A private trust for a family with assets in Mainland China

For a family whose wealth sits largely inside the Mainland, the question of succession is rarely abstract. Assets tied to operating companies, real property and investment accounts in one of the world's most closely administered capital environments do not migrate, restructure or pass on their own. They require a plan built around two legal systems, and the consequences of getting that plan wrong fall on the next generation.

A private trust structured under Hong Kong law – governed by the Trustee Ordinance (Cap. 29) as substantially reformed with effect from 1 December 2013 – can provide a workable succession and asset-protection vehicle for a family with Mainland China exposure, provided the structure is designed around the specific legal interface between Hong Kong and the Mainland rather than imported from a template built for a different geography.

This note sets out when this type of structure becomes urgent, the route our desk runs, the documents the client must own, the cross-border interface that drives the legal analysis, and the questions most families ask before they engage. The relevant practices are Private Wealth, source-of-funds and source-of-wealth work, and the enforcement and recognition position across the Mainland–Hong Kong boundary.

When does a Mainland-connected family need this structure?

The trigger is rarely a single event. In our cross-border practice, the decision to move to a formal trust structure typically arrives in one of three situations: a founder approaching a generational transition, a family that has recently obtained or is planning a change of residence outside the Mainland, or an estate where default succession rules would produce an outcome the family would not have chosen. Each situation carries a different urgency, but they share a common legal problem.

Mainland China applies its own succession law. Without a properly recognised and structured vehicle, assets held in Mainland corporate or real-property form will pass under those rules. The outcome depends on the asset type, the family composition, and whether any probate or recognition process in a foreign jurisdiction can reach inside China to affect the result. In most cases, it cannot – at least not without significant delay and cost.

The forced-heirship (mandatory succession share for close family members under civil-law and some domestic regimes) question adds a further layer. Hong Kong law, by contrast, has no forced-heirship regime. The 2013 reform to the Trustee Ordinance strengthened the protection of Hong Kong-law trusts against foreign forced-heirship claims. That protection matters where a family member's residence or domicile in a forced-heirship jurisdiction could otherwise unwind a distribution from the trust.

The enforcement risk – the trigger type that brings most families to us at this stage – is the possibility that the plan they have informally in place simply will not work when it is needed.

What does the governing instrument actually provide?

The Trustee Ordinance as reformed in 2013 made several structural changes that are directly relevant to Mainland-connected families. The rule against perpetuities (the common-law limit on how long a trust can run without vesting) was abolished for Hong Kong trusts. A trust can now, in principle, run indefinitely. That matters for a family that wants to preserve a business or property interest across multiple generations without a forced distribution at a fixed point.

The Ordinance also provides statutory protection for settlor reserved powers – the ability of the person establishing the trust to retain certain rights without invalidating the trust. In a Mainland-connected context, founders frequently want to retain some control during their lifetime. The statutory protection means that retention of defined powers does not, on its face, destroy the trust structure under Hong Kong law. The exact scope of what can be reserved requires careful drafting; this is one of the documents the client must own, described in the section below.

The firewall provisions – the statutory protection of a Hong Kong-law trust against claims brought under foreign forced-heirship rules – operate alongside the choice of law. Together, they mean the family's succession plan can be anchored in a legal system that does not impose a mandatory share for any particular class of heir, as long as the structure is properly documented and the Hong Kong-law trust is the vehicle through which the relevant assets are held.

How does the Mainland–Hong Kong interface shape the structure?

The cross-border interface is the hardest part of this work. Assets sitting inside the Mainland – equity in a Mainland-registered operating company, real property in a Mainland city, accounts held with a Mainland bank – cannot simply be "put into" a Hong Kong trust by declaration. The trust holds what it legally owns, and ownership of Mainland assets by a foreign-law trust requires a route that the Mainland's own regulatory and corporate law permits.

The typical structure runs a holding layer: the trust (governed by Hong Kong law, administered by a trustee operating in Hong Kong or an agreed offshore centre) holds shares in an offshore vehicle – most commonly a British Virgin Islands or Cayman Islands company – which in turn holds the equity in a Mainland entity through an approved foreign-investment structure. The Mainland operating or property assets remain inside Mainland corporate wrappers. The trust's economic interest reaches them through the holding chain.

That design has implications. Capital flows between the Mainland entity and the offshore structure are subject to the Mainland's foreign-exchange and capital-account rules. Distributions upward through the chain require proper documentation and, depending on the transaction type, regulatory approval or registration. None of this is unworkable, but it must be planned, not assumed. A structure designed without accounting for the capital-flow mechanics will stall the first time a distribution is needed.

The succession point is equally specific. On the founder's death, the trust's interest passes to the named beneficiaries without a Mainland probate process – because the trust holds the offshore company, not the Mainland assets directly. The Mainland entity continues to be owned, through the chain, by whoever succeeds to the trust interest. This is the core advantage. But it depends on the holding chain remaining clean, the Mainland entity remaining in good standing, and the documentation at every layer being in order.

