What can be done if there are disputes over the validity of a will or the administrator of the estate? Provided that the ‘Grant of representation’ has not yet been issued by the Hong Kong Probate Registry, which would indicate that it has already validated the will, a concerned party may enter a ‘Caveat’. This will ensure that the “Caveator’, that is the person who lodges the caveat, will be informed if any application is made for the issue of a grant of representation.

While the existence of a caveat may indicate there are genuine concerns in a probate or administration process and therefore a sign of potential disputes, the effect of entering a caveat is not necessarily contentious in itself. Nevertheless, caveat proceedings do start when a caveat is lodged with the Probate Registry against an estate of a Deceased. The Probate Registry only process non-contentious applications for grant. If the application has become “contentious”, the contention must be resolved first. In theory, the entering of a caveat can be contentious, and the caveat must be dealt with first before the application can be processed further.

A caveat is a notice preventing a grant of representation being issued by the Registry without notice to the caveator. Some of the common reasons to enter a caveat are:-

•    To allow more time for the caveator to make enquiries, obtain further information or evidence to:

o    Oppose proof of a will
o    Challenge the validity of a will
o    Oppose the issue of the grant of representation to the person entitled
o    Ascertain entitlement where there is no will (the deceased died intestate)

•    To act as a preliminary step to a probate action, or to citation (for more information, see our article on citations)
•    To be a first step in an application by people who have equal entitlement to the grant of representation

Once entered, a caveat remains in force for 6 months from the date of entry and then automatically ceases to have effect, unless withdrawn or removed prior to such date. There is no limitation to the number of further caveats and extensions that can be made. 

How to Handle a Caveat?

Issuing of any grant of representation shall not be allowed if the Probate Registry has knowledge of an effective caveat. Where an effective caveat is in place, the applicant for grant of the relevant estate would be asked by the Registrar to deal with the caveat. This can sometimes come as a surprise to grant applicants as they may not have been previously aware of the caveat.

Depending on the circumstances, there are various ways of handling an estate with a caveat. In any event, given the many potential contentious issues that may arise and the sensitive nature of probate or administration in general, legal advice should be sought and the matter should always be handled with care.

A caveat can only be removed:-

•    By withdrawal of the caveat by the caveator giving notice at the Probate Registry, as long as an appearance to a warning has not been entered
•    By the non-appearance of a caveator to the warning to caveator
•    By an order of the High Court that the caveat does cease to have effect and a grant of representation be issued
•    By the expiration of 6 months form the date of entry or effective extension

It may be worrying to discover that a caveat has been lodge, but it is not unusual to find occasions where the caveat process is misused and caveats are simply lodged to stall for time, or even where parties have no grounds to contest a will or the administration of an estate. Where there is no valid reason to lodge a caveat, there could be costs consequences for the caveator. 

Whether you discovered a caveat or you are thinking of entering one, it should be reminded that caveat proceedings are by nature contentious and can well be the start of a litigation. Any step taken after the commencement of a caveat proceedings could cause legal consequences, including costs. It is therefore recommended that you seek independent legal advice before taking any step in dealing with a caveat.

If you have any questions regarding the above or would like to obtain further information on our probate and estate planning services, please feel free to contact our Probate and Estate Planning team.  

This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.

February 2021

How early advice can significantly mitigate future costs

It is deep rooted in Chinese culture that all family problems should be resolved within ‘the four walls’, perfectly illustrated by the old adage ‘Do not wash your dirty linen in public’. Often families and private wealth managers find it daunting to contact lawyers, and when a problem eventually (as a last resort) reaches the legal advisor it is most likely to have evolved into a disastrous problem that could cost a significant part, if not all, of the family’s wealth to fix it. This bulletin seeks to provide practical pointers on the legal ringfences that could be put into place at the early stages to avoid such future nightmares.

Structure formation

A diverse range of services and products are being marketed to and consumed by high-net-worth individuals and families in Hong Kong. Hong Kong remains the hub for a large number of super-rich individuals and families with private wealth, predominantly comprising of easily investable assets, most of which is held in private trusts, the primary vehicle used for wealth and estate planning. This may sound simple but as the pool of high-net-worth individuals expands, wealth and estate planners in Hong Kong are seeing increasing demand from second and third tier wealthy individuals for sophisticated planning, particularly for intergenerational transmission of wealth, succession for family-owned businesses and long-term philanthropic goals.

