Matter note: a reserved-powers trust

A founder who has spent three decades building a business does not hand over control easily. That instinct is rational. The question for private wealth structuring is whether the law allows the founder to retain meaningful operational authority over a business held inside a trust – and still have that trust recognised, protected, and respected across the jurisdictions where the family's assets and heirs actually sit.

Under Hong Kong trust law, a reserved-powers trust is not invalidated by a settlor retaining certain powers over investment or management decisions. The governing instrument is the Trustee Ordinance (Cap. 29), substantially reformed with effect from 1 December 2013, which provides statutory protection for settlor-reserved powers and strengthens Hong Kong-law trusts against foreign forced-heirship claims. That combination makes Hong Kong a defensible choice for a founder whose business and family span multiple civil-law jurisdictions.

This matter note describes an anonymised cross-border instruction in which those provisions were central. The names, jurisdictions, and commercial particulars have been altered. The legal sequence and the turning points are accurate.

What was the founder's situation?

The principal was the controlling shareholder of an operating group whose principal assets were in a civil-law jurisdiction in Central Asia, with a BVI holding entity sitting above the operating companies. The family included heirs in two European jurisdictions, one of which applied a forced-heirship regime that the founder regarded as incompatible with the long-term continuity of the business.

The founder had no intention of retiring or transferring day-to-day authority over the group's investment decisions. An outright transfer to a discretionary trust would have removed the control that, in the founder's view, protected the business from fragmentation on death or incapacity. At the same time, the existing BVI holding structure had no succession mechanism, no firewall against the European forced-heirship claim, and no clear governing law that the family could rely on.

The question put to us was direct: could the family restructure so that the trust would hold the business, the founder would retain effective operational control, and the forced-heirship exposure would be contained – all within a structure that a common-law court would uphold?

Why the existing structure was insufficient

BVI structures are efficient for holding. They are not, by themselves, succession instruments. The BVI Business Companies Act provides a flexible corporate form but does not offer the trust law protections that govern settlor-reserved powers, forced-heirship firewalls, or the long-term accumulation of assets across generations. The gap is structural, not administrative.

The founder's existing will – governed by a European civil-law system – would, on death, have given the forced-heirship claimants a direct route to the BVI shares. The shares were the apex of the operating group. A successful forced-heirship claim at the apex level would have split the ownership of the group among heirs who had neither the commercial knowledge nor the shared incentive to maintain it as a unified enterprise.

There was a second risk. The founder's tax residence had shifted in the years before the instruction came to us. The intersection of a changed residence, an existing European will, and a BVI structure with no governing-law clause created a conflict-of-laws exposure that no single adviser had mapped across the whole family position. That is a pattern our desk sees with some frequency: partial structuring done by advisers in each individual jurisdiction, without anyone holding the consolidated cross-border picture.

The route chosen: a Hong Kong-law reserved-powers trust

The decision to use Hong Kong trust law rested on three verified features of the Trustee Ordinance (Cap. 29) as reformed in 2013. First, the statutory protection for settlor-reserved powers: the trust is not invalidated merely because the settlor retains certain powers over investment decisions or the management of trust assets. Second, the abolition of the rule against perpetuities and excessive accumulations for Hong Kong trusts: the structure can hold the business across generations without a fixed termination date. Third, and most significant for this family, the anti-forced-heirship firewall: the 2013 reform strengthened the position of Hong Kong-law trusts against foreign forced-heirship claims, meaning the civil-law jurisdiction's mandatory inheritance rules would face a material legal obstacle before reaching the assets held in trust.

None of those protections are unique to Hong Kong, and we evaluated alternative trust jurisdictions before recommending this route. What distinguished the Hong Kong choice here was the combination: a common-law system with a functioning court structure that the founder's business counterparties in Greater China and the BVI already recognised; a legal system in which English is an official working language of the courts; proximity to the operating assets; and a mature body of trust practice among the locally licensed firms we work with on matters of Hong Kong law.

The reserved-powers mechanism itself was the core. The founder would settle the trust. The trustee would hold the BVI holding entity. The trust deed would expressly reserve to the founder the power to direct investment decisions relating to the operating group and, within defined parameters, to instruct the trustee on distributions. The trustee would retain residual control and the duties that give the trust its legal integrity. The founder would not be a trustee and would not hold any legal interest in the assets.

