Trust Consciousness Week
16 March 2006
The Living Trust
is alive and well
Reynaldo G. Geronimo
Partner
Romulo Mabanta Buenaventura
Sayoc and De Los Angeles
Versatility of the trust device
• trust “is an institute of great elasticity
and generality; as elastic, as general as
contract.”
-Frederick William Maitland
• “the purposes for which trusts can be
created are as unlimited as the
imagination of lawyers…The trust can be
and has been applied as a device for
accomplishing many different purposes”
-Austin Wakeman Scott
Elements of a trust relation
• Trustor, or settlor, or grantor, or
creator, or donor
• Property, or trust res, or trust corpus, or
principal
• Transfer, or conveyance, in trust
• Trustee, or fiduciary
• Purpose, or objective
• Beneficiary, or cestui que trust
Who can be a trustor?
• Generally: Anyone who has the legal
authority to perform the act needed to
effect a valid transfer in trust
• Specifically:
Testamentary trusts: 18 yrs + sound mind
Inter vivos, gratuitous or
for consideration: capacity to contract
What property can be put in trust?
• All things which are or may be the object
of appropriation (Art. 414), whether real,
or personal, or mixed
• The property must be certain or definite
• The property must be transferable
What is meant by
“transfer in trust”?
• The settlor must “convey” his title over the trust
res and must clearly show that he intended to
create a trust.
• No particular words are required (Art. 1444).
• But if the trust res is real property, the
document creating the trust must be in a public
instrument, i.e. notarized, in order to be
accepted as evidence (Art. 1443). To bind third
parties, it must be registered (Sec. 50, Act No.
496)
Who can be a trustee?
• Any natural person, but aliens cannot be
trustees of land in the Philippines
• Any juridical person, if so authorized by
their enabling charter: national or local
governments, private corporations,
partnerships
• But, to engage in the business of trust,
the trust entity must have a trust license
from the BSP (Sec. 79, Gen. Banking Law)
What purposes may a trust pursue?
• Passive trust- objective is for trustee to be mere
title holder
• Active trust- objective is for trustee to have
affirmative duties of administration and
management
• Private trust- for the benefit of identified persons
• Charitable trust- for the benefit of society as a
whole
• Not for illegal purposes
For whom a trust may be made?
• Any person or group of persons who have
juridical capacity
• Excluded are persons who cannot receive
by donation or will
• Acceptance by beneficiary is necessary.
But acceptance is presumed if no onerous
condition is imposed
Common kinds of trusts
• As to mode of creation:
– Testamentary trust
– Intervivos or living trust
• As to the finality of transfer
– Revocable
– Irrevocable
– Reversionary
• As to segregation of the trust res
– Separately or individually managed trust
– Participating trust in a “CTF”, now “UITF”
More types of trusts
• As to powers of the trustee
– Full Discretion
– Limited Discretion
– Directory or directed
• As to rights of the beneficiary
– Spendthrift or protected trust
– Fully transferrable interest
• As to duration of the trust
– Short term
– Co-terminus with attainment of purpose
Why the special focus
on Living Trusts
• BSP is about to issue a circular providing
“Guidelines on Living Trust Accounts”
• This is in response to certain market behavior
that is seen as systemic risk generating
• It is the latest move in the game of “hot potato”
among three parties: (a) the regulator of banks;
(b) the regulated banks; and (c) the clients of
the banks.
Structure of the proposed Circular
• Lays down what it takes for a relationship to be
considered a “living trust” under the Manual of
Accounts for trusts
• Governs the method of marketing the service of
being a trustee of a living trust
• Allows for a transitory period for trust entities to
reconfigure their current trust accounts to
conform to the new requirements and provides
penalties for non-compliance
General Criteria for trusts to be
qualified as Living Trusts
• Must be created by an Agreement and must be
operational during the lifetime of the trustor as
soon as the Agreement is executed.
• Beneficiary must be trustor and 3rd parties or 3rd
parties only; not trustor only
• Agreement must specify (a) purpose, (b) nature
and value of res, (c) trustee’s investment
powers,(d) names of beneficiaries, and (e)
terms of distribution of income and principal
Specific Requirements-1
• Size: minimum entry is Php 100,000.
• Investment area of initial fund: Php
100,000 to Php 500,000-ONLY in deposits
• Lock-up: 6 mos. If terminated before
that, account must be closed and trustor
disqualified to open another one for one
year.
• Reversion of “principal and/or income”–
allowed only upon revocation
Specific Requirements-2
• Form: May be pre-printed, BUT, in that
case,the Purpose Clause and Dispositive
Clause must be left blank and filled out by
client upon signing of Agreement.
• Purpose clause- samples are provided.
• Dispositive clause
– Terms and conditions must be clearly defined
– Must also be coordinated with Purpose Clause
Specific Requirements-3
• Settlor/s
– May be more than one in one Agreement
– But, if so, must be related by consanguinity or
affinity within the second degree
• Marketing
– Bank proper personnel cannot market Living
Trust products or sign pre-printed
Agreements
– Bank Managers/Officers may refer clients to
Trust Dept. and make short introduction of
the products to clients
Carrot and Stick
• Carrot:
Non-compliant living trust accounts have 3
months to comply
• Stick
– After 3 mos. – non-compliant living trust accounts will
be TOFA, subject to reserves
– Violations of Circular- subject to Sec. 37 of R.A. No.
7653, the New Central Bank Act
Assessment by 1
the TRUST GURU
• The impending circular is a mere stop-gap measure
to arrest the migration of funds from CTFs and
UITFs pending completion of BSP’s over-all review
of trust regulations.
• Last week, an international commercial law expert,
Satish M. Kini, from the Washington law firm,
GOODWIN l PROCTOR, was here to make an onsite
study of our trust industry.
• I must disclose that we had two sessions, of more
than two hours each, talking about my comments
and observations on the trust industry.
2
Assessment by
the TRUST GURU
• The focus of the new issuance is not Living Trusts
but Living Trust Accounts.
• The intention is to give guidelines in order to
qualify an account as a Living Trust in the
Manual of Accounts for trusts.
• The substantive nature of a Living Trust is not
affected. What is sought to be achieved is the
unmasking of deposits masquerading as
trusts.
• The honest-to-goodness Living Trust is
still alive and well.
Thank You
For related topics:
www.thetrustguru.com