How should high-net-worth individuals in the cryptocurrency space safely allocate their crypto assets? A guide to setting up trusts in Hong Kong

Authors: Liu Honglin, Bai Zhen, Mankun Law Firm

With the development of globalization and the opening of international financial markets, an increasing number of high-net-worth individuals and entrepreneurs from mainland China are choosing to establish trusts in Hong Kong for purposes such as asset protection, wealth inheritance, and tax planning. In practice, mainland Chinese citizens need to consider factors that include not only the legal structure of the trust but also foreign exchange controls, tax implications, and asset management methods. When establishing a trust, selecting the appropriate trustee and trust company is crucial, as this will directly affect the effectiveness and security of the trust.

This article will detail the steps for mainland Chinese citizens to establish trusts in Hong Kong, the advantages and disadvantages of Hong Kong trusts, practical considerations, the costs of establishing various types of trusts, and the regulatory system and licensing requirements for Hong Kong trust companies.

Advantages and Disadvantages of Hong Kong Trusts

Can mainland Chinese citizens establish trusts in Hong Kong? Why invest in virtual currencies through trusts?

As one of the global financial centers, Hong Kong attracts a large number of high-net-worth individuals and entrepreneurs who wish to establish trusts. This is not only due to Hong Kong's well-established legal system and tax incentives but also because of its unique geographical location and economic environment, making it an ideal place for trust establishment. For mainland Chinese citizens, establishing a trust in Hong Kong is not only feasible but also offers numerous advantages and opportunities.

First, trusts can provide strong asset protection functions. The legal protections in Hong Kong are undoubtedly one of the greatest advantages of establishing a trust there. Hong Kong has a mature trust legal system that ensures the legality of trust arrangements and the responsibilities of trustees. By establishing a trust, investors can separate their assets from other properties held in their name, preventing claims during legal disputes or debt issues. This isolation mechanism is particularly important for virtual currency investments, as the legal environment surrounding virtual currencies is also relatively complex.

Second, privacy protection is another significant advantage of Hong Kong trusts. For investors wishing to maintain financial privacy, trusts are an ideal choice. Trusts keep the information of beneficiaries confidential, helping to prevent unnecessary information leaks and protecting personal privacy and asset security. This is particularly important in virtual currency investments, as virtual currency transactions are highly anonymous but can also easily attract the attention of legal and regulatory authorities.

Tax incentives are also an important factor in Hong Kong's appeal. Unlike many other jurisdictions, Hong Kong does not impose capital gains tax or inheritance tax, providing significant tax advantages for the appreciation and inheritance of trust assets. For high-net-worth individuals, establishing a trust in Hong Kong can effectively reduce tax burdens and achieve optimal tax planning results.

As an international financial center, Hong Kong offers a wide range of investment opportunities and efficient financial services. Trust assets can be flexibly invested in global markets, enjoying the convenience and professional services of Hong Kong's financial markets. This not only helps preserve and increase the value of trust assets but also provides trustees with more investment options and management tools. Through trusts, investors can hire professional trustees or asset management companies for investment management, ensuring the professionalism of investment strategies and the effectiveness of execution. Additionally, trust agreements can be customized according to the specific needs of investors, allowing for flexible adjustments in investment direction and management methods to meet personalized wealth management needs.

Finally, allocating virtual currencies and other assets through trusts can achieve wealth inheritance and long-term planning. Trusts can set clear beneficiaries and distribution rules, ensuring that assets are passed on to the next generation or designated beneficiaries according to the investor's wishes. The terms in the trust agreement can include conditional distributions, periodic distributions, and other arrangements, providing more flexibility and security for wealth inheritance.

However, there are also some challenges and disadvantages to establishing trusts in Hong Kong.

First, although Hong Kong's legal environment is favorable, establishing and managing trusts requires compliance with strict regulatory requirements. Trust companies must comply with Hong Kong's laws and regulations, which may increase compliance costs and management complexity.

