A reserved-powers trust for a founder-controlled business

A founder who has spent two decades building a cross-border operating group rarely wants to hand control to a trustee on day one. Yet without a settled holding structure, the business sits exposed: succession is uncertain, forced-heirship rules in the family's home jurisdiction may reach further than anyone expects, and the next generation inherits a dispute rather than an enterprise. The question is not whether to plan – it is whether the plan preserves control where it belongs while it is still needed.

A reserved-powers trust (a trust in which the settlor retains defined powers over investment, distribution or asset management without invalidating the trust itself) offers a workable answer for founders who need succession protection now but are not ready to step away from operational decisions. Under the Trustee Ordinance (Cap. 29), as substantially reformed with effect from 1 December 2013, Hong Kong law expressly protects a trust from being set aside solely because the settlor has reserved such powers. That statutory protection, combined with Hong Kong's firewall provisions (statutory rules that prevent foreign forced-heirship regimes from overriding the trust), makes Hong Kong a serious candidate for the governing law when the family's asset map spans Mainland China, a BVI or Cayman holding layer, Southeast Asia and a second residence in Europe or the UAE.

This note sets out when and why a founder reaches this decision, the route our desk runs, the documents the client must own, and the cross-border questions the structure must answer before it is executed.

When does a founder-controlled business need this structure?

The trigger is usually not a birthday or a retirement date. It is an event that makes the exposure visible: a co-founder's death without a succession plan, a family-law proceeding in a jurisdiction the founder never expected to be relevant, a near-miss in a forced-heirship jurisdiction where a sibling's estate was contested, or a buyer's counsel raising succession risk in a due-diligence questionnaire. Our desk sees all four, and the window to act before a live dispute complicates the structure is shorter than most founders realise.

Three conditions together tend to define the moment. First, the operating group is material in value and the founder remains the controlling mind. Second, the family's residence and asset map crosses at least two legal systems – one of which imposes légitime (a forced share of an estate reserved for certain heirs under civil-law systems) or an equivalent claim. Third, the founder is willing to accept a trustee on record, provided the structure preserves day-to-day influence over the business.

The reserved-powers model addresses each condition. It places the shares of the holding entity into a trust governed by a law that recognises the settlor's reserved powers. It removes the holding entity from the scope of succession proceedings in forced-heirship jurisdictions – or at least reduces the exposure materially. And it does so without requiring the founder to accept a fully discretionary structure that feels, commercially, like giving the business away.

For a founder with a BVI holding company sitting above Mainland China operating entities, a Hong Kong-law trust over the BVI shares is a natural read. The structure is familiar to the offshore registries, the trustee community, and the Hong Kong courts. The governing law has no forced-heirship regime of its own, and the 2013 reforms fortified the anti-forced-heirship firewall in a way that directly addresses the concern.

What powers can the founder realistically reserve?

Hong Kong law does not prescribe a fixed list of reservable powers – the structure is built around what the trustee and the governing law will sustain. In our cross-border practice, founders typically seek to reserve some or all of the following: the power to direct the trustee on investment decisions concerning the business assets; a power of appointment or removal of trustees; a limited power to add or remove beneficiaries within a defined class; and in some cases a power to revoke the trust in specified circumstances. Each reservation carries a different risk profile and a different drafting discipline.

The critical planning question is not which powers to include, but how to express them so they do not collapse the trust under any of the laws that may review it. A trust that looks settled in Hong Kong may still be characterised as a sham, a bare trust, or a revocable asset if a Mainland court, a European inheritance court, or a UAE family-court examines the documents. The drafting must survive scrutiny in each jurisdiction the family's assets or beneficiaries touch. That is a cross-border drafting exercise, not a boilerplate one.

There is a second discipline: protector arrangements (a mechanism in which a named individual or body holds a veto or consent right over specified trustee decisions). A protector is not the same as a settlor with reserved powers, but the two are frequently combined. The protector role can house powers that are harder to reserve directly to the settlor – for example, a consent right over distributions – while keeping the settlor at one remove. Whether the protector should be the founder personally, an independent professional, or a family advisory board is a governance question that shapes the succession outcome as much as the legal drafting does.

How does Hong Kong law protect the structure against forced-heirship claims?

Hong Kong has no forced-heirship regime. A founder domiciled or resident in a civil-law jurisdiction cannot use that domicile to attack the trust once it is validly constituted under Hong Kong law, because the Trustee Ordinance's firewall provisions direct that the validity, effect and administration of a Hong Kong-law trust are determined by Hong Kong law alone – not by the law of the settlor's domicile, residence or nationality, and not by the law of the jurisdiction where the trust assets happen to sit.