Recognition of Hong Kong-law trusts in the Mainland is not governed by a bilateral instrument equivalent to the judgment-enforcement regime that came into force under Cap. 645. The position is fact-specific and should be verified as part of the structuring work. Our desk approaches this question with locally licensed counsel on both sides of the boundary, and the analysis forms part of the initial engagement.

The route our desk runs – step by step

An engagement of this kind runs in a defined sequence. The sequence matters because decisions made early – about the trustee, the governing law, the reserved powers, the beneficiary class – constrain what is available later. We do not reverse-engineer structures. We build them in order.

The first step is a family and asset mapping exercise. We need to understand the full asset picture: what is held in the Mainland, in what form, by whom, and what the existing corporate or ownership structure looks like. We also need to understand the family – the founder's intentions, the beneficiary class, the residence and domicile position of each relevant family member, and whether any of them is in a forced-heirship jurisdiction. This is not a document-collection exercise. It is a legal analysis that shapes every decision that follows.

The second step is the structural design. On the basis of the mapping, we prepare a structural proposal. This covers the trust jurisdiction and governing law (Hong Kong in most cases for families with this profile), the trustee selection, the holding chain, the reserved-power scope, and the interaction with any existing corporate structures. Where the family already has offshore vehicles in place, we assess whether those vehicles can be incorporated into the new structure or whether they carry legacy problems.

The third step is document preparation. The trust deed is the central instrument. It must be drafted to reflect the specific family's intentions, the asset map, the reserved powers, the beneficiary class and the distribution provisions. A standard-form deed is not adequate for a Mainland-connected structure. Alongside the trust deed, the engagement typically produces a letter of wishes (a non-binding but important document setting out the founder's guidance to the trustee), any amendment to the existing corporate documents in the holding chain, and – where the structure involves a new offshore entity – the incorporation documents for that vehicle.

Locally licensed Hong Kong firms join the engagement at two specific points: where the work touches on Hong Kong law directly (the trust documentation and its compliance with the Trustee Ordinance as a matter of Hong Kong law), and where filings or registrations with Hong Kong bodies are required. Our role is to advise on the international and foreign-law dimensions, design the cross-border structure, and coordinate the work across the relevant advisers.

The fourth step is implementation. This covers the formal establishment of the trust, the transfer of the relevant assets or interests to the trust vehicle, any required Mainland regulatory steps for the holding chain, and the execution of all transaction documents. Implementation typically takes longer than families expect – not because of complexity in the trust documentation itself, but because the Mainland-side steps carry their own timelines.

The fifth step is ongoing review. A private trust is not a filing and forget exercise. The family's circumstances will change; the asset base will change; the regulatory environment across two systems will change. We recommend a structured review at intervals and whenever there is a significant change in the family's composition, residence, or asset picture.

The sequence above describes the standard position. Your matter turns on the specific documents, the jurisdictions actually engaged, and the order of steps – which is where the route is won or lost. To discuss how this structure applies to your family's position, contact info@lockhartyip.com.

What documents and decisions does the client own?

Families frequently underestimate the decisions they personally must make in a trust structure. The advisers prepare the documents; the client owns the decisions behind them. Getting those decisions right is the condition on which the structure works.

The first decision is the trustee. The trustee is the legal owner of the trust assets. The choice of trustee – a professional trust company, an individual, a purpose trust – carries legal and practical consequences that cannot be undone easily after the trust is established. The family should understand what they are delegating and what oversight they are retaining before the deed is signed.

The second decision is the beneficiary class. Who benefits, in what order, with what discretion given to the trustee, and with what protection against a beneficiary's personal creditors or marital claims. These are not administrative details. They are the substance of the succession plan.

The third decision is reserved powers. The founder can, under Hong Kong law, retain certain powers without destroying the trust. But the scope of retention must be defined in the deed. Retaining too much may expose the trust to challenge; retaining too little may leave the founder without the control they expected. The letter of wishes records non-binding guidance but does not substitute for the deed.

The fourth decision is the distribution mechanism. Discretionary trusts give the trustee broad power to distribute among the class; fixed trusts specify the shares. Each has advantages depending on the family's circumstances, the tax positions of the beneficiaries, and the founder's intentions. In a Mainland-connected structure, the tax position of a beneficiary who is tax-resident in the Mainland will affect how distributions from the trust are received and taxed at the beneficiary level.

A family that cannot articulate these four decisions clearly at the start of an engagement will spend considerably more time – and more cost – working through them during drafting. We ask clients to come to the first substantive meeting with a view, even a provisional one, on each of these points.

What do foreign principals and their advisers most often get wrong?

We regularly advise families who have already attempted a structure, or whose existing advisers have proposed one, and where the design has a material gap. The most common gaps in Mainland-connected structures follow a consistent pattern.

The first and most frequent error is treating the trust as though it holds the Mainland assets directly. It does not and cannot in most cases. The trust holds the offshore vehicle, which holds the approved foreign-investment entity, which holds or owns the Mainland interest. Each link in the chain must be legally sound. A gap at any link – an unsigned document, an unregistered transfer, an entity in non-compliance with its maintenance requirements – will create a problem at exactly the moment the structure is needed.

