Navigating the Succession Maze: Hong Kong's Intestacy Dilemma in a Global Estate

By Wisdom Hon

2024

In today's interconnected world, the dispersion of assets across multiple jurisdictions has become increasingly common, especially among affluent individuals who prefer holding assets through various structures. Without knowing that holding structure may change the situs of assets, one may inadvertently leave out those assets in a Will rendering them to be distributed under the intestacy rules. This presents a challenge in the application of the succession laws, underscored by the Hong Kong intestacy law which has not been modernised in the past three decades.

General rules on intestacy succession under s4 of the IEO

In instances where individuals domiciled in Hong Kong pass away without a comprehensive Will covering their entire Hong Kong estate, the Intestates’ Estates Ordinance (Cap. 73) (the IEO) governs the distribution of their assets. Section 4 of the IEO delineates the framework for intestate succession, providing guidelines for distribution scenarios based on the composition of the surviving family members. The key provisions are:

· If the deceased leaves a surviving spouse and leaves no issue, no parent and siblings, the surviving spouse will get the residuary estate;

· If the deceased leaves a surviving spouse and issue, the surviving spouse will take personal chattels, a net sum of HK$500,000 plus interest (i.e. the spousal entitlement), and half of the residuary estate with the other half for the issue equally;

· If the deceased leaves no issue but a surviving spouse and parent or siblings, the surviving spouse will take personal chattels, a net sum of HK$1,000,000 plus interest, and half of the residuary estate with the other half to the parent(s), failing that, to the siblings equally; and

· If the deceased leaves issue but no surviving spouse, the issue will share the residuary estate equally.

Interaction with foreign estate under s8A of the IEO

However, complexities arise when the deceased leaves assets situated outside Hong Kong without explicit Will coverage. Section 8A addresses such scenario, the offset rule delineated in the provision seeks to harmonize the distribution of assets across multiple jurisdictions, mitigating potential conflicts and ensuring equitable outcomes for all parties involved. The legislative intent extends beyond surviving spouses to encompass any beneficiary, reflecting a broader policy consideration of fairness and consistency (see Report of the Bills Committee to study the Wills (Amendment) Bill 1994, Intestates’ Estates (Amendment) Bill 1994, Inheritance (Provision for Family and Dependants) Bill Legco Paper No. HB 1021/94-95 at para 37).

Section 8A provides that:

(1) Where the intestate leaves a husband or wife who acquires under the law of intestacy or of partial intestacy of a place other than Hong Kong any beneficial interests in the intestate's estate, subsection (2) applies to that estate.

(2) The references in this Ordinance to the net sum payable to a surviving husband or wife, and to interest on that sum, shall be taken to be references to the net sum diminished by the value at the date of death of the beneficial interests referred to in subsection (1), and to interest on that sum as so diminished and, accordingly, where the value of those beneficial interests exceeds the net sum, this Ordinance shall have effect as if references to the net sum, and interest on that sum, were omitted.

(3) Where under this Ordinance the residuary estate of an intestate, or any part thereof, is directed to be held on trust, or on statutory trust, for persons other than the husband or wife of the intestate, the value at the date of death of the beneficial interests specified in subsection (4) that is acquired by any of such persons shall be taken as being paid or settled in or towards satisfaction of the entitlement of that person and shall be brought into account in accordance with the requirements of the personal representatives.

(4) The beneficial interests for the purpose of subsection (3) are those acquired under the law of intestacy or of partial intestacy of a place other than Hong Kong in the intestate's estate.

Application and Ambiguities of s8A

While Section 8A effectively addresses the avoidance of double benefits for spousal entitlement part (Mark Ho Yin v Leung Sek Lun Allen HCMP 87/2015 at para 24), ambiguities persist regarding the treatment of other beneficiaries. The surviving spouse is required to bring his/her entitlement to the foreign estate under the foreign intestacy law into account to diminish the spousal entitlement under the IEO. Here, only the spousal entitlement is subject to the offset, the half residuary estate entitled by the spouse remains intact (Yuen Tsz Chun v Lo Chi Keung and Chan Chi Wah [2021] HKCFI 493 at para 21), whereas for other persons entitling the other half residuary estate, the whole of such half residuary estate is accountable to the offset rule.