Clients’ preference (or in many cases, preference of their service provider), and legacy reasons are often the governing factors for selecting structures and jurisdictions. However, poorly designed structures and inappropriate choice of jurisdictions could lead to drastic compliance issues, immobility of assets, unnecessary administrative costs, or impediments to business operations. It is therefore important to work closely with legal advisors to frame appropriate structures at the most suitable jurisdiction, based on the following key factors:

1.    Specific needs of the beneficiaries

The relevant questions include:

a)    Whether on-going support is required and for how long (e.g., for minor and old age beneficiaries)? In that case, what is the best way to ensure part of the assets remains mobile?

b)    Is it necessary to have segregated wealth portfolios, and if so, would an offshore fund be suitable?

c)    Is there any specific jurisdictional matter (e.g., a US citizen issue) that warrants more protection for certain beneficiaries?

d)    Do they have any role in the family business? Are conflicts from wearing multiple hats foreseeable if a private trust company will be used? 

2.    Tax efficiency

Entities and activities in popular offshore jurisdictions (such as BVI and Cayman) do not attract tax, which is ideal for those who require their assets to be easily transferrable, coupled with a high level of confidentiality concerning ownership. In Hong Kong, while there is no capital gain tax for local entitles, profits arising in or derived from trading activities, a profession, or business undertakings carried out in the city are subject to profits tax. Therefore, remuneration or profits, even via offshore vehicles, received by a related Hong Kong entity in the structure might still be taxable.

Another aspect of tax consideration is the potential personal liability of individual beneficiaries, especially in receiving distributions.

3.    Compliance issues

With the joint effort to combat money laundering and financial crimes globally, it is impossible to avoid compliance requests – from provisions of basic personal particulars to details regarding source of funds and income. Terms such as “beneficial ownership”, “economic substance” and “FATCA” make headlines frequently in all popular wealth parking jurisdictions. Selection of a jurisdiction based on the incentive of non-compliance of a reporting duty is unrealistic, as one would simply end up at a jurisdiction with little or no financial and professional infrastructure, and even then, such a jurisdiction would eventually develop and become regulated.

The correct approach towards compliance requests is to ask a legal advisor to map out the actions and information that would be required to fully comply with all reporting duties each year. Logically, the cost of proper planning and preparation would be significantly lower than the cost for handling the consequences of failing to comply with certain duties.   

Key Documents

Trusts have been the default setting for asset protection and succession planning in Hong Kong for many years. Despite understanding the benefits, families are generally not willing to give up their control over the assets and will often seek to reserve certain powers. Recent court cases (e.g. JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch)) however proved that trusts that are controlled by settlors are vulnerable to attacks, with courts having developed ways to enable third parties (usually creditors or divorcing spouses) to enforce orders against trust assets. 

In contrast, numerous jurisdictions have introduced specific provisions intended to enable the reservation of a wide range of powers by the trustmaker (settlor). A Hong Kong trust will not be invalid solely because the settlor has reserved for themselves the powers of investment or asset management. The statutory protection in Hong Kong however does not include the reservation of powers of revocation or powers to appoint and remove trustees or beneficiaries, which are available in offshore regimes including in Singapore.
 
It is therefore important to understand that all documents must always be drafted in a fact-specific way. However, as a general principle, the key is to reserve only the powers that are necessary for the settlor in question. For example, a settlor who has settled a business into the trusts may wish to retain the power to veto a proposed sale or other disposition of the business. Note, however, if this is combined with other extensive powers such as the power to replace trustees, the right to determine who is to be a member of the beneficial class and, for example, a right of veto over any disposition of trust assets, then it is likely for a Court to say that the settlor has the means to control the disposition of the trust assets and, in practice, to ensure that they have in place trustees who will bend to their will. Another general rule is that retaining the right of veto over actions is likely to be safer than positive powers. By merely being able to prevent actions taking place, a settlor is far less likely to be held as having retained beneficial ownership as they cannot by exercising those powers of veto alone bring about any disposition of the property.

Mitigating litigation risks

Disputes are inevitable and would often put trustees in a conflicted position. Typical contentious scenarios include the spouse of a beneficiary demanding disclosure of details of a trust during a divorce, beneficiaries unable to reach consensus on distribution or disagreement between the trustee and the beneficiaries regarding the dealing of certain assets. 

