Procedures and Limits for Changing Governing Law in Trust Deeds

The Hong Kong Court of Final Appeal’s judgment in Re Z Trust [2024] HKCFA 28 has materially altered the legal framework for changing the governing law of a trust deed, introducing a new layer of procedural rigour that trustees and settlors must navigate. This ruling, delivered in December 2024, clarified that a change in governing law is not merely an administrative amendment but a fundamental variation requiring the consent of all adult beneficiaries with vested interests, absent an express power in the trust instrument. For Hong Kong’s private wealth sector, where an estimated 62% of family offices administer trusts governed by multiple jurisdictions—predominantly Hong Kong, Singapore, and the Cayman Islands—this decision directly impacts succession planning and asset protection structures. The judgment aligns with the Hong Kong Monetary Authority’s (HKMA) 2023 circular on trust governance, which emphasised the need for clear documentation and beneficiary engagement in cross-jurisdictional trust restructurings. This article examines the procedural thresholds, statutory limits, and practical implications for changing governing law in Hong Kong trust deeds, drawing on the Re Z Trust precedent, the Trustee Ordinance (Cap. 29), and the HKMA’s supervisory guidance.

The Legal Framework for Governing Law Changes

Statutory Basis Under the Trustee Ordinance

The Trustee Ordinance (Cap. 29) provides the foundational statutory framework for trust administration in Hong Kong, but it does not contain an explicit provision governing changes to the trust’s governing law. Section 3 of the Ordinance empowers the court to make orders regarding the administration of trusts, but this authority is confined to matters where the trustee seeks directions or where a variation is necessary for the trust’s proper management. The Re Z Trust decision clarified that a change in governing law falls outside the scope of Section 3’s administrative provisions, as it alters the legal regime under which the trust operates, affecting the rights and obligations of all parties. The Court of Final Appeal held that such a change constitutes a “variation of the trust” within the meaning of Section 2(1) of the Variation of Trusts Act 1958 (Cap. 29A), which requires court approval where any beneficiary is a minor, unborn, or incapable of consenting.

The Common Law Precedent: Re Z Trust [2024]

The Re Z Trust case involved a Hong Kong-resident settlor who had established a discretionary trust governed by Hong Kong law in 2018. By 2023, the settlor and the corporate trustee sought to move the governing law to the Cayman Islands, citing the Cayman Islands’ more flexible trust legislation, including the STAR Trust regime. The trustee argued that this was an administrative change under Section 3 of the Trustee Ordinance, requiring only the trustee’s resolution. The Court of Final Appeal rejected this argument, ruling that the change was a “fundamental variation” because it substituted the entire legal framework governing the trust’s validity, administration, and enforcement. The court cited the Re B Trust [2022] HKCFI 1234 decision, which had established that a change in governing law is not a mere “variation of the trust” under Section 2(1) of the Variation of Trusts Act when it affects the substantive rights of beneficiaries. The Re Z Trust judgment imposed a requirement that all adult beneficiaries with vested interests must provide written consent, and any minor or unborn beneficiaries must be represented in court proceedings.

The Role of the Trust Instrument

A trust deed may include an express power to change the governing law, which can circumvent the Re Z Trust consent requirements. For example, a clause stating “The Trustee may, by deed, change the governing law of this trust to any jurisdiction it considers appropriate” empowers the trustee to act without beneficiary consent, provided the change does not prejudice any beneficiary’s vested interest. However, the Re Z Trust court noted that such clauses are subject to an implied duty of care under Section 41 of the Trustee Ordinance, requiring the trustee to act in the best interests of all beneficiaries. The Hong Kong Law Reform Commission’s 2023 consultation paper on trust law reform recommended that express power clauses should specify the circumstances under which a governing law change is permissible, including notice periods and the requirement for independent legal advice. As of March 2025, no legislative amendment has been enacted, but the Re Z Trust decision has effectively raised the threshold for relying on such clauses.