Second, the costs of establishing and managing trusts in Hong Kong are relatively high compared to other offshore financial centers. Although it offers a good legal and financial environment, the associated fees are also relatively high, making it suitable for high-net-worth individuals. If the scale of trust assets is small, the management costs may be disproportionately high, affecting overall efficiency.

Additionally, when mainland citizens inject funds into Hong Kong trusts, they must comply with mainland China's foreign exchange management regulations. Cross-border fund transfers require relevant foreign exchange registration procedures, which may increase operational complexity and time costs. This means that in practice, the principal must prepare adequately to ensure the smooth transfer of funds and the establishment of the trust.

In summary, allocating investments in virtual currencies or other assets in Hong Kong using trusts not only provides asset protection, professional management, and tax advantages but also achieves privacy protection and wealth inheritance. This makes trusts an ideal tool for high-net-worth investors to engage in complex investments and long-term wealth planning.

Types of Trusts in Hong Kong and Establishment Costs

The types of trusts in Hong Kong mainly include private trusts, commercial trusts, and charitable trusts, each suitable for different user groups.

• Private Trusts: Typically used for family wealth management and inheritance, suitable for high-net-worth families and individuals. Through private trusts, assets can be effectively protected and passed on. These trusts usually involve a high degree of flexibility, similar to discretionary trusts, allowing trustees to allocate assets based on family needs. The initial cost of establishing a private trust is approximately HKD 20,000 to HKD 50,000, with annual management fees ranging from HKD 50,000 to HKD 100,000, and the establishment period is usually 1 to 3 months.
• Commercial Trusts: Used for commercial purposes, such as Real Estate Investment Trusts (REITs), suitable for corporate and institutional investors. These trusts typically have moderate flexibility, similar to unit trusts, allowing adjustments based on market conditions and investment strategies. The initial cost of establishing a commercial trust is approximately HKD 50,000 to HKD 100,000, with annual management fees possibly ranging from HKD 100,000 to HKD 200,000, and the establishment period is usually 3 to 6 months.
• Charitable Trusts: Focused on charitable purposes, with beneficiaries required to be charitable organizations or activities, suitable for individuals and enterprises wishing to achieve long-term public welfare goals through donations. Charitable trusts are usually similar to special purpose trusts, and their structure can be customized according to specific charitable goals. The initial cost of establishing a charitable trust is approximately HKD 30,000 to HKD 70,000, with annual management fees ranging from HKD 50,000 to HKD 150,000, and the establishment period is usually 1 to 3 months.

If you are considering which trust structure best suits your needs, you can compare the main characteristics of typical trust structures listed in the table below:

Which Hong Kong Service Providers Can Help Clients Establish Trusts?

In Hong Kong, institutions that can assist in establishing trusts include:

• Trust Companies. Institutions specializing in trust management and administration, regulated by the Hong Kong Monetary Authority (HKMA), and required to obtain a license under the Trust Companies Ordinance.
• Lawyers and Law Firms. Lawyers and law firms typically assist in drafting trust agreements, providing legal advice, and ensuring compliance with relevant legal regulations. They are regulated by the Law Society of Hong Kong but do not require a specific trust license to provide these services.
• Accountants and Tax Advisors. These professionals can provide advice on the tax implications and financial planning related to trusts. They are regulated by the Hong Kong Institute of Certified Public Accountants, and while they do not require a specific trust license, they must comply with relevant accounting and tax regulations.
• Financial Planners and Wealth Managers. They provide consulting services regarding trust structures and investment strategies. While they do not require a specific trust license, if they provide investment advice, they are usually regulated by the Securities and Futures Commission (SFC) or other relevant financial regulatory bodies.
• Banking Institutions. Banks that provide trust services may need to comply with specific regulatory requirements, including those set by the HKMA. Banks typically offer trust services through their wealth management or private banking departments.

