Digital Assets & Virtual Assets
RWA Tokenisation in Hong Kong: Legal Framework and Structuring Guide
Understanding the Basic Trust Structure
A trust in Hong Kong involves three parties: the settlor (who transfers assets to the trust), the trustee (who holds and manages the trust assets), and the beneficiaries (who are entitled to benefit from the trust). The trustee holds legal title to the assets, while the beneficiaries hold the equitable or beneficial interest.
The nature and extent of the beneficiaries' rights, and the discretion afforded to the trustee, differ significantly between discretionary trusts and bare trusts. Choosing the right type of trust is fundamental to achieving the settlor's wealth planning objectives.
What Is a Discretionary Trust?
In a discretionary trust, the trustee has broad discretion to determine how the trust income and capital are to be distributed among a class of beneficiaries. No individual beneficiary has a fixed, enforceable right to any specific distribution. Instead, each beneficiary has only a hope or expectation of receiving a benefit — sometimes called a spes — which the trustee may or may not exercise in their favour.
Discretionary trusts are the dominant structure in wealth planning because their flexibility allows the trustee to respond to changing circumstances: the needs of individual beneficiaries, tax law changes, family disputes, and the emergence of new family members (such as grandchildren) can all be accommodated within the trustee's discretion.
The trustee's discretion is typically guided by a letter of wishes from the settlor, which is a non-binding document expressing the settlor's wishes as to how the trust should be administered. The trustee is not bound by the letter of wishes but will give it significant weight in exercising their discretion.
What Is a Bare Trust?
In a bare trust (also known as a simple trust or naked trust), the trustee holds the trust assets for the absolute benefit of one or more identified beneficiaries who are of full legal capacity. The beneficiary has an immediate, unconditional, and indefeasible right to both the income and the capital of the trust, and can demand that the trustee transfer the assets to them at any time.
The trustee of a bare trust has no active management discretion — their role is purely custodial. They must follow the instructions of the beneficiary in relation to the management and disposition of the assets. Common examples of bare trusts include nominee shareholding arrangements, where a nominee holds shares on behalf of the beneficial owner, and custodian arrangements for investment assets.
Key Legal Differences
Trustee Discretion: The defining distinction is that a discretionary trustee has active decision-making power over distributions, while a bare trustee merely holds legal title and must act on the beneficiary's instructions.
Beneficiary's Rights: A discretionary beneficiary cannot compel a distribution and has no fixed interest in the trust assets. A bare trust beneficiary, by contrast, has an immediate and absolute right to call for the assets at any time (the rule in Saunders v Vautier).
Asset Protection: A properly structured discretionary trust provides strong protection against the beneficiaries' creditors, because no beneficiary has a fixed, attachable interest. A bare trust provides no creditor protection, as the beneficiary's interest is absolute and can be reached by creditors.
Succession Planning: Discretionary trusts are effective succession planning tools, as the settlor can ensure that assets are distributed across generations according to the trustee's discretion guided by the letter of wishes. Bare trusts do not serve a succession planning function, as the assets belong absolutely to the current beneficiary.
Tax Implications in Hong Kong
Hong Kong does not impose inheritance tax, capital gains tax, or trust-specific tax. Profits tax applies to trust income arising from a business in Hong Kong. In general, the tax consequences of a discretionary trust and a bare trust differ primarily in terms of the attribution of income and gains.
For a bare trust, income and gains are treated as belonging to the beneficiary for tax purposes, as the trustee acts as the beneficiary's agent. For a discretionary trust, income accumulated within the trust and not distributed may not be attributed to any specific beneficiary until a distribution is made. This distinction has greater relevance where the trust holds assets in jurisdictions with income tax on trust distributions or accumulated trust income.
Practical Applications
Discretionary trusts are used for intergenerational wealth transfer, family asset protection, succession planning for family businesses, and philanthropic purposes. Bare trusts are used for nominee shareholding, custodian arrangements, and situations where the beneficial owner wishes to hold an asset through an intermediary for administrative convenience without giving up any beneficial rights.
How Alan Wong LLP Can Help
Alan Wong LLP advises settlors, trustees, and beneficiaries on the establishment and administration of discretionary trusts and bare trust arrangements in Hong Kong. Our team assists with trust deed preparation, letters of wishes, trustee governance, and the resolution of disputes arising from trust administration. We provide practical advice tailored to each family's specific wealth planning objectives and circumstances.