That distinction matters. A settlor who is also the sole trustee, or who has effectively stripped the trustee of all discretion, risks the trust being set aside as a sham. The reserved-powers architecture avoids that outcome by drawing a clear line between the powers the founder retains – defined in the deed, limited in scope – and the trustee's independent functions.

The sequence and the turning point

The instruction opened with a cross-border mapping exercise. We needed to understand, before drafting a single document, where the family's assets sat legally – not just geographically. That meant reviewing the BVI constitutional documents, the European will, the founder's current tax-residence position, and the nature of the forced-heirship exposure under the relevant civil-law regime. We worked alongside locally licensed Hong Kong firms on the trust instrument and with allied counsel admitted in the Central Asian and European jurisdictions on the analysis of those local laws.

The turning point in the instruction was a conflict-of-laws question that had not been addressed in any prior structuring work for the family. The founder's European will was expressed to cover "all worldwide assets." The BVI shares were, at the time, an asset of the founder personally. A Hong Kong-law trust settled before death would remove the BVI shares from the estate – provided the settlement was effective and the reserved powers did not cause the assets to be treated as estate assets under the relevant civil-law system's clawback rules.

Clawback – the civil-law concept under which gifts or settlements made during a person's lifetime can be pulled back into the estate for the purpose of satisfying forced-heirship claims – varies materially across civil-law systems. In some systems, the clawback window runs for several years from the date of the settlement. In others, it is triggered by intent rather than time. The European jurisdictions relevant to this family applied different tests, and the timing of the settlement relative to the clawback exposure was therefore a live variable in the structuring sequence.

Once the clawback analysis was complete, the team was in a position to advise on the sequence: which step had to precede which, how to document the purpose of the settlement in a way that addressed the solvency and intent questions that clawback analysis routinely raises, and how to position the trust's governing-law clause so that Hong Kong law – with its firewall provisions – applied with maximum clarity.

A second turning point arose from the founder's tax-residence position. We referred the detailed tax-residence modelling to our tax-positions practice, which assessed the implications of the settlement for the founder's position in the new residence jurisdiction. The interaction between trust settlements and personal tax obligations in the receiving jurisdiction was not, at that point, fully analysed in the existing structuring documents. Bringing that analysis forward, rather than discovering it after settlement, avoided a restructuring cost that would have been materially larger than the cost of the initial analysis.

For groups with similar cross-border exposure, our private wealth practice works through exactly this sequencing question – mapping the estate, identifying the conflict points, and coordinating the instruments before any step is executed.

The sequence described above is the standard position for a cross-border reserved-powers instruction. Your matter turns on the documents actually in place, the jurisdictions engaged, the clawback rules applicable to the family's civil-law exposure, and the order of steps – which is where the structure is either secured or lost.

To discuss the reserved-powers route for your position, write to us at info@lockhartyip.com.

What the trust deed had to address

A reserved-powers trust for a founder-controlled business is not a standard discretionary trust with extra clauses. The deed must be drafted to withstand scrutiny from three directions simultaneously: the Hong Kong court (which will assess whether the trustee has been left with sufficient genuine discretion); the foreign forced-heirship court (which will look for arguments that the trust is ineffective, a sham, or that the clawback rules apply); and the tax authority in the founder's residence jurisdiction (which will assess whether the settled assets remain within the founder's estate or control for tax purposes).

The drafting work for this instruction addressed each of those angles separately. On the Hong Kong side, the deed specified the reserved powers in precise, bounded terms. It preserved the trustee's power to withhold consent to obviously damaging instructions, and it documented the trustee's acceptance of the appointment and the trustee's independent review of the terms before execution. Those features establish the trustee's real role and protect the trust from a sham argument.

On the forced-heirship side, the deed contained an express governing-law clause selecting Hong Kong law and an express acknowledgment – supported by the legal analysis obtained from allied counsel – of the Hong Kong firewall provisions. The deed also included a recital documenting the founder's understanding of the effect of the settlement, which goes directly to the intent question that civil-law clawback rules often raise.

The corporate layer also required attention. The BVI holding entity's constitutional documents were reviewed to confirm that the transfer of shares to the trustee would not trigger any pre-emption rights, drag-along provisions, or change-of-control clauses in the operating subsidiaries. In a founder-controlled group, those provisions are common, and an unreviewed transfer can unintentionally trigger a default or a consent requirement at the operating level. That review is not a trust question; it is a corporate question. It is, however, a question that must be answered before the trust is settled.