Steps to Establish a Trust in Hong Kong

Establishing a trust in Hong Kong requires a series of steps, each of which needs careful planning and execution. The following are the specific operational steps and their detailed descriptions:

Consult Professional Advisors

Before starting to establish a trust, it is advisable to first consult professional legal, tax, and financial advisors. They can provide comprehensive advice to help understand relevant legal requirements and tax implications, ensuring the legality and effectiveness of the trust arrangement. The advice from professional advisors can not only help design a reasonable trust structure but also navigate the complex legal environment to avoid potential legal and tax risks.

Clarify the Purpose of the Trust

Determining the specific purpose of establishing the trust is very important. Whether for asset protection, wealth inheritance, or tax planning, a clear purpose can help design the most suitable trust structure and terms. For example, using a trust to protect family assets, avoid property disputes within the family, or provide long-term financial security for children's education and future living. A clear goal helps define the rights and obligations of all parties in the trust agreement.

Choose the Trust Structure and Trustee

Based on specific needs, choose the appropriate type of trust (such as private trust, commercial trust, or charitable trust). Each type of trust has its unique advantages and applicable scenarios, so selecting the correct type of trust is crucial. At the same time, choosing an experienced and reputable trustee is also key. The trustee can be an individual, a trust company, or a professional trustee institution, and they will play a critical role in the management and execution of the trust, ensuring that trust assets are properly managed and operated.

Draft the Trust Agreement

Once the trust structure and trustee are determined, a lawyer will draft the trust agreement based on the needs. This agreement will specify the purpose of the trust, beneficiaries, trust assets, and the responsibilities and rights of the trustee in detail. The trust agreement is the core document for establishing the trust, so it is essential to ensure that the content is thorough, legal, and aligns with the intentions of the principal. During the drafting process, the lawyer will communicate repeatedly to ensure that all details are fully considered.

Handle Foreign Exchange Registration and Fund Transfer

For mainland citizens, when transferring funds to establish a trust in Hong Kong, relevant foreign exchange registration procedures need to be completed. This is to ensure that the fund transfer is legal and compliant with mainland China's foreign exchange management regulations. Funds should be transferred from the mainland to Hong Kong through legal means such as bank remittances, and relevant records should be kept for future reference. Foreign exchange registration procedures may include filling out foreign exchange registration forms and providing relevant proof of the source of funds, ensuring that the entire fund transfer process is transparent and legal.

Open a Trust Account and Inject Funds

Opening a trust account at a bank in Hong Kong is an important step in establishing a trust. This account will be used to receive and manage trust assets. After the account is opened, funds will be transferred to the trust account, officially completing the establishment of the trust. This step not only requires selecting a suitable bank but also ensuring that the bank understands the specific requirements and purposes of the trust to provide the best services and support.

Registration and Management

Depending on the nature of the trust, some types of trusts may need to be registered in Hong Kong. The trustee must manage the trust assets according to the provisions of the trust agreement and regularly report to the beneficiaries on the financial status and management of the trust. Trust registration may include submitting registration applications to relevant government departments and providing copies of the trust agreement. Once registered, the trustee needs to conduct regular financial audits to ensure transparency and compliance in the management of trust assets.

In summary, establishing a trust in Hong Kong is a complex and systematic task that requires strict adherence to legal procedures. Careful planning and execution of each step not only ensure the legality and effectiveness of the trust but also help achieve wealth management goals. With the guidance of professional advisors and effective management, the advantages of Hong Kong trusts can be fully utilized to realize the vision of asset protection and wealth inheritance.

Summary by Mankun Law Firm

With its well-established legal system, tax incentives, status as a financial center, and privacy protection, Hong Kong has become an ideal location for establishing trusts. However, attention must also be paid to compliance requirements and the challenges of establishment costs, especially the complexity of cross-border fund transfers.

As a Chinese citizen, establishing a trust in Hong Kong requires a series of steps, including consulting professional advisors, selecting trustees, drafting trust agreements, injecting funds, and managing the trust. It is essential to ensure that all operations are compliant and legal, and to choose suitable trustees and professional advisors to achieve the objectives of trust establishment. If you have further specific questions or need more details, please feel free to consult professional advisors.