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A trust for all in the family

  

(Article published in the Mar 22, 2006 issue of Manila Standard Today)

Many years ago, during the open forum after my talk on the then recent developments in the law on "Trust Functions and Allied Undertakings" at the 1st Institute on Banking Laws conducted by the UP Law Center, a difficult question was asked by Atty. Eulalio Menla, Jr., then connected with the trust department of Veterans Bank. Atty Menla asked, "How would you size up the stage of development of trust business in our country?" I found the question difficult because at that time I had no more than three years of actual practice in Philippine trust law.

Consequently, instead of answering, I thought it the better part of pride and prudence to pass the question to one in the audience more experienced than I was. I thus called on Atty. Lauro J. Jocson, by then though still in his youth, had already served the trust industry as president of the Trust Officers Association of the Philippines. Larry Jocson willingly took up the cudgels for me.

Last Thursday on the occasion of the trust industry’s celebration of Trust Consciousness Week, Larry had his revenge. As the open forum after my lecture on "Living Trust" was about to end, he walked to the mike and asked me a more difficult one.











The time available did not permit a long reply and my short and stummered answer, I am sure, did not do justice to the depth of his query. Thus, I am devoting this space today to responding to the question that the now Grand Old Man of the Philippine Trust Industry, just raised.

Larry asked, whether or not, under Philippine law, a person is permitted to set up in the country an irrevocable living trust for his or her spouse. In the United States and in most other common law countries, trusts for spouses are commonplace.

The question at first sight seems simple enough, but the simplicity of Larry’s formulation hid the complex interplay of the legal and business issues underneath. In the first place, it is hornbook Trust to say, as I did in my presentation last week, that an irrevocable living trust is in the nature of a gift to the beneficiaries. Consequently (and this often dampens enthusiasm for this type of trust arrangement), the establishment of such a trust normally attracts liability for the donor’s tax under the National Internal Revenue Code.

In addition, the irrevocable trust, precisely because it is a gift, is thus also made subject to the restrictions on gifts found in the Civil Code. Incidentally, that body of law is officially still called the "New Civil Code" even if it had been in effect since 1950.

One of those restrictions is the provision that declares void every donation between spouses during their marriage, except gifts mortis causa and moderate gifs on occasions of any family rejoicing (Art. 133).

But experience shows that the surviving spouse, in many cases, is in most need of a trust arrangement. Death of one of the spouses comes, usually, at a late age, when working for a living by the sweat of one’s brow or brawn is no longer a viable option. Medical bills are enormous; expenses of keeping aging body and tired soul together come more frequently than before.

Is a prudent estate planner thus consigned by Philippine law to make provisions for the surviving spouse, as he must, only through a will, or a testamentary trust, which takes effect upon the testator’s death? This option, however, has the major set back of involving an additional financial burden. Property passing upon the death is usually subject to the estate tax. And the estate tax is far more expensive than the donor’s tax due on an irrevocable living trust. What, then, can a trust officer, recommend to his client?

I suggest the use of a family trust. "Family trust" is not a legal term, like a nominate contract with its own set of standard rules, such as, pledge, mortgage, sales, etc. It is instead a descriptive term referring to a particular type of living trust (which is the legal term) set up by a person primarily in favor of beneficiaries who are members of his family. Carefully crafted, a family trust, I submit, can successfully navigate around the shoals just beneath the surface of Philippine law that wait in ambush for the reckless or unwary.

The person who creates the family trust is typically the head of the family. Officially, he is known in the Philippines as the trustor (Art. 1440); but in other places, as grantor, settler, or even creator. Recently, I found trust literature in New Zealand referring to him (undoubtedly without the pejorative connotation attached to the term by Philippine media) as "instigator."

Though usually created by the head, the family trust I recommend to address Larry Jocson’s concern is best created, in the light of our conjugal and community property law and culture, by both spouses using as trust principal or trust res property owned in common.

The beneficiaries of a family trust are naturally limited to members of the trustors’ immediate family and their children. And generally the purposes for which the trust is created is the comfort, support, maintenance, education, and medical needs of the beneficiaries. Because of this focus on basic needs, the arrangement is sometimes called also as a support trust.

The objectives of a family trust can, of course, conceivably be achieved by setting up as many separate trusts as there are beneficiaries; but a one-for-all family trust has the advantage of the economies of scale. Centralization of management and backroom work, such as accounting and record keeping, makes for efficiency in administration. Investment management fees, which are usually charged on a decreasing scale (opposite of the graduated rates in the income tax, for instance), are moderated, if not reduced considerably. And, of course, a larger pool of funds is easier to diversify for safety and flexibility than smaller separate funds.

Against these benefits, however, is the vulnerability of the family trust to inter-beneficiary squabbles and jealousies. These intra-family disputes come generally after both parents have died and most commonly when the children have started going their separate ways and pursuing divergent, if not conflicting, long term personal and family objectives of their own.

These challenges, though difficult, are not insurmountable, however. Greater attention to detail in the planning of the structure of the trust both in operation as well as distribution and a more careful drafting of the trust agreement can often prevent family feuds. That is where we estate planning practitioners are expected to help out.

I have no doubts that a family trust which is set up by both parents for primarily their own support and maintenance, for the duration of their lives and the life of the survivor of them, and then, for that of their children and their respective families, will very well pass existing standards in trust law and regulation. In fact, it fits to a "T" the norms that the Bangko Sentral ng Pilipinas (BSP) is looking to require of Living Trusts.

The minimum entry amount (Php 100,000 if invested only in deposits and Php 500,000.01 if investment flexibility is desired) is affordable to the trust industry’s market for estate planning. The parents as joint trustors is within the new circular’s limits and their inclusion together with their children as beneficiaries comply with the BSP’s desire to engender true settlement trusts. Of course, support is number one of the accepted reasons for the living trust arrangement.

It is also my submission that making the parents joint trustors and at the same time primary beneficiaries in a family trust effectively hurdles the legal prohibition discussed earlier against conjugal gifts. Since mutual support is the primary purpose, it can be successfully argued that the transaction, far from being a gift of the spouses-trustors to each other, is, instead, a straightforward method of complying with the spouses obligation to mutually help and support each other (Art. 109). That the trust res is their conjugal or community property further buttresses the legal proposition since the mutual support of the spouses and of the immediate members of their family is exactly what the common ownership of property by the spouses is supposed to serve.

I could not help but notice, after the last question was asked at last Thursday’s open forum, that, judging from the turn-out and the interest evidenced by the questions of non-trust practitioners in the audience, trust business in our country has indeed come a long way since 1974. No doubt credit is due to the persistent efforts of the mother-and-child institutions, Trust Officers Association of the Philippines and its educational arm, Trust Institute Foundation of the Philippines.

If today Atty. Menlo’s query is thrown my way, I will find no need to once again duck as I did 32 years ago. My ready response will be a quote from Larry Jocson’s response: "We may not have reached the stage of development in foreign countries like the United States for instance, but more and more people are getting conscious about trust business. I would say we have improved a lot."

       

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