Private Trust Companies

A private trust company is a company incorporated to act as a captive trustee for a family trust. It is an alternative to an institutional trustee. A high net worth individual establishing a family trust may consider opting for a private trust company over an institutional trustee (e.g. bank related trust companies) to exert a higher degree of control over or flexibility into the trust. Where a private trust company is advantageous, a Hong Kong incorporated private trust company can offer a number of advantages.

Benefits of a Private Trust Company

A high net worth individual will often establish a family trust to minimize tax liabilities, to protect his or her assets from creditors and to ensure a particular distribution of those assets, either during his or her lifetime or afterwards. As the essence of the trust is that the individual transfer ownership of assets to a trustee on trust and thus, ceases to be the owner of those assets, the individual may be concerned about the extent to which he or she can continue to control those assets, particularly if those assets are being held by an institutional trustee who may have their own liability management considerations in determining how to treat those assets. Similarly, for liability management considerations, an institutional trustee may resist holding certain types of assets, such as interests in private businesses or interests in complex or leveraged financial products.

Form of Private Trust Company

A private trust company in Hong Kong can take the form of a company limited by guarantee or a private company limited by shares. Both are separate legal persons with members and directors and perpetual existence. Each can own assets in its own right and it can sue in its own name. The liabilities of each are separate and distinct from those of its members, meaning that members are insulated from the liabilities of the company.

Where a company limited by guarantee differs from a company limited by shares is that the members of a company limited by guarantee have no ownership interest in the company. In contrast, members of a company limited by shares own shares in the company.

One advantage of using a company limited by guarantee over a traditional company limited by shares as a vehicle for a private trust company is that in a company limited by guarantee, it is possible to prevent a transfer of the membership. Though the constitutive documents of a company limited by shares may restrict share transfers, ultimately, if a member of a company limited by shares dies, those shares will devolve in accordance with the laws of inheritance and succession. As a result, it is possible, for example, that the shares may end up in the hands of a hostile party, such as a unhappy spouse or child. In contrast, in a company limited by guarantee, where a member dies, the membership ends.

Who is a member of the private trust company is important because ultimately, the members (or some portion of them) will select the directors of the company and thus, will determine who controls the trust of which the private trust company serves as trustee.

Membership of Private Trust Company

There are no restrictions on who can be a member of the private trust company. Membership may be determined by looking at how control of the company should devolve. For example, if control is intended to pass from the individual setting up the trust, then to his or her spouse and then to their children in that order, it may be desirable to establish different classes of membership for the individual, the spouse and the children, each class having different voting rights.

Directors of Private Trust Company

There are no Hong Kong residency requirements for directors.

Where a private trust company takes the form of a company limited by guarantee, it must have at least 2 directors. These directors must be individuals. They cannot be bodies corporate. However, if its takes the form a private company limited by shares, it need only have 1 director.

Ultimately, the composition of the board of directors will be dictated by considerations beyond the minimum statutory requirements, including, for example, tax planning considerations and the need to ensure compliance with legal requirements.

Contact us if you are interested in setting up a private trust company