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Trust services in these times of crises

(Article published in the Feb 18, 2009 issue of Manila Standard Today)

This coming week-end, Feb. 20 to 22, the members and officers of the Trust Officers Association of the Philippines (TOAP) go to Boracay for their annual get-together.  Boracay is their, as well as others’, favorite get-away venue, and the beautiful island, on account of its just the right blend of physical challenges and hotel comforts, is the suitable venue for them or any similar hardworking group to recollect and regenerate relationships.

I remember being in Boracay with the officers and members of the TOAP during the same yearly affair roughly fifteen years ago, when most of the industry’s present leaders were still in High School, if not primary grades.  The mood was very festive then (by law and nature, no tourist, domestic or foreign, is permitted any other); but there were serious whispers passed around as the conference wore on about some sort of weather disturbance brewing in the banking system.  The following Monday, I was called by my boss, Dick Romulo, to join a command conference to be briefed about the exposure to the Bancap scam of one of our major banking clients.

 The trust industry had come a long way since then.  In 1995, the total assets managed by the industry, per figures submitted to the BSP, amounted to Php 262,963,597.00.  By the end of last year, each of the top two trust departments in terms of assets managed had surpassed that amount, based on their published Statements of Condition for year end 2008. First placer Banco de Oro recorded Php 311,042,090,888.52; Bank of the Philippine Islands, for its part had Php 265,261,455,520 in its Statement of Condition.


I had hoped to be able to join the TOAP outing this year and had committed to the organizers, in exchange for free board and lodging and some beer, to do some public musing on what the trust industry could offer its clients in these times of global financial meltdown. I have, after all, seen the industry go through the previous similar crises that had swept through the country, but, matters of more serious concern at my domestic post, foreclosed the expectation.  Hence, this feeble attempt to be with them in spirit by suggesting some new services and tweaking of some traditional ones in response to the financial difficulties everyone is facing.

 Trust services have heretofore been focused on assets: acquiring, conserving, utilizing, managing, and transferring assets.  In fact, some sort of departmental identity confusion has emerged in banks which also have units dedicated to their clients’ asset management requirements.  With the value of assets that the trust industry is taking care of expected to go on heading south, new areas ought to be explored that could utilize the resulting excess expertise of the managers. 

 I suggest Liability Management.  Most individuals, families and corporate entities, did not expect their current difficulties.  While there had been warning signs, many were recognized only in hind-sight and the common wisdom was that we would escape the storm, or at least not be at the center of it.  As it turned out, while it remains true that we are not in Ground Zero, still the impact on the country was by most underestimated.  Hence, the liability side of our personal and corporate balance sheets mostly contains items which were incurred and committed to during the recent better times.

 Clients of trust departments would therefore appreciate receiving advice and assistance in coping up with the resulting mismatch between their current ability to meet their liabilities and what they had thought it would be when the obligations were contracted or otherwise incurred.  The task, of course, is not new. Many of our senior bankers have had actual experience in the restructuring frenzy that occurred in the early ΄90s as well as in the dying days of martial law in the mid ΄80s.

 In addition to helping clients manage their existing liabilities, trust departments could also think of showing them how to avoid unwanted liabilities or claims against their assets.  Many heads of families, even in better times, have been expectedly confronted by creditors of their children who call on them to make good the financial obligations of their scions.  To protect the family name, padres de familia have been known to have had no choice but to dip into the family’s common assets.

 While charging the “forced” payment against the erring child’s inheritance share could be a practical remedy, such reaction is not without its limitations.  There are questions of present values of future inheritance expectations, emotional issues of favoritism, stern problems of family and personal discipline, etc. 

 A spendthrift clause in living trusts established for less financial responsible children could mitigate that risk to a certain extent.  A spendthrift clause is not common in the Philippines, but is a standard feature of trusts established abroad.  What a spendthrift clause essentially provides is protection against the beneficiary’s own inexperience, incompetence, wastefulness or gullibility.

 It prohibits a beneficiary from transferring his right to future payments of income and principal and renders his creditors unable to get their hands on his interest in the trust.  Only after the trustee has distributed income or principal to the beneficiary will the latter be free to spend it as he wishes and his creditors able to enforce payment of their claims.  Coupled with discretionary power on the part of the trustee to distribute or not any benefit from the trust prior to its termination, it ensures that property set aside by a parent for his child is preserved until the appointed time.

 Finally, the present level of depressed values of assets is an opportunity for substantial tax-savings for estate owners.  Trust departments might wish to assist their clients evaluate the suitability of their clients making transfers of property that attract taxes based on the value of the property transferred.

 For instance, making donations (in trust or outright) of depreciated assets ought to be attractive to estate owners.  An asset, which when donated in normal times, worth, say Php 5 million would have been taxed at Php404,000.  If those assets had by now gone down in value by 40% to Php 3 million, the resulting donor’s tax goes down by almost 50% to only Php 204,000.

 Even those not yet as decided on giving up their control and enjoyment of property as donors may also derive some tax benefit from today’s depressed prices.  They should consider transferring their value-challenged assets to a holding corporation that they control.  If they bite the small bullet by conveying their assets and paying either the final withholding tax on the assumed capital gains (applicable when real estate or shares of stock in non-listed corporations are involved) or the regular income tax (imposed on transfer of “ordinary” assets) to the holding corporation, the shares of stock they ought to receive in exchange therefore will be valued at par.

 When the business cycle goes north, and the assets of the holding company increase in value, the conveyor’s balance sheet will still carry the shares of stock at the same par value. Should the inevitable happen to the estate owner, or he should make up his mind as to who of his beneficiaries will inherit his property, at any time after the transfer to the holding corporation, his gross estate or the donor’s tax base will value the shares also at par. This is because the corporation is, as a general proposition, considered as having a separate taxing and juridical personality as its shareholders, mainly the conveyor.

 My message is that these times of crises need not put the trust industry practitioners in a state of paralysis.  Like the white sands of Boracay that beckon in good times and in bad, estate owners always have a need for a trust practitioner’s guiding hand.

 May my friends in the trust industry find both much-deserved solace and much-needed strength in the sea and sand of Boracay.  And if as expected, they take enough care and have sufficient prudence not loose themselves in the surf or stars, or suds, may they come back with skins smiling with the sun.