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Understanding the Types of Trust Plans and Their Functions in Hong Kong
In this article, we explain the differences between the different types of trust plans and their functions in Hong Kong. Settlors in Hong Kong have the option of picking particular types of trust plans which will have different functions that suit their specific needs.
What is a Trust?
A trust is a fiduciary relationship that involves three parties: 1) trustor/settlor, 2) trustee, 3) beneficiary. A trust is made when a settlor transfers (“settles”) property and/or another type of asset (typically monetary) to a trustee who manages it for the benefit of the beneficiary.
Trusts can serve as powerful tools to ensure wealth and asset management. It serves to protect assets and/or ensure that they are passed on to specific loved ones. Investment strategies and wealth management tactics can also help assets to grow.
Different Types of Trust Plans and Their Functions
There are various types of trusts that serve different functions:
1. Bare Trusts or Simple Trusts
A bare trust is a basic trust in which the beneficiary has the absolute right to capital and assets within the trust (and any generated income) once they have reached the age of 18 or above.
This trust is widely used by parents or grandparents to ensure that a portion of their assets are transferred to their children/grandchildren once they are ready to assume responsibility for any substantial sum or assets.
Taxes will typically be levied onto the settlor if the beneficiary is under the age of 18 whilst the trustee has minimal power over how the assets or sum is used as the beneficiary retains full right to the assets specified in the trust.
2. Discretionary Trusts
A discretionary trust is a legal arrangement whereby the trustee(s) have sole discretion about how and which of the beneficiaries will receive any assets or property as stated in a trust. This means that the trustee has the sole right to determine whether or not the assets will even be passed onto any of the beneficiaries and in what portion or percentage. The assets are thus said to be ‘held in trust’ for the beneficiaries until decisions are made by the trustee(s) as specified in the trust document.
Discretionary trusts are commonly used to retain flexibility in making decisions and to ensure that any assets or properties are passed onto suitable candidates who will have the capability to manage it and not squander it away.
3. Will Trust
A will trust is any trust that is created from a legally drafted will. The trust will only come into effect after the settlor’s death and any assets or property specified by the will is then inherited by chosen beneficiaries.
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