structure, they are not. The sequencing of the settlement, and the governing law of the holdco, affect the tax and duty treatment. Both need to be worked through before execution.

Fourth, and most practically: timing is not neutral. The Hong Kong Trustee Ordinance's firewall operates on assets settled into a valid trust before death. A structure executed after a claim has arisen – or after a domicile has crystallised in an unfavourable jurisdiction – may not achieve the same result. The analysis should happen before the event it is designed to address.

For principals holding business interests through a Cyprus vehicle – a common structure for certain European and Middle Eastern families – the interaction between the trust layer and the Cyprus holding entity raises its own questions of substance and succession. Our analysis of estate planning for Cyprus-held assets addresses that interface.

What foreign counsel and principals commonly miss

There is a recurrent error in how foreign counsel approach this structure. The assumption is that Hong Kong trust law is simply the equivalent of an English or offshore trust. In many respects it is. But the 2013 reform to the Trustee Ordinance introduced features specific to Hong Kong's position as a cross-border hub – in particular, the forced-heirship firewall and the reserved-powers protection – that do not map directly onto English or Cayman trust law. Treating the instruments as interchangeable produces drafting that does not fully use the statutory protections available.

A second error is conflating residence and domicile. In our cross-border practice, we regularly see principals who have relocated to Hong Kong or another Asian centre and assume their forced-heirship exposure is resolved by residence. It is not. Domicile, under most common-law analyses, is determined by a combination of physical presence and intention to remain permanently. A principal who has relocated but retains ties to the birth jurisdiction – property, family, a stated intention to return – may remain domiciled there for succession purposes. That analysis has to be done independently of the residence question.

A third error is leaving the holdco review until after the trust is executed. The trust holds the holdco interest; the quality of what the trust holds depends on the holdco's structure, governing law and shareholder register. If the holdco's articles or a shareholders' agreement contains a pre-emption right on transfer, the settlement of the holdco shares into trust may trigger that right. That review should happen at the mapping stage, not after execution.

For a principal in this position – direct or indirect holding of a family business interest, a residence trajectory under way, and a forced-heirship exposure from a home jurisdiction – the structure described in this note is a tested route. The sequence is: map the jurisdictional footprint; assess the forced-heirship exposure under the applicable private international law rule; design the trust and holdco structure to address that exposure; review the settlement mechanics and any transfer taxes; execute in the right order.

The sequence above describes the standard position. Your matter turns on the documents, the jurisdictions actually engaged, and the order of steps – which is where the result is won or lost.

To discuss how the Trustee Ordinance and a Hong Kong-law trust structure apply to your cross-border position, contact info@lockhartyip.com.

Related practices

• Private Wealth – succession, trust structures and asset protection across jurisdictions
• Holding Structures – offshore and Hong Kong holding entity design and implementation

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• Private Wealth
• Will Estate Plan Covering Assets Mainland China Mainland 5
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This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.