Trust A Tool For Estate Planning - Bedan Review Vol. V
Trust A Tool For Estate Planning - Bedan Review Vol. V
Trust A Tool For Estate Planning - Bedan Review Vol. V
One of the most common tools in estate planning is the use of a Trust, an arrangement
under which one can place his assets for his or someone else’s benefit (the beneficiary) under
the control of a trustee.
The concept of Trust was introduced in the Philippines by the Americans and was
formally incorporated in the New Civil Code of the Philippines in 1950. For many years,
this concept has been mistaken and confused with the “trust certificate” which was actually an
instrument issued by banks in the early 1970’s and is more synonymous with a time deposit,
or with a “trust receipt” which is an instrument being availed of by importers as a corollary
to a letter of credit application and as a security to a credit accommodation. This confusion
is unfortunate considering that Trust is probably the most versatile and effective transaction
a person with property could enter into. While in the United States and some European
countries, they have sophisticated and more advanced rules on Trust, it is unfortunate that in
the Philippines, this tool in estate planning is still not very much recognized as to its varied uses
and benefits.
Meaning of Trust
Trust is a legal instrument or device whereby a person called a Trustor delivers part
or all of his properties to another person called Trustee who administer and manages the
property/ies for the benefit of designated person/s called Beneficiaries. The term “person”
may refer to an individual or natural person or a juridical person like a corporation.
Under the New Civil Code, Trust may be implied or express. Implied trust is created by
operation of law, as for example when a person acquires property by mistake, he is considered
by the law as a trustee while he holds the same for the real owner of the property. Express trust
is established by the mutual stipulation of the parties or of the trustor.
In this article, I will only discuss express trust which is the most commonly used in the
trust business or industry.
exchange or sale. Thus, a person under a legal disability to sell or donate a property,
such as a minor or a mentally disable person, could not be a trustor.
2. The trustee – the person or institution in whom the confidence is reposed as regards
the management of a property for the benefit of another person. The trustee may
either be a natural person or a corporation or an institution.
3. The beneficiary/ “cestui que trust” – the person who is to receive the benefits from
the trust or for whose benefit the trust has been created and is sufficiently identified as
such. The beneficiary may be the trustor himself or persons other than the trustor,
as for example, the trustor’s children or a foundation like Tuloy sa Don Bosco
Streetchildren Foundation in Alabang, Muntinlupa City.
C. Trust Property
The subject matter of the trust or the ‘res’ must be clearly identified. It is important
that the property to be transferred in trust must be existing, lawful, definite and transferrable.
Anything that has an economic value and which a person may own and to which he may own
and to which he may transfer legal title, by gift or sale, is a property that may be conveyed in
trust. Hence, a trust may be constituted on real estate, household effects, cash, stocks, bonds
and other securities, livestock and growing crops, works of art, jewelry and other tangible
things.
Trust property need not be a tangible thing; it may be comprised of a claim, such as
a right of action for breach of contract or upon a promissory note. For example, a trust may
exist in life insurance policies or the proceeds thereof, or may consist of patents, copyrights,
goodwill, trademarks and trade secrets.
D. A lawful purpose
If the trust violates a law or it is against morals, public policy or public order, the trust
will be void and of no effect. Hence, a trust will be void if it involves the commission of a
criminal act by the trustee, or if the trustee encourages the neglect of parental duties, restrains
marriage, religious freedom or the performance of public duties.
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to perform trust and fiduciary business. In the case of authorized banks or investment houses,
the trust or fiduciary business is normally carried out through their Trust division, department,
group, unit, section, or any other form of aggrupation. In the case of trust companies or
trust corporations, the entire company or corporation is involved in carrying out the trust or
fiduciary business, precisely because the company is establish for this particular business.
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A. Fiduciary/Trusteeship
The institutional trustee acts as the fiduciary when it is appointed by the court
and serves as the executor or administrator of the properties left by a deceased person,
as guardian of the estate of a minor or an incapacitated person, and a trustee of a legally
constituted trust.