The second error is the residence and domicile analysis. Many families assume that because the trust is governed by Hong Kong law and the trustee is in Hong Kong, the succession outcome is determined by Hong Kong law. It is not that simple. The residence and domicile of the founder, the beneficiaries, and the trustee each carry legal significance in different ways across different jurisdictions. A founder who is domiciled in a civil-law jurisdiction at the time of death may find that jurisdiction asserting a claim over part of the estate regardless of the trust structure.

The third error is ignoring the capital-flow mechanics. A trust that cannot move money from the Mainland operating company up through the holding chain to the trustee for distribution is structurally inoperable. The capital-account and foreign-exchange rules that govern those flows are not a tax question – they are a regulatory question that must be addressed in the design phase.

If an earlier structure or planning attempt has produced a gap or an adverse result, a second review can identify the issue and the routes still open. Write to info@lockhartyip.com with a brief description of your position and we will respond with a first read.

The tax interaction – where it touches the structure

Tax is not the primary driver of this type of structure for most Mainland-connected families. Succession and asset protection are. But the tax position of the trust and its beneficiaries cannot be ignored.

Hong Kong operates on a territorial basis. There is no capital gains tax and no withholding tax on dividends in the general case. The profits tax applies at 8.25% on the first HK$2,000,000 of assessable profits and 16.5% above that threshold, but only on profits from a Hong Kong source. A trust that is purely a holding vehicle above an offshore company will not, in most structures, have assessable profits in Hong Kong from the trust layer itself.

The Foreign-Sourced Income Exemption (FSIE) regime, in force from 1 January 2023 and subsequently amended, conditions the exemption of certain passive income on economic substance. Where the holding structure routes dividends or other passive income through a Hong Kong entity, the FSIE analysis applies. This is a design point, not an afterthought.

For Mainland-connected families with a global footprint, the Pillar Two minimum top-up tax – effective for fiscal years beginning on or after 1 January 2025 for in-scope multinational groups – may be relevant where the group's consolidated revenue exceeds the EUR 750 million threshold. Most private family structures do not reach that scale, but the question should be asked at the design stage.

The tax position of the beneficiaries at the point of distribution – particularly beneficiaries who are Mainland tax-resident – requires separate analysis under Mainland tax rules, which are outside our direct advisory scope but which we can frame as part of the structuring discussion and refer to appropriate tax counsel.

Source-of-wealth and source-of-funds documentation sits alongside the tax analysis. The trustee and any financial institutions in the chain will require documentation of how the assets entering the trust were accumulated. Our briefing on source-of-wealth and source-of-funds files for family office clients covers this in detail, and our matter note on how that documentation was assembled in a cross-border family office context illustrates the practical approach.

A scenario: the founder who waited too long

Consider a situation our desk has seen in variation several times. A founder in their mid-sixties, with an operating business in a Mainland tier-one city and a BVI holding company established years earlier for a transaction that was ultimately not completed. The BVI company sits above nothing useful. The Mainland operating entity is held directly in the founder's name through a joint-venture structure. A previous adviser proposed a trust several years earlier; the founder deferred the decision.

The trigger came with a health event. By that point, the founder's ability to execute documents and make certain decisions was time-limited. The structure we ran needed to account for that constraint, work within the existing corporate documents, and achieve a result that would be defensible under both Hong Kong succession principles and the Mainland's own rules on how the joint-venture equity could be transferred. The BVI company was repurposed as the intermediate holding vehicle. The trust was established under Hong Kong law. The letter of wishes was given particular care because the founder's instructions needed to be on record in detail.

The outcome was a structure that will function on the founder's death without a Mainland probate application. The joint-venture partner was informed of the change in the holding structure at the appropriate point. The process took longer than it would have taken four years earlier and required more intensive coordination across the relevant advisers. The substantive result was achieved; the cost of waiting was measured in time, complexity and constraint.

The checklist before you engage

Before a first meeting, the following questions sharpen the engagement and reduce the time spent in the early mapping phase.

• What assets are held inside Mainland China, in what form (equity, real property, accounts), and in whose name?
• Is there an existing offshore holding structure? If so, in which jurisdiction, and is it maintained in good standing?
• What is the residence and domicile position of the founder and each intended beneficiary?
• Are any beneficiaries resident in a forced-heirship jurisdiction?
• Has the family made any prior estate-planning arrangements – wills, prior trusts, family agreements – that would interact with a new structure?
• Does the founder wish to retain any powers over the trust assets during their lifetime? If so, which?
• Is source-of-wealth documentation for the Mainland assets available and in order?
• Is there a timeline pressure – a transaction, a residence change, a health consideration – that affects the sequence?

Families that arrive at a first meeting with answers to most of these questions move through the design phase materially faster than those who are working through the questions for the first time in the room.

Related practices

• Private Wealth – succession, asset protection, trusts and family office across borders
• Holding Structures – offshore and Hong Kong holding design for cross-border operating groups
• Tax Positions – FSIE, territorial basis and Pillar Two interaction for holding and trust structures

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Related

• Private Wealth
• Source Wealth Source Funds Files Family Office Briefing
• Source Wealth Source Funds Files Family Office Matter

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