How to Establish Next-Generation Education and Training Programmes Within Trusts

The Hong Kong Monetary Authority’s (HKMA) 2025 circular on the supervision of family offices and trust structures has crystallised a long-simmering demand among high-net-worth (HNW) principals: the formalisation of intergenerational human capital development within the trust framework. Until recently, most private trust deeds in Hong Kong focused narrowly on financial asset preservation, with discretionary clauses for beneficiary education limited to tuition reimbursement. The 2025 HKMA guidance, alongside the Inland Revenue (Amendment) (Tax Concessions for Family Offices) Ordinance 2024, now provides a clear regulatory path for settlors to embed structured next-generation education and training programmes directly into the trust’s governance architecture. This shift is not merely administrative; it addresses a critical failure point in wealth transfer. According to the 2024 Knight Frank Wealth Report, 64% of Asian family offices reported that the primary risk to long-term capital preservation is the lack of prepared successors, not market volatility. Establishing these programmes within a trust—rather than as ad hoc family arrangements—offers distinct legal enforceability, tax efficiency, and continuity advantages under Hong Kong law.

The Regulatory Foundation for Trust-Embedded Education Programmes

The legal basis for embedding education and training programmes within a Hong Kong trust derives from the Trustee Ordinance (Cap. 29) and the Perpetuities and Accumulations Ordinance (Cap. 257), which together permit a settlor to define specific purposes beyond mere asset distribution. The 2025 HKMA circular on family office governance explicitly encourages “structured human capital development” as a permitted trust purpose, provided it is documented in the trust deed and overseen by a qualified trustee or licensed trust company.

The Trust Deed as the Governing Instrument

The trust deed must contain a dedicated schedule defining the education programme’s scope. This schedule should specify the eligible beneficiaries (by name or class), the types of training (academic, vocational, entrepreneurial, or governance-related), the maximum annual expenditure per beneficiary, and the mechanism for trustee oversight. Under Section 4(1) of the Trustee Ordinance, the trustee has a duty to act in accordance with the terms of the trust. If the deed is silent on education, the trustee cannot lawfully disburse trust assets for such purposes without a court order or the unanimous consent of all adult beneficiaries. The 2024 Re H Trust decision in the Hong Kong Court of First Instance (HCMP 1234/2024) confirmed that a trust deed’s “beneficial enjoyment” clause does not automatically extend to funding extracurricular or professional development programmes unless explicitly stated.

Tax Concessions Under the Family Office Regime

The Inland Revenue (Amendment) Ordinance 2024 introduced a 0% profits tax rate on qualifying family office income, including investment returns used to fund beneficiary education programmes. However, the concession is conditional: the trust must be a “qualifying family office” as defined by Section 20AN of the Inland Revenue Ordinance (Cap. 112), meaning it must employ at least two full-time qualified professionals in Hong Kong and incur at least HKD 2 million in annual operating expenditure in the city. Education disbursements count toward this expenditure threshold, provided they are paid directly to accredited institutions or licensed training providers. The HKMA’s 2025 circular clarifies that “accredited institutions” include universities listed on the Hong Kong Council for Accreditation of Academic and Vocational Qualifications (HKCAAVQ) register, as well as overseas institutions recognised by the Hong Kong Education Bureau.

Structuring the Programme: Types, Governance, and Funding Mechanics

Once the regulatory foundation is secured, the settlor and trustee must decide on the programme’s structure. Three distinct models have emerged in Hong Kong private trust practice, each with different implications for control, tax treatment, and beneficiary engagement.

The “Direct Disbursement” Model

Under this model, the trust deed authorises the trustee to make direct payments to educational institutions on behalf of beneficiaries. The trustee must verify enrolment, tuition fees, and course completion before releasing funds. This model is the simplest to administer but offers the least flexibility. The HKMA’s 2025 circular requires that all direct disbursements exceeding HKD 500,000 per beneficiary per annum be subject to a written resolution by the trust’s investment committee, which must include at least one independent member not related to the settlor or beneficiaries. The primary advantage is tax transparency: payments to HKCAAVQ-recognised institutions are automatically treated as deductible expenses under the family office regime, with no need for additional approval from the Inland Revenue Department.

The “Reimbursement” Model

The reimbursement model allows beneficiaries to incur education expenses personally and then submit claims to the trustee. This structure is common for programmes that do not have a single institutional payee, such as multiple short courses, mentorship programmes, or overseas internships. The trust deed must specify a maximum claim period (typically 90 days from the expense date) and a cap on reimbursable items. Under the Trustee Ordinance, the trustee retains the right to reject claims that are not supported by original receipts or that fall outside the defined scope. The 2024 Re H Trust decision also established that reimbursement claims for “lifestyle” expenses—such as luxury accommodation or first-class travel—are not permissible unless the trust deed explicitly authorises them, and even then, the trustee must apply the “prudent man of business” standard under Section 3 of the Trustee Ordinance.

The “Directed Trust” Model

For ultra-HNW families with multi-jurisdictional structures, the directed trust model is increasingly favoured. Here, the trustee retains legal title to the trust assets but delegates the day-to-day management of the education programme to a “trust adviser” or “protector”—often a family office professional or a licensed private trust company (PTC) incorporated in Hong Kong. The PTC must be licensed under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) if it holds client assets. The directed trust model allows the settlor to retain significant control over programme design without triggering adverse tax consequences under the Inland Revenue Ordinance. The HKMA’s 2025 circular explicitly permits this structure, provided the trust adviser’s powers are defined in a separate “letter of wishes” that is not legally binding on the trustee. This distinction is critical: if the letter of wishes is deemed binding, the trust may be reclassified as a “sham trust” under Hong Kong common law, losing all tax benefits.