The application of the spousal entitlement part is clear because the diminished amount will be added to the residuary estate. For the other beneficiaries, the wordings are unsatisfactory leaving room for interpretation, raising uncertainties in its application, particularly concerning the offset rule (Butterworths Hong Kong on Probate, Administration and Trustee Handbook (3rd Edition) pp53-55). It is submitted that one way of interpreting this s8A(3) is the other beneficiaries’ interests in the Hong Kong estate is subject to the offset rule like the surviving spouse (Legislative Council Brief (Ref: L/M to CNTA/CD 2129/83 V) by the Secretary for Home Affairs dated 24 June 1994). If, say, the children are entitled to HK$100 under the Hong Kong estate and HK$10 under the foreign estate. Applying s8A would mean the children will only receive HK$90 under the HK estate. It is uncertain who will receive such HK$10 deducted from the children’s entitlement. Would it be the surviving spouse, who seems to be the natural choice considering the legislative intent is to favour the surviving spouse. There is no case law nor commentary to further clarify this issue.

Taking this example further, what if the interest under the foreign estate is more than the residuary estate in Hong Kong? This is possible given the popularity of holding assets through offshore entities such as BVI. The situs of such assets will then be changed from Hong Kong to BVI. In that case, the spousal entitlement will be fully diminished by the BVI interest such that the surviving spouse will not receive spousal entitlement under the Hong Kong estate. Such amount, i.e. HK$500,000, will then add back to the residuary estate, which is to be shared half to the spouse and half to the other beneficiaries. As to the other beneficiaries’ part, following the same logic as the above example, the whole of their half residuary estate will be satisfied by their interest under the foreign estate such that they will receive nothing from the Hong Kong estate. The question goes back to who will then get the other beneficiaries’ half residuary estate.

Partial intestacy and jurisdictional boundary – s8 of IEO

The offset rule in s8A also applies similarly in partial intestacy under s8 for both surviving spouse and the children. Again, the application relating to the children’s part faces similar challenges as in s8A discussed above.

Some practitioners determine partial intestacy from a global estate perspective, this view faces challenges. They consider that where a deceased died wholly testate in some jurisdictions and intestate in other jurisdictions, such deceased died partial intestate. While the definitions within the IEO do not explicitly clarify on the scope of "estate", it is clear from the history of IEO that IEO governs the distributions of intestates’ estates in Hong Kong only (Report on the Law Reform Commission of Hong Kong at Para 7.5).

Similarly, some practitioners advocate for combining the Hong Kong estate and foreign estates as a single estate for distribution. While such approach may streamline distribution, especially where IEO is the applicable succession law for foreign estate under its private international law principles, it requires careful consideration of legal basis for such approach.

Available Options

Despite divergent views among practitioners, adherence to the principles of intestacy law is crucial. Engaging in distribution without due regard for legal requirement risks contravening the law. To safeguard the interests of all stakeholders, an order under Order 85 rule 2 of the Rules of the High Court (Cap.4) may be applied to clarify the interpretation and application of the IEO (in particular s8 and s8A). Alternatively, the beneficiaries may agree among themselves as to the distribution of the Hong Kong estate (and the foreign estate where applicable) irrespective of the true interpretation and application of the IEO and record such consensus in a deed of family arrangement providing a legally sound framework for distribution.

Conclusion

The interplay between Hong Kong intestacy law and foreign estates presents a complex legal landscape that requires meticulous navigation. While section 8A aims at striking a balance between fairness and preferential treatment to the surviving spouse, the application of the offset rule to the other beneficiaries’ interests is not without uncertainty. As individuals and families entering in an era marked by the globalization of assets, a comprehensive estate planning and nuanced understanding of the jurisdictional intricacies are crucial, guided by the expertise of legal professionals well-versed in both local and international laws.