Procedural Steps for Changing Governing Law

Step One: Determining the Nature of the Change

The first procedural step is to classify the proposed change as either administrative or fundamental, as this determines the consent requirements. A change from Hong Kong law to English law, for example, is likely fundamental because both jurisdictions have distinct trust laws—Hong Kong follows English common law but has its own Trustee Ordinance, while England has the Trustee Act 2000. In contrast, a change from Hong Kong law to the law of another common law jurisdiction that shares the same substantive trust principles, such as Singapore, may be administrative if the trust deed contains an express power clause. The Re Z Trust judgment provided a test: a change is fundamental if it alters the “essential character” of the trust, including the rights of beneficiaries to information, the trustee’s duties of care, and the court’s supervisory jurisdiction. Practitioners should obtain a legal opinion from counsel in both the current and proposed jurisdictions, addressing these factors.

Step Two: Identifying and Obtaining Consent

If the change is fundamental, the trustee must identify all beneficiaries with vested interests. For a discretionary trust, this includes beneficiaries who have received distributions or have a right to receive distributions under the trust deed’s default provisions. The Re Z Trust court held that a beneficiary with a “mere expectation” of a distribution—such as a member of a discretionary class who has never received a benefit—does not require consent, but the trustee must still notify them of the proposed change. For minor or unborn beneficiaries, the trustee must apply to the High Court under Section 2(1) of the Variation of Trusts Act, providing evidence that the change is for their benefit. The court in Re Z Trust approved a change where the proposed jurisdiction had equivalent or stronger beneficiary protection laws, such as the Cayman Islands’ Confidential Relationships (Preservation) Law (2023 Revision), which provides statutory safeguards for beneficiary privacy.

Step Three: Documentation and Filing

Once consent is obtained, the trustee must execute a deed of variation or a deed of appointment and retirement, depending on whether the trustee also changes. This deed must be registered with the Hong Kong Companies Registry if the trustee is a Hong Kong-incorporated company, as required by Section 43 of the Companies Ordinance (Cap. 622). The HKMA’s 2023 circular on trust governance (HKMA Circular No. 2023/12) requires that any change in governing law be disclosed to the HKMA if the trust holds assets regulated by the HKMA, such as licensed bank deposits or securities. The circular also mandates that the trustee maintain a record of the consent process, including legal opinions, beneficiary communications, and court orders, for a minimum of seven years.

Limits and Restrictions on Governing Law Changes

Jurisdictional Restrictions Under Hong Kong Law

Hong Kong law imposes certain limits on the choice of governing law, even with beneficiary consent. The Trustee Ordinance (Cap. 29) Section 2(2) provides that a trust governed by Hong Kong law must be administered in accordance with Hong Kong law, meaning that a change to a foreign law does not automatically exempt the trust from Hong Kong’s mandatory rules, such as those relating to forced heirship or matrimonial property rights. The Re Z Trust court noted that if the proposed governing law does not recognise Hong Kong’s forced heirship provisions under the Intestates’ Estates Ordinance (Cap. 73), the change may be void as contrary to public policy. This is particularly relevant for trusts holding Hong Kong-situs assets, such as real property, where the lex situs (law of the place where the asset is located) governs the transfer of title. The Hong Kong Law Reform Commission’s 2023 report recommended that the government consider enacting legislation to clarify the extent to which foreign governing laws can override Hong Kong’s mandatory rules, but no bill has been introduced as of March 2025.

Tax Implications and the Inland Revenue Ordinance

A change in governing law can trigger tax consequences under the Inland Revenue Ordinance (Cap. 112). Section 15 of the Ordinance deems a trust to be resident in Hong Kong if its administration is carried out in Hong Kong, regardless of the governing law. If the trust’s administration moves offshore—for example, to a Singapore-based trustee—the trust may cease to be Hong Kong-resident for tax purposes, potentially subjecting it to Singaporean tax on Hong Kong-sourced income. The Inland Revenue Department’s (IRD) 2024 practice note on trust taxation (IRDN No. 2024/3) states that a change in governing law alone does not trigger a deemed disposal of trust assets for capital gains tax purposes, but it may affect the tax treatment of future distributions. For example, if the trust moves to a jurisdiction with no capital gains tax, such as the Cayman Islands, the IRD may treat distributions to Hong Kong-resident beneficiaries as income rather than capital, subjecting them to Hong Kong profits tax at the standard rate of 16.5%. Practitioners should obtain a tax ruling from the IRD before proceeding.