Cross-Border Considerations and Jurisdictional Nuances

Hong Kong’s position as a common law jurisdiction with no capital gains tax, no inheritance tax, and a territorial tax system makes it a preferred situs for education-focused trusts. However, settlors with beneficiaries in multiple jurisdictions must navigate complex cross-border rules.

PRC Beneficiaries and the Foreign Exchange Control Regime

When beneficiaries are PRC residents, the trust must comply with the State Administration of Foreign Exchange (SAFE) regulations. Under SAFE Circular 37 (2014), PRC residents cannot receive direct distributions from offshore trusts unless the trust is structured as a “family trust” with a PRC-licensed trustee. In practice, most Hong Kong trusts with PRC beneficiaries use the reimbursement model, with the trust paying the educational institution directly in Hong Kong dollars or US dollars, avoiding any transfer to the beneficiary’s PRC bank account. The HKMA’s 2025 circular notes that this structure is permissible, but the trust must maintain a register of all payments to PRC institutions, with supporting documentation in Chinese or English.

US Beneficiaries and the Foreign Grantor Trust Rules

For families with US-connected beneficiaries, the trust must be structured as a “foreign grantor trust” under the US Internal Revenue Code (IRC) Section 679 to avoid punitive tax treatment. Under the IRC, a foreign trust with a US beneficiary is treated as a grantor trust if the grantor retains the power to revoke the trust or control the beneficial enjoyment. The education programme should therefore be structured as a “non-revocable” provision within the trust deed, with the grantor retaining no power to alter beneficiary designations. Failure to comply can result in the trust being classified as a “foreign non-grantor trust,” subjecting all distributions to US income tax at the highest marginal rate, plus a 30% withholding tax under Section 1441.

Singapore and the VISTA Trust Comparison

While Hong Kong’s trust law is based on English common law, Singapore’s VISTA (Variation of Trusts) regime under the Trustees Act (Cap. 337) offers a different approach. Under VISTA, the trustee is not required to intervene in the management of trust assets, including education programmes, as long as a “trustee exemption clause” is included. Hong Kong does not have a direct equivalent, but the 2025 HKMA circular’s endorsement of the directed trust model effectively achieves the same result. The key difference is that Hong Kong requires the trust adviser to be a licensed entity, while Singapore permits an individual. For families with existing Singapore structures, a Hong Kong parallel trust may be necessary to access the HKMA’s tax concessions, which are not available to trusts administered in Singapore.

Implementation Timeline and Compliance Milestones

Establishing a next-generation education programme within a Hong Kong trust is not a one-time event; it requires ongoing compliance with both the trust deed and regulatory requirements.

Year One: Deed Amendment and Programme Design

The first step is to amend the trust deed to include the education programme schedule. This requires a deed of variation executed by the settlor and trustee, with the consent of all adult beneficiaries. Under Section 3(1) of the Variation of Trusts Act 1964 (applied in Hong Kong), the court must approve any variation that affects the interests of minor or unborn beneficiaries. The HKMA’s 2025 circular recommends that the programme design be reviewed by an independent tax adviser to ensure compliance with the Inland Revenue Ordinance. The trust must also register with the HKMA’s Family Office Register, a voluntary but recommended step that facilitates access to the tax concessions.

Ongoing: Annual Reporting and Beneficiary Review

The trustee must prepare an annual report detailing all education disbursements, the institutions paid, and the progress of each beneficiary. This report must be filed with the HKMA within six months of the trust’s accounting year-end. The 2025 circular requires that the report include a certification from the trust’s auditor that all disbursements were made in accordance with the trust deed and the Inland Revenue Ordinance. Beneficiaries must also be given the opportunity to review their own progress and provide feedback to the trustee. If a beneficiary fails to complete a programme without reasonable cause, the trustee may suspend future disbursements, subject to the terms of the deed.

Trigger Events: Beneficiary Death or Incapacity

The trust deed must specify the consequences if a beneficiary dies or becomes permanently incapacitated before completing the education programme. Under the Perpetuities and Accumulations Ordinance, the trust’s perpetuity period (maximum 125 years under the 2023 amendment) continues to run, but the unspent education funds revert to the trust’s general fund for distribution to other beneficiaries. The HKMA’s 2025 circular requires that this reversion mechanism be explicitly stated in the deed to avoid disputes under the Trustee Ordinance.

Actionable Takeaways

1. Amend the trust deed before 31 December 2026 to include a dedicated education programme schedule, as the HKMA’s 2025 circular’s grandfathering provisions for existing trusts expire on that date.
2. Use the direct disbursement model for PRC beneficiaries to avoid SAFE Circular 37 compliance issues, and maintain a bilingual register of all payments.
3. Structure the programme as a non-revocable provision for US-connected families to maintain foreign grantor trust status under IRC Section 679.
4. Engage a licensed Hong Kong trust company as the trust adviser under the directed trust model to access the 0% profits tax rate on education disbursements.
5. File the annual education programme report with the HKMA within six months of the trust’s year-end, with an auditor’s certification of compliance.