That firewall was strengthened materially by the 1 December 2013 reforms. It now expressly covers challenges based on a foreign jurisdiction's heirship rules, matrimonial property rules, or capacity rules. The protection is real, but it is not absolute. Several practical qualifications apply.

First, assets situated in a forced-heirship jurisdiction may still be reached directly by local courts, independently of the trust. If the founder holds real property in France or Italy, or operating-company shares registered in a civil-law jurisdiction, those assets may be subject to local succession law regardless of what the trust instrument says. The solution is to structure the trust over assets situated in a more favourable jurisdiction – typically the shares of a BVI or Cayman holding vehicle, not the underlying operating assets directly.

Second, courts in some jurisdictions have declined to follow Hong Kong's characterisation of a trust for succession purposes where the deceased was domiciled in their jurisdiction at the date of death. The firewall protects the trust under Hong Kong law; it does not bind foreign courts. A founder with a permanent residence in a civil-law country, and whose estate may be administered there, needs a residency and domicile analysis before the trust is executed.

Third, any transfer of assets into the trust must survive scrutiny as a genuine disposition. A transfer made in contemplation of a forced-heirship claim that was already known, or within a period that local law treats as vulnerable, may be challenged as a transaction in fraud of creditors or heirs. Timing the establishment of the trust to a genuine business or succession trigger – not to a pending family dispute – is a basic risk-management step.

The cross-border interface: Hong Kong, the offshore holding layer, and the family's map

Most founder-controlled businesses that come to our desk operate through a tiered structure: one or more holding companies in the BVI or Cayman Islands sit above Hong Kong or Mainland China operating companies. The trust is placed over the apex – the BVI or Cayman shares. That is the layer that the founder owns personally, and it is the layer that succession proceedings in any jurisdiction would reach first.

The choice of governing law for the trust (Hong Kong, BVI, Cayman, Jersey, or another jurisdiction) is not the same as the law of the holding company. The two are separate legal questions. A BVI holding company can be held in a Hong Kong-law trust. A Cayman structure can sit in a Jersey-law trust. The selection depends on which governing law best addresses the family's forced-heirship exposure, which trustee community has the most relevant capacity, and where the family's advisers can supervise the structure over time.

For families with a Mainland China connection, the cross-border interface is sharper. Mainland courts apply their own succession law to assets situated in the Mainland. Where a Hong Kong-law trust holds BVI shares that sit above a Wholly Foreign-Owned Enterprise (WFOE – a foreign-invested company incorporated in the Mainland under PRC law) or a variable-interest-entity (VIE – a contractual structure widely used in sectors restricted to foreign ownership), the trust holds the economic exposure but the Mainland operating layer remains subject to PRC succession and corporate rules directly.

Since the Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance (Cap. 645) came into force on 29 January 2024, effective Mainland judgments can be registered and enforced in Hong Kong more readily than before. The practical consequence for trust planning is that a Mainland succession order or a creditor judgment against the settlor can now reach the Hong Kong layer through a registration mechanism that is materially simpler than the previous regime. Structures that were considered well-insulated before that date should be reviewed in light of the current enforcement environment. We regularly advise on that review as a distinct exercise separate from the initial trust establishment.

For founders with a UAE connection – a second residence, operating companies in an emirate free zone, or beneficiaries who are UAE nationals – a parallel analysis applies under UAE personal-status law and the relevant emirate's wills and succession framework. The interface between a Hong Kong-law trust and UAE succession law is an area our desk works through regularly. The short version: a Hong Kong-law trust over non-UAE assets provides meaningful protection; assets registered in the UAE require a local planning layer that must sit alongside the trust, not instead of it.

See also our briefing on private trusts over family assets with a Mainland China connection and our note on private trust structures for families with UAE-situated assets, which address those jurisdiction-specific interfaces in more detail.

The route we run, step by step

We open with a structured briefing call with the founder and, where they are engaged, the family office or external advisers. The purpose is to map the asset picture, the family's jurisdiction exposures, and the founder's control requirements before any drafting begins. In our cross-border practice, the most common structural error is a trust executed before the full jurisdiction map has been drawn.

Once the map is clear, we prepare a structuring note that sets out the proposed governing law, the trustee selection criteria, the reserved-powers architecture, the protector arrangement (if any), and the interaction with the existing holding structure. This document is the client's decision record. It does not bind anyone, but it forces the choices that the trust deed will later reflect.

