Matter note: succession planning across Hong Kong and the BVI

A family's wealth does not sit in one place. The holding entity is in the BVI. The liquid assets are managed through Hong Kong. The family members are scattered across three time zones. And the founding principal's estate plan was drafted years ago, in a jurisdiction whose forced-heirship rules now cast a long shadow over a structure that has quietly outgrown its original design.

Succession planning across Hong Kong and the BVI requires a coordinated approach to trust law, residence, and the forced-heirship rules of the family's origin jurisdiction. The Trustee Ordinance (Cap. 29), as reformed with effect from 1 December 2013, provides the governing framework for Hong Kong-law trusts and includes a statutory firewall (an anti-forced-heirship protection preventing foreign mandatory-heirship rules from overriding the trust) that is central to the strategy. The BVI holding layer brings its own corporate and trust instruments into the picture.

This note describes an anonymised matter of this kind. The jurisdictions are real. The structure type is real. The identifying details are not.

The situation: a structure that worked until it didn't

The family behind this matter had built a mid-market industrial group over two decades. The principal holding entity was a BVI business company, sitting above operating subsidiaries in Asia. The principal had transferred shares into a discretionary trust some years earlier, settling the trust under a foreign law that the family's advisers at the time had described as "neutral."

That choice had not been examined since. The trust deed had not been reviewed. The family's residence profile had changed materially: two of the three adult children had relocated to jurisdictions with réserve héréditaire (a forced-heirship regime that reserves a fixed share of an estate for defined family members), and the principal himself had spent increasing time in Hong Kong.

The immediate trigger was straightforward. The family was preparing for a partial liquidity event – a sale of one operating subsidiary. Before distributing proceeds through the trust, the family's Hong Kong-based advisers wanted to confirm that the existing trust structure would hold, and that the distribution would not be challenged on forced-heirship grounds by the children resident in civil-law jurisdictions.

The answer, on examination, was not comfortable. The trust's governing law offered limited protection against foreign forced-heirship claims. The trust deed did not include a reserved powers provision (a clause allowing the settlor to retain certain specified powers without invalidating the trust) under a law with robust statutory protection. And the BVI holding layer, while structurally sound for operating reasons, had not been optimised for the succession function it was now being asked to perform.

What looked like a routine pre-transaction confirmation became, in our cross-border practice, a structured re-examination of the entire succession architecture.

What was the legal problem?

The core tension in a cross-border succession structure of this type is the interaction between three bodies of law that do not automatically align: the law governing the trust, the law of the principal's domicile (relevant to the forced-heirship exposure), and the law of the jurisdiction where assets are held or companies are incorporated.

Hong Kong law is particularly useful here. The Trustee Ordinance (Cap. 29), following its substantial reform in 2013, contains a statutory firewall provision. That provision protects a Hong Kong-law trust against foreign forced-heirship claims, provided the settlor was not precluded by the applicable foreign law from disposing of the property in question. Hong Kong also has no forced-heirship regime of its own. A Hong Kong-law trust can, in appropriate circumstances, ring-fence assets from the forced-heirship claims of a civil-law domicile jurisdiction.

The BVI adds a further dimension. The BVI Business Companies Act and the applicable BVI trust legislation both accommodate holding structures of this kind. The BVI is a common-law jurisdiction. Its trust law broadly mirrors the English equitable tradition. Importantly, the absence of forced-heirship rules in BVI law, combined with the flexibility of the BVI corporate form, made the existing holding layer an asset rather than a liability – provided the trust law above it was properly aligned.

The problem, in this matter, was not the BVI entity. It was the governing law of the trust and the incomplete documentation of the settlor's reserved powers. Those two features, taken together, left the structure exposed to challenge.

How did we approach the route?

The starting point was mapping the family's full jurisdictional profile: where the principal was resident and domiciled, where each beneficiary was resident, the governing law of each asset, and the forced-heirship rules applicable in each relevant jurisdiction. This is not a theoretical exercise. It determines which legal system's rules will be applied if a beneficiary or a creditor brings a claim against the trust or its distributions.

The map produced a specific set of risks. Two of the adult children, resident in civil-law jurisdictions, had potential forced-heirship claims. The applicable foreign rules would have entitled them each to a reserved share. Whether those claims could reach the trust assets depended on the trust's governing law and the strength of its firewall provision.

The route chosen addressed three things in sequence.

First, we advised on a change of the trust's governing law to Hong Kong law. This is a recognised procedure. Its effect was to bring the trust within the protection of the Trustee Ordinance's firewall and to subject the trust to Hong Kong's well-developed common-law trust principles. The principal, as settlor, was not precluded by any applicable foreign law from making this change; that condition was confirmed before the step was taken.