B. Advisory
Under this role, the institutional trustee makes financial recommendations to the
client as in, for example, the proper timing for selling or buying stocks, or which investment
outlets to go into for maximization of yields, or the prospects of foreign currency investment,
or transfer of assets at the least tax cost, etc. In addition to the financial advice, the client
gets access to the in-depth and comprehensive investment research and analysis available to
the institutional trustee because of its resources and extensive network. Some smart owners
of big owners of portfolios split their money among several investment advisory accounts
with the different institutional trustees and, after comparing the financial recommendations
of these financial advisors, make their investment decisions based on where the weight of
well-informed opinion lies.
C. Agency
As an agent, the institutional trustee does not take legal title to the property under
its agency. The institutional trustee acts in behalf of the client in a representative capacity.
Examples of these services are as follows:
1. Safekeeping –The property owner turns over his securities and other valuables to
the institutional trustee as agent. The institutional trustee has no other duty than
to keep them safely and in due time return them to the owner or deliver
them upon the owner’s order or instructions.
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the trust where such amendment would constitute the diversion of all or a part of the
principal and/or income of the fund to purposes other than those specified in
the Retirement/Pension Plan.
5. Sinking Fund Management, Trust Indenture, Escrow Agency, Collateral and Similar
Arrangements – Amendments in the terms can be made only upon mutual consent of
the trustor and the beneficiary.
In any trust arrangement, however, the trustor and, in some cases the beneficiary, can
change the trustee at any time.
1. Capitalization Requirements/License
Not every bank or investment house can engage in the business of trust and other
fiduciary functions. Only those authorized by the Bangko Sentral ng Pilipinas (BSP) may do
so. And the BSP has set very high standards and stringent measures for financial institutions
that are engaged in trust business.
Under a circular issued by the Monetary Board, an applicant for a trust license must
have a combined capital account of not less than P250 million. This means that the total of its
unimpaired paid-in capital, earned surplus and undivided profits, excluding amounts it had set
aside for income taxes as well as unbooked valuation reserves and other capital adjustments
required by the BSP, must be at least P250 million. Hence, the trust business is limited to
banks and investment houses who can show their capability to be financially responsive.
Sometime July 2015, the Monetary Board in order to spur the interest in the
establishment of stand-alone trust corporations adjusted the minimum capitalization
requirements. Previously, a trust corporation was required to put up a minimum paid-in
capital of P300 million at inception. The new guidelines have reduced this to P100 million at
inception, but is coupled with a five-year transition period within which the trust corporation
should eventually increase its capital to P300 million. The lowering of the minimum capital
requirements is not only intended for banks, but also for other market entrants who desire to
engage in the trust business but find the previous P300 million requirement too restrictive.
2. Reserves
Before a trust institution with trust license can actually accept money in trust, it must
also make an initial deposit of at least P500,000.00 with the Bangko Sentral ng Pilipinas,
in the form of eligible government securities, as security for the trust institution’s faithful
performance of its trust duties. If, while doing business, the assets that a trust institution
holds in trust exceeds P50 Million, the trust institution must place with the BSP additional
government securities to maintain its deposit at the equivalent of at least 1.0% of total value of
the trust assets it is managing. This deposit likewise serves as security that the trust institution
will perform its duties well. At no time can the security deposit be less than P500,000.00. In
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addition to the basic security deposit, the BSP requires liquidity reserves of varying rates for
common trust funds and for certain types of trust and other fiduciary arrangements.
3. “Prudent-Man” Rule
Under this rule, the trust institution is required to “administer the funds or property
under its custody with the skill, care, prudence and diligence necessary under the circumstances
then prevailing that a prudent man, acting in like capacity and familiar with such matters,
would exercise in the conduct of an enterprise of a like character and with similar aims.”
6. Earmarking/Separation of Accounts
Trust assets are required to be kept separate and distinct from all other assets of the
trust institution’s business; trust books and records are separate and independent from other
books and records of the trust institution. The records of each trust account are separate
from those of all other accounts and are adequately identified.
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7. Preference of Claims
No assets held by the trust institution, as a trustee, shall be subject to any claims other
than those of the parties (trustor/beneficiaries) interested in the specific trust accounts.
In conclusion, I would like to state that contrary to the understanding of some people
that trusts are only for the wealthy, this is not true. Anyone can utilize a trust in their estate plan
as an instrument to distribute assets effectively and efficiently upon death or to put stipulations
on assets gifted to children.
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