Trustee selection is a decision the founder owns, not one we make for them. We can describe the relevant considerations – regulated versus unregulated, corporate versus individual, licensed in Hong Kong or offshore, with relevant family-office or business-holding experience – but the relationship between settlor and trustee is a long one, and the founder must own that choice. We will flag if a proposed trustee raises a structural concern.

Drafting the trust deed is the core legal work on our side. We prepare the instrument under the governing law identified in the structuring note, incorporating the reserved-powers provisions, the letter of wishes framework (a non-binding record of the settlor's intentions for the trustee's guidance), and the beneficiary class. Where the governing law is Hong Kong, the Trustee Ordinance provides the statutory base; the instrument builds on it. Where the governing law is BVI or Cayman, we coordinate with locally licensed counsel in the relevant jurisdiction.

The transfer of assets into the trust – the vesting step (the formal act of putting assets under the trustee's ownership) – requires separate legal steps. For BVI or Cayman shares, a share transfer is executed and the register of members updated. Stamp duty and transfer-tax implications in each jurisdiction must be confirmed before the transfer is completed. For Hong Kong stock transfers, ad valorem stamp duty of 0.1% per party applies on the higher of consideration or market value; shares in a non-Hong Kong company holding no Hong Kong-situated assets are generally outside Hong Kong stamp duty, but the position must be verified on the specific facts.

After execution, we prepare an implementation checklist covering the corporate changes, the trustee's acceptance formalities, the opening of trust banking if required, and the governance documents for the holding entity. The checklist is the handover document. Once it is complete, the structure is live.

What the client must own: documents and decisions

A reserved-powers trust is only as strong as the discipline around the documents the founder controls. Three categories matter.

The first is the letter of wishes. This non-binding document addresses the trustee's exercise of discretion – how the business should be managed in the event of the founder's incapacity, which family members should receive distributions and in what sequence, and how the business should be approached if a sale is proposed. It is not part of the trust instrument and does not carry legal force, but it carries practical force. A trustee who acts against a clear letter of wishes in a non-urgent situation creates reputational and relational risk for themselves. The founder should draft this document personally, with legal assistance, and review it every two to three years.

The second is the governance structure of the underlying holding company. If the founder retains the power to direct the trustee on investment decisions concerning the business, the articles of the holding company and any shareholders' agreement must be consistent with the trust instrument. A conflict between the trust's reserved-powers language and the corporate documents will need to be resolved, and the resolution will not always favour the founder. We review the corporate documents as part of the trust structuring exercise, not after it.

The third is the record of the transfer. The disposition of trust property (the founder's transfer of assets to the trustee) must be documented clearly, at a price or value that is defensible, and in a manner that does not suggest the transfer was circular or illusory. For a founder whose business will later be sold or listed, the clean documentation of the original transfer is a due-diligence point that comes back. We prepare a contemporaneous record as part of the execution process.

Common errors and what foreign advisers misread

Foreign counsel – particularly those trained in civil-law systems – sometimes assume that a reserved-powers trust is legally equivalent to no trust at all, because the settlor "still controls the assets." That is a misread of Hong Kong law. The Trustee Ordinance explicitly validates a trust where the settlor has reserved defined powers; the question is whether the powers go so far that no genuine trust interest was ever created. There is a difference between a settlor who retains a power to direct investment decisions and a settlor who retains the power to revoke the trust and recover all assets at will. Hong Kong law distinguishes between the two. Most civil-law systems treat them identically.

The practical consequence is that a foreign lawyer advising the same founder in their home jurisdiction may characterise the trust as transparent for succession purposes, when Hong Kong law would treat it as a valid separate holding. That divergence is not just an academic problem. It affects how the founder's estate is administered if they die with a civil-law domicile, and it affects the forensic analysis a creditor or disappointed heir will run.

A second error is treating the trustee's written consent to the reserved powers as a mere formality. The trustee's acceptance of a structure with significant settlor powers is a regulatory and governance event for the trustee, not just a signature. A corporate trustee regulated in Hong Kong or in an offshore centre will conduct its own review of the reserved-powers architecture before it accepts appointment. If that review has not been factored into the timeline, the execution will stall.

A third error – common when the structure is assembled piecemeal by multiple advisers – is the mismatch between the trust instrument and the corporate documents of the holding entity. We have seen structures where the trust deed reserved the power to direct the trustee on shareholder votes, but the holding company's articles required resolutions to be passed by the registered shareholder alone, without the ability to receive directions from a third party. The trust instrument and the corporate documents must be reviewed as a single architecture.

