Jurisdictions vary massively as to how they treat wills and probate – with manifold implications for international private clients and family wealth. Here, Nerine Hong Kong’s Katja Meyer-Paysan examines how Hong Kong deals with probate and introduces a new trust structure to obviate it completely.

As the global population becomes wealthier and more mobile it is not unusual to have families living in a variety of geographies around the world. There are several legal considerations which vary from jurisdiction to jurisdiction. One important variance is how wills and probate are treated and the risk is that family wealth is not treated as the deceased might want because the law is different from what is assumed.

In 2010 three of my friends died suddenly, none were at the age that one would have expected it and none had been ill. One, in the UK, left a longstanding girlfriend and a child but no will - unfortunately for her, as she was dependent on him and her only remedy was to file a claim under the Inheritance (Provision for Family and Dependants) Act 1975. 

While she held common law wife status during his lifetime, on death the law was not helpful or clear. Many jurisdictions don’t even have a concept of common law husband and wife. Hong Kong is one of them and Germany another. If a person dies without making a will or a valid will, i.e. intestate, the property and assets belonging to that person is inherited according to the local intestacy rules. In other words, instead of the property going to the person’s chosen beneficiaries it is left to those recognised by the law in a particular order. 

More importantly, the rules of intestacy are not interested in taking into account whether the deceased had expressed his/her wishes prior to their death.

Every jurisdiction sets out clear rules for what happens to an estate - property, personal possessions and cash - if the estate owner dies intestate.

In England, under the Administration of Estates Act 1925, the spouse and children do not automatically receive everything in the deceased's estate. There is a strict order for deciding who gets what.

In order to meet those rules the matrimonial home is often sold to satisfy the various family claims. If the deceased has no one that qualifies under the rules of intestacy, the estate will pass to the Crown and the Crown may provide for dependants of the deceased or for other persons for whom the deceased might reasonably have been expected to make provision.

In Hong Kong, the rules provide for a ranking for entitled individuals when applying for a grant. Under the Rule 21 of the Non-Contentious Probate Rules (Cap.10A) the order of priority is:  the surviving spouse, the child or one of the children of the deceased, the father or mother of the deceased and the siblings of the deceased.

Similar to England, in Hong Kong if there is no-one that falls within the above categories then the estate of the person dying intestate goes to the government, as bona vacantia, and the government may, out of the whole or any part of the property, provide for dependants, whether kindred or not, of the deceased, and other persons for whom the intestate individual might reasonably have been expected to make provision.

A will made in Hong Kong will generally recognise property in Hong Kong and may also apply to assets elsewhere in the world, depending on the laws of the jurisdictions where the foreign assets are held.

Many people shy away from writing a will believing it is morbid or “tempting fate” but it is a very important part of estate planning, particularly for those whose family and assets are scattered.

With proper planning one can ensure that all changes in lifestyle and circumstances are accommodated and ensure that the right people are looked after. A will is one of many methods to ensure this. It will, of course, require updating to ensure that changing circumstances are reflected and, in order to be fully enforceable, formalities need to be adhered to. Furthermore, probate can be slow and, where the estate is varied, costly.  Avoiding probate completely is another way of ensuring best practice estate planning.

An alternative to a traditional will

The Nerine Group has recently launched an Executor Trust, which functions as a replacement vehicle for a will. It is a specialised, refined version of the BVI VISTA trust. The thinking behind the development of the Executor Trust was to produce a trust structure which could improve the functions of a will in a straightforward and cost effective way.

In designing this new solution, four basic principles were considered. Firstly, the trust had to be able to get rid of the need for probate. Secondly, the settlor had to be able to make financial provision for his family after his death. There was also the objective that the trust could allow the settlor to place BVI company shares (the so-called “designated shares”) into the trust in a way that permitted them to remain in the trust long term without interference from the trustee. In other words, the settlor could continue to manage a company held in this structure in the same fashion as he did before it was held in trust. Finally it was important that the settlor could continue to have control over any other trust assets (other than the designated shares) while maintaining the integrity of the trust.

Benefits of an Executor Trust

An Executor Trust is typically used where there is a sole director/shareholder of a BVI company. Instead of owning the shares in the BVI company in their own capacity, the sole director/shareholder settles the shares in an Executor Trust. The trust is revocable by the settlor at any time. The VISTA Trust component adds an extra benefit (for the director of the company) insofar that it removes the trustee’s fiduciary duty to ensure the company operates as a prudent investor. In effect this allows the director during his/her lifetime to operate and run the company, which is owned by the trust, without trustee interference.

The estate planning benefits are evident when compared with what happens when a sole director owning shares in his/her own capacity dies. If the sole director has a will, then an application for probate needs to be filed. Probate needs to be sealed by the courts. Typically, there is a delay of six months to ensure there are no competing claims and that all liabilities of the estate are recognised. If there is no will, then an application to the courts for a grant of letters of administration will need to be made. The letters of administration are court-appointed directives as to the administration of the estate. In effect the courts appoint appropriate people to deal with the deceased estate under the intestacy rules.

Both these courses take time, incur legal fees and allow claimants against the estate to advance their claims. As well as the complexities of dealing with estates in multiple jurisdictions there are some jurisdictions which impose forced heirship. Forced heirship refers to those jurisdictions with testamentary laws which limit the discretion of the testator to dispose assets under will or codicil on death.

Indeed, the Channel Island of Guernsey is one, but not for very much longer. In 2010, the States of Guernsey approved proposals from the Inheritance Law Review Committee which will pave the way to abolishing forced heirship and introducing testamentary freedom. The new law is expected to be enacted later this year. 

To date anyone dying in Guernsey is subject to provisions which put the rights of the spouse and legitimate descendants ahead of others who also may have a legitimate claim to the assets of the deceased. If a person dies, and is not married with children, there is a strict set of disbursement rules to follow. There have been cases where half siblings who have had no relationship with the deceased have claimed their share of the assets of the deceased, leaving common law wives and husbands out in the cold. Most right-minded thinking people see this as being archaic at best. 

Forced heirship remains prevalent in civil law jurisdictions and in Muslim countries as well as in the US (Louisiana) and Japan. A number of factors have influenced the development of modern day forced heirship laws, including the world's major religions (particularly Judaism and Islam) and governments, such as the Roman Empire. Forced heirship was designed by intent to protect the heirs (males first) of the patriarch, thus perpetuating the tribe or family. The freedom to transfer, leave, or to bequeath wealth seems to be more in line with the progression of secular society.

The Executor Trust removes all the obstacles associated with probate, including forced heirship. Since the director no longer owns the shares, the trustees do, the shares no longer form part of the shareholder’s estate and can be distributed by the trustees in accordance with the settlor’s wishes on his/her death.

It is important to note the Executor Trust is a basic short form trust used solely as a will replacement vehicle holding the trust fund to be distributed (and the trust to terminate) on the death of the settlor. It is designed as a simple unalterable pro forma document which allows the costs to be fixed but means it is only a will replacement vehicle and nothing else.

I must also caution that the Executor Trust is not a tax planning vehicle and it is always advisable to obtain independent tax advice. It is not designed for multiple settlors, complex succession matters or for flexibility on the distributions after the settlor’s death and there is no continuation of the trust.

What the vehicle is designed for is to take some of the uncertainty, red tape and pain out of a time in any family’s life when emotions are running high. Will or trust - it is time for clients to bite the bullet and put their affairs in order.