The idea of taking a matter to court may sound intimidating, but most courts have statutory supervisory jurisdiction to give orders to deal with trust assets. Section 56 of the Hong Kong Trustee Ordinance allows the trustee to make an application to the court for the necessary power to manage or administer property vested in the trustee. This is a relatively narrow jurisdiction when compared to the much wider discretion that the offshore courts may exercise. The author acted for a trustee based in Hong Kong of a Cayman trust to seek an order from the Cayman court pursuant to s.48 of the Trusts Law to sanction a distribution proposal that the beneficiaries could not agree upon. It is therefore a good practice to seek directions from the court which has jurisdiction over the trust during the early stage of a dispute to mitigate the risk of full-blown litigation.  

Conclusion

With the variety and complexity of issues revolving around private wealth management, as highlighted by the questions and scenarios set out above, wealth managers should work closely with legal advisors at early stages of planning, drafting, and also at the first sign of any potential dispute. 

February 2021

When someone passes away without having put into place a valid will, the ‘Law of intestacy’ governs the administration and distribution of their estate. In Hong Kong, the two key pieces of this legislation are the Intestates’ Estates Ordinance (Cap. 73) (the “IEO”) and the Non-contentious Probate Rules (Cap. 10A) (the “Rules”).

Before dealing with the deceased’s estate, a Grant of Letters of Administration must be obtained from the Probate Registry. Individuals who are allowed to apply for a Grant of Letters of Administration of the deceased’s estate are those set out in rule 21 of the Rules, in the following order of priority:

1.    A surviving spouse
2.    Children
3.    Parents
4.    Siblings
5.    Grandparents
6.    Uncles and aunts.

Those who are successful in obtaining a Grant of Letters of Administration are the administrators and are empowered to deal with the estate in accordance with the IEO.

After obtaining the Grant of Letters of Administration and having arranged for the funeral of the deceased, the administrator should first collate all the assets of the deceased and settle any debts and expenses. After that, the administrator should distribute the estate to the beneficiaries in accordance with section 4 of the IEO, with the table below illustrating some examples of entitlement under section 4 of the IEO.

Order of Entitlement When There is No Will

	Surviving Relatives	Status of Other Relatives	Entitlement Arrangement
1.	Spouse	No issue* of the deceased, parent, full sibling or issue* of full sibling	All to the surviving spouse
2.	Spouse and issue* of the deceased	Other relatives immaterial	The surviving spouse takes the personal chattels, HK$500,000 and half of the residuary estate. The other half is held on statutory trust** for the surviving issue*.
3.	Spouse and one or more of the following relatives, namely: parent or full sibling or issue* of full sibling		The surviving spouse takes the personal chattels, HK$1,000,000 and half of the residuary estate. The other half is held for the surviving parent(s) or on statutory trusts for the surviving full sibling(s).
4.	Issue* of the deceased	No spouse	All to the surviving issue* on statutory trust.
5.	Parent(s)	No spouse, no issue* of the deceased	All to parent(s)
6.	Full siblings	No spouse, no issue*, no parent	All to full siblings on statutory trusts**
7.	Half siblings	No spouse, no issue*, no parent, no full siblings	All to half siblings on statutory trusts**
8.	Grandparent(s)	None of the above	All to grandparent(s)
9.	Full uncles and aunts	None of the above	All to full uncles and aunts on statutory trusts.
10.	Half uncles and aunts	None of the above	All to half uncles and aunts on statutory trusts.
11.	None of the above relatives		All to the Hong Kong Government as unowned property.

Despite the prescribed entitlement under the IEO, beneficiaries of an estate may sometimes redistribute their entitlement through a Deed of Family Arrangement executed by all beneficiaries and setting out the agreed redistribution of the deceased’s estate. Do note though that the redistribution through a Deed of Family Arrangement may attract stamp duty. 

While the law prescribes a specific priority for the distribution of an intestate’s estate and may leave certain wiggle room for beneficiaries to alter their entitlement, it would certainly be useful to make a valid will to ensure your estate will be inherited exactly as planned. 

If you have any questions or would like to obtain further information on our probate and estate planning services, please contact one of the members of our Probate and Estate Planning team, who are listed here: https://oln-law.com/probate-estate-planning.  

This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.

January 2021