The sequence above describes the standard position. Your matter turns on the specific documents, the jurisdictions engaged, and the reserved-powers architecture that is commercially realistic for your business – which is where the structure is won or lost.

For a structured assessment of your cross-border succession position and the reserved-powers options available across the relevant jurisdictions, write to us at info@lockhartyip.com.

Decision matrix: situation, instrument, route, risk

The right structure depends on where the principal sits, where the assets sit, and what control the founder needs to retain. The following positions describe the main scenarios our desk encounters.

A founder resident in a common-law jurisdiction (the United Kingdom, Singapore, Australia) with BVI holding assets and Mainland operating companies has the clearest path. A Hong Kong-law trust over the BVI shares, with investment-direction powers reserved to the settlor, is well-supported by statute and practice. The main risk is the Mainland operating layer: PRC succession rules apply to assets situated in the Mainland, and the trust holds the equity layer above, not the Mainland assets themselves. The structure handles the holding layer cleanly; the Mainland layer requires a separate plan.

A founder resident in a civil-law jurisdiction (continental Europe, Russia, certain Middle Eastern countries with civil-law influence) with the same asset profile carries an additional risk: their estate may be administered in their country of residence, under a succession law that does not recognise the trust as a separate estate. The structure still provides meaningful protection over the offshore holding layer, but the residency and domicile analysis must precede the trust execution. Moving residence before establishing the trust, or using a trust jurisdiction with stronger recognition in the relevant civil-law forum, may be the correct sequence.

A founder in a business-partner dispute, or against whom a creditor claim is anticipated, faces a timing problem. A transfer of assets into a trust after a dispute has crystallised, or after a claim has been notified, will be scrutinised as a transaction at undervalue or a transfer designed to defraud creditors. In that situation, the trust may still be established – but the transfer must be made at full value, documented contemporaneously, and reviewed for solvency implications. We advise on the risk position before the transfer, not after it.

A founder approaching a business sale has a different calculus entirely. If the business is likely to be sold within a short horizon, placing it into a trust before the sale may create complications around beneficial-ownership disclosure, stamp duty on the share transfer, and the buyer's due-diligence requirements around the holding structure. The planning question becomes: establish the trust now and handle the sale within the structure, or complete the sale and use the proceeds as the trust asset? Both routes are viable; the choice depends on the tax and succession implications of each, which must be modelled before a decision is made.

If an earlier structuring attempt stalled, or if an existing trust was established under a different governing law that no longer reflects the family's map, a review engagement can identify the strategic gap and the routes still open.

For a preliminary read on your cross-border succession and control position, email info@lockhartyip.com.

Self-assessment: is the structure ready to proceed?

Before engaging counsel to draft a reserved-powers trust, a founder should be able to answer seven questions. If any answer is unclear, the structuring exercise should begin with the question, not with the documents.

• Is the asset map complete? Every holding entity, operating company, real property interest, listed security and significant financial account must be identified by jurisdiction before the trust is placed.
• Is the forced-heirship exposure in each jurisdiction understood? This requires a view on the founder's domicile, residence and nationality under the succession law of each relevant jurisdiction – not just a general assumption that "the trust will handle it."
• Has a trustee been identified, and has that trustee been briefed on the reserved-powers architecture? The trustee's acceptance of appointment on those terms should be confirmed before the drafting begins.
• Are the corporate documents of the holding entity consistent with the proposed reserved-powers architecture? If not, amendment is needed before the trust is executed, not after.
• Is the transfer of assets into the trust properly timed relative to any existing or anticipated dispute or creditor claim?
• Is the letter of wishes ready to be prepared? The trust can be executed without it, but the structure is materially weaker without a current, signed letter of wishes in the trustee's files.
• Have the tax implications of the transfer been reviewed in each relevant jurisdiction? This is not a question our international-law desk answers on its own; it requires input from tax advisers in the relevant jurisdictions, working from the same structuring note.

Our desk works through these questions with the founder and, where relevant, with the family office, the accountants, and the locally licensed Hong Kong counsel who handle the Hong Kong-law elements of the structure. The goal is a structuring note that resolves each question before a word of the trust deed is drafted.

For more on the broader private-wealth practice at Lockhart & Yip, see our private wealth practice page.

Related practices

• Holding Structures – structuring the offshore and Hong Kong holding layer above operating companies
• Tax Positions – FSIE, territorial-basis analysis and treaty implications across the holding architecture

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