The qualitative outcome and the transferable lessons

The instruction concluded with a settled Hong Kong-law reserved-powers trust holding the BVI structure, a revised succession document in each of the relevant jurisdictions that reflected the new ownership position, and a documented cross-border analysis that the founder's family and their advisers could use as the governing reference for future decisions.

The founder retained operational authority over the group through the reserved-powers mechanism. The forced-heirship exposure was contained behind the Hong Kong-law firewall, and the clawback risk was addressed in the sequencing and documentation rather than ignored. The tax-residence question was resolved before settlement rather than after.

The transferable lessons from this instruction apply broadly to founder-led groups with cross-border succession exposure.

First: the reserved-powers mechanism is only as strong as the drafting that defines it. Broad, undefined reserved powers increase the sham risk and reduce the firewall effectiveness. Precision in the deed is the primary protection.

Second: the forced-heirship firewall in Hong Kong trust law is a genuine legal protection, but it is not self-executing. It must be invoked through the governing-law clause, supported by proper drafting, and tested against the specific clawback rules of each civil-law jurisdiction in the family's map. Advisers who treat the firewall as a guarantee without analysing the clawback exposure are leaving the most important variable unexamined.

Third: the corporate layer and the trust layer must be reviewed together. A trust settled over shares in a company that has unconsidered change-of-control provisions is a trust that may trigger unintended consequences at the operating level before it provides any succession benefit.

Fourth: the sequencing of advice across jurisdictions matters as much as the content of that advice. The instruction described here required a coordinated analysis across Hong Kong, the BVI, Central Asia, and two European civil-law jurisdictions. No single adviser in any one of those jurisdictions held the full picture. The consolidation of that analysis into a single governing framework was itself a material part of the work.

For founders and families considering a similar route, the relevant analytical context on succession and estate planning across CIS and comparable civil-law jurisdictions is set out in our analysis of will and estate planning for CIS-connected assets. The specific interaction between forced heirship and cross-border succession risk is examined in detail in our guide on forced heirship and cross-border succession risk.

If an earlier structuring attempt produced an incomplete or stalled result – a trust settled without the clawback analysis, a BVI structure with no succession instrument, or a will that still covers assets now intended to be in trust – a consolidated review can identify what remains open and what steps remain available.

Email info@lockhartyip.com to begin that review.

Frequently asked questions

Which jurisdiction's law applies to a reserved-powers trust for a founder-controlled business?

The law applicable to a reserved-powers trust is determined primarily by the governing-law clause in the trust deed. Where Hong Kong law is selected, the Trustee Ordinance (Cap. 29) applies, providing statutory protection for settlor-reserved powers and a firewall against foreign forced-heirship claims. Hong Kong has no forced-heirship regime of its own. Foreign mandatory rules – including civil-law forced-heirship and clawback provisions – may still be asserted in foreign courts, which is why the governing-law clause must be supported by a cross-border conflict-of-laws analysis specific to each family's jurisdictional map.

What documents are needed for a reserved-powers trust for a founder-controlled business?

The core instrument is the trust deed, which must precisely define the reserved powers, confirm the trustee's independent role and genuine discretion, and contain an express governing-law clause. Supporting documents typically include the letter of wishes, a schedule of the assets being settled, corporate constitutional documents for any holding entities transferred to the trustee, and the cross-border legal analysis addressing forced-heirship and clawback exposure in each relevant jurisdiction. Where the trust holds shares in a BVI or Cayman holding entity, the corporate documents of that entity must be reviewed for any transfer restrictions or consent requirements before settlement.

What does the route look like for a reserved-powers trust for a founder-controlled business?

The route begins with a cross-border asset and exposure mapping exercise, followed by the selection of governing law and trustee, then the drafting and execution of the trust deed and supporting documents. The corporate layer must be reviewed for transfer restrictions before the shares are settled. Where forced heirship or clawback rules are in scope, the sequencing of advice – and the documentation of intent and purpose at each step – is part of the legal work. The whole sequence is typically coordinated by the international adviser, working alongside locally licensed firms in each relevant jurisdiction.

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

Matter note: a reserved-powers trust for a founder-controlled business