Second, the trust deed was amended to include an explicit reserved powers clause. Under the Trustee Ordinance's statutory reserved powers protection, a trust is not invalidated under Hong Kong law merely because the settlor retains certain specified powers – for example, the power to direct investment decisions or to add and exclude beneficiaries. The amended deed was carefully drafted to stay within the statutory perimeter.

Third, the BVI holding layer was reviewed and left substantially intact. The BVI business company served legitimate operational and privacy functions. No restructuring of the underlying corporate form was required. What changed was the trust documentation sitting above it and the governing-law choice governing distributions from that level.

The sequence mattered. The governing-law change came first. The deed amendment followed. The transaction – the subsidiary sale – proceeded after both steps were complete and documented.

The turning point

The most consequential moment in this matter was not a procedural step. It was a legal opinion question that arose mid-process: could a beneficiary resident in a civil-law jurisdiction argue that the governing-law change itself was a fraude à la loi (a deliberate use of private international law rules to defeat a mandatory rule that would otherwise apply)?

This is a genuine risk in this type of restructuring. Civil-law jurisdictions with forced-heirship regimes do not always respect a governing-law change made shortly before a principal event. Some jurisdictions apply a renvoi (a conflict-of-laws doctrine under which a court applies not just the foreign substantive law but also its conflict rules) or a mandatory-rule override that can pull the analysis back to the domestic forced-heirship regime.

The answer in this matter turned on the principal's domicile. He was not domiciled in the civil-law jurisdiction where the children resided. His long-term residence in Hong Kong, and the structure of his affairs, supported a credible case for Hong Kong as the relevant domicile for succession purposes. That domicile position was not invented for the transaction. It reflected a genuine pattern of life and activity. But it had never been formally documented.

We prepared a contemporaneous residence and domicile memorandum, drawing on the principal's actual pattern of presence, professional ties, and intention. This documentation, prepared at the right point in the timeline, provided the evidentiary foundation for the position that Hong Kong law – and the Trustee Ordinance's firewall – applied to the trust and its assets.

Without that document, the governing-law change would have rested on an undocumented assertion. With it, the position was defensible across the jurisdictions that mattered.

Outcome and transferable lessons

The transaction proceeded. The subsidiary was sold. Distributions were made through the trust to the principal and, to a limited extent, to named beneficiaries. No challenge has been brought. The structure is now documented and the governing-law position is on record.

The qualitative outcome was not merely that the transaction completed. It was that the family now has a succession structure whose legal foundations are mapped, documented, and aligned with the family's actual jurisdictional profile. That is a different thing from a trust that exists on paper but has never been stress-tested against the cross-border position it is meant to hold.

What does this matter illustrate that transfers to other families in a similar position?

The first lesson is that the governing law of a trust is a choice – and it is a choice that can be revisited. Many families settled trusts years ago under laws that seemed convenient at the time. The legal environment has shifted. Hong Kong's 2013 reforms make it, in a number of respects, a more protective governing law than many of the alternatives. That choice should be reviewed whenever the family's jurisdictional profile changes materially.

The second lesson is that the reserved powers provision is not a detail. It is, in our experience, one of the most frequently omitted elements in older trust deeds. Its absence can turn a routine distribution into a contested transaction. Its presence, under a law with statutory protection, removes a significant category of risk.

The third lesson concerns domicile documentation. This is an area where many families rely on professional belief rather than documented position. A contemporaneous memorandum, prepared by counsel with cross-border succession experience, is not a bureaucratic exercise. It is the evidentiary foundation for every claim about governing law and forced-heirship exposure that may arise after the principal's death – or, as here, before a significant transaction.

The BVI element of this matter is worth noting separately. The BVI holding layer attracted no criticism in this analysis. It is a well-tested jurisdiction for holding structures above Asian operating assets. The absence of forced-heirship rules, the common-law tradition, and the flexibility of the corporate form are genuine advantages. The risk in cross-border succession planning is rarely the BVI itself. It is the trust law or the domicile position sitting above it.

For a preliminary read on your succession structure and the cross-border exposure it carries, the sequence described here – governing-law review, deed examination, domicile documentation – is the starting point. The specific route depends on the family's current map.

To discuss how this approach applies to your cross-border position, contact info@lockhartyip.com.

Related practices

• Private Wealth – succession, trusts, and asset-protection planning across jurisdictions
• Holding Structures – BVI, Cayman, and Hong Kong holding-layer design and review

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