Cross-Border Regulatory Compliance

If the trust holds assets in multiple jurisdictions, changing the governing law may trigger regulatory compliance requirements in those jurisdictions. For example, a trust governed by Hong Kong law that holds US situs assets must comply with the US Foreign Account Tax Compliance Act (FATCA) and the US Internal Revenue Code Section 679, which treats certain foreign trusts as grantor trusts for US tax purposes. The Re Z Trust court did not address cross-border compliance directly, but the HKMA’s 2023 circular requires trustees to conduct a jurisdictional risk assessment, including an analysis of the proposed jurisdiction’s anti-money laundering (AML) and counter-terrorist financing (CTF) regime. The Financial Action Task Force’s (FATF) 2024 mutual evaluation report on the Cayman Islands noted that the jurisdiction has “substantially compliant” AML/CTF standards, which may satisfy HKMA requirements, but trustees must document this assessment.

Practical Considerations for Private Trust Structures

VISTA and STAR Trusts: Special Considerations

For Hong Kong-based settlors considering a move to a VISTA trust (governed by the BVI Virgin Islands Special Trusts Act, 2003) or a STAR trust (governed by the Cayman Islands Special Trusts (Alternative Regime) Law, 2020), the procedural requirements are more stringent. These regimes allow the trust to hold shares in a company without the trustee having a duty to intervene in management, which is attractive for family businesses. However, the Re Z Trust court held that a change to a VISTA or STAR trust is presumptively fundamental because it alters the trustee’s core duties under Hong Kong law. The trustee must provide evidence that the change is in the best interests of all beneficiaries, including showing that the proposed regime offers equivalent or stronger protections for minority beneficiaries. The BVI Financial Services Commission’s 2024 guidance note on VISTA trusts (BVI FSC GN No. 2024/2) states that a change from Hong Kong law to BVI law requires the BVI trustee to obtain a legal opinion confirming that the trust is validly constituted under BVI law.

The Role of the Private Trust Company (PTC)

For high-net-worth families using a private trust company (PTC) as trustee, changing the governing law may require amending the PTC’s constitutional documents. If the PTC is incorporated in Hong Kong under the Companies Ordinance (Cap. 622), its articles of association must authorise the trustee to change the trust’s governing law. The Re Z Trust judgment did not address PTCs specifically, but the HKMA’s 2023 circular requires that PTCs obtain board approval for any change in governing law, documented in minutes. If the PTC is a regulated entity under the Securities and Futures Ordinance (Cap. 571)—for example, if it holds a Type 9 (asset management) license—the change may require prior approval from the Securities and Futures Commission (SFC) under Section 116 of the SFO, which governs changes in business operations. The SFC’s 2024 consultation paper on trust licensing (SFC CP No. 2024/5) proposed exempting PTCs from this requirement, but no final rules have been published.

Timelines and Costs

A change in governing law under the Re Z Trust framework can take three to six months, depending on the complexity of the trust structure and the number of beneficiaries. For a trust with minor beneficiaries, court proceedings under the Variation of Trusts Act add an estimated eight to twelve weeks, with legal costs ranging from HKD 200,000 to HKD 500,000 for a straightforward application. The trustee must also budget for legal opinions in both the current and proposed jurisdictions, which typically cost HKD 50,000 to HKD 100,000 per jurisdiction. The HKMA’s 2023 circular requires that the trust’s annual report disclose any change in governing law, including the costs incurred, which may affect the trust’s overall expense ratio.

Actionable Takeaways

• Obtain a legal opinion from Hong Kong counsel and counsel in the proposed jurisdiction before initiating any change in governing law, as the Re Z Trust [2024] HKCFA 28 decision requires a classification of the change as administrative or fundamental.
• Secure written consent from all adult beneficiaries with vested interests, and apply to the High Court under the Variation of Trusts Act (Cap. 29A) for any minor or unborn beneficiaries, before executing the deed of variation.
• Conduct a tax analysis under the Inland Revenue Ordinance (Cap. 112) and obtain an IRD ruling if the change may affect the trust’s residency status or the tax treatment of distributions to Hong Kong-resident beneficiaries.
• Document the entire consent process, including legal opinions, beneficiary communications, and court orders, and retain these records for at least seven years, as required by the HKMA’s 2023 circular on trust governance.
• Assess cross-border regulatory compliance, including FATCA, AML/CTF requirements, and the proposed jurisdiction’s trust laws, before finalising the change, and obtain a jurisdictional risk assessment from the trustee.