(Article published in the Dec 27, 2006
issue of Manila Standard Today)
In this season of feasting and celebrating, I propose a toast to the
coming, if it has not come yet by the time this item gets into print,
circular of the Bangko Sentral ng Pilipinas
amending the guidelines it previously issued on living trusts.
The most significant aspect of this amendatory circular on living
trusts is that it is the result of a dialogue conducted in good faith by
the regulators and the regulated. May
we have more such fruitful exchange of views and sentiments in the coming
On 21 March 2006, the Bangko Sentral issued Circular No. 521 pursuant to
Monetary Board Resolution No. 227 dated 23 February 2006.
The purpose of the circular was to set forth the standards which a
living trust arrangement must comply with in order not to be subjected to
reserves. As pointed out in
an earlier column I had written in anticipation of that issuance (January
25, 2006 issue of The Manila Standard Today), the set of new guidelines on
living trusts was a dot in a long line of attempts by the Bangko Sentral
(such attempts even dating back to when BSP was still known as the
“Central Bank”) to frustrate deposits arrangements from masquerading a
There was a need to draw a line between the two classes of relationships
with banks with a trust license since deposits are a bank’s actual
liabilities duly accounted for in its balance sheet (hence, “on
books”) while trust accounts are contingent accounts which do not go
into the computation of the bank’s resources and obligations, (hence,
“off-books”). From this
main distinction flows a whole set of different regulations relating
separately to both and regulators insists that, to borrow a phrase from
Rudyard Kipling, “ne’er the twain shall meet.”
After all, when a
person makes a deposit, he is doing business with the bank. When he,
on the other hand, enters into a trust relationship, he asks the bank to
do business for him.
When Circular No. 521 was issued, it was met with a collective cry and hue
from the trust industry. The standards set were perceived to be too strict and the
consequence of not meeting them, i.e. the need to set up reserves as if
living trusts were deposits, was seen as unduly burdensome to the personal
trust business. Fortunately,
both the regulator and the regulated had enough openness in themselves and
trust in each other to reach an acceptable middle ground, “in [the]
medio” where says Horace, “stat virtus.”
The first amendment to Circular No. 521 is to be found in the definition
of a Living Trust, for purposes of the Manual of Accounts.
It will henceforth be: “Living
Trust is defined under the Manual of Accounts for Trust as a PERSONAL
trust created by Agreement.”
The addition of the word “personal” limits the no-reserve treatment to
those trusts established by individuals intended for their private
benefit, including those of the trustor’s family.
Falling under this category would be trusts created as part of an
estate plan, trusts for wealth management, trusts for asset protection,
and, generally, trusts for family maintenance and support.
The major amendments are found in the additional standards under Section 2
of Circular No. 521. First,
on the matter of the size of the account, both at the start and during its
existence. The old rule
provided for (a) a minimum initial amount of P100,000.00 and required
investments of accounts less than P500,000.00 to be only in deposits.
This was intended to strike against accounts which are really time
deposits by treating them as time deposits.
Unfortunately, the unintended effect was to also prevent small
personal trusts in investing in instruments created by the government
itself intended for small investors, such as the Retail Treasury Bonds.
Under the amendments, Php 100,000 is
going to be both a minimum entry and maintaining balance requirement.
However, in addition to being invested in deposits, living trust
accounts with balances of up to P500,000.00 may also be in government
securities. That should make
National Treasurer Omar Cruz happy for the new year.
The second change deals with the ticklish issue of termination.
Undoubtedly, a living trust’s strong point is its flexibility,
particularly the need to meet the financial requirements of the
beneficiaries when and as they occur.
However, it is difficult to determine when a capital withdrawal is
due to a bona fide need on the part of the beneficiaries, or, just a
subterfuge for a placements being terminated in accordance with the terms
agreed upon in a “side letter” or mutual understanding at the start of
To plug this loophole, Circular No. 521 established a minimum holding
period of 6 months and permitted a reversion of the property to the
trustor only upon termination. The
unwanted import of this remedy was to severely restrict the flexibility of
the trust. For example, how
is the trust bank to respond to a need of the beneficiary (who could be
the trustor himself, if he is one of many beneficiaries) within the
minimum period? On the one
hand, the terms of the trust require he makes a payment; on the other,
Circular No. 521 prohibits payment without the trust meeting dire
In such a situation, payment to the needing beneficiary (if so authorized
by the dispositive provisions) will be permitted.
Such a payment, however, should not effectively result in
exhausting, or nearly exhausting, the trust corpus.
In any case, the remainder must be no less than the maintaining
What if the situation of the beneficiary really required the payment of
all of the principal pursuant to the dispositive provisions within the
minimum holding period? In
that case, the likelihood is that the living trust was not, in the first
place, suited to the trustor. What
he really needed was a time deposit, and so, even if he and the bank
erroneously entered into a trust relationship, the arrangement will be
treated, for reserve purposes, as a deposit.
This removes all incentive for the trust marketers to fool around
with the trust concept.
And just to make it plain and unequivocal, I suppose, a separate paragraph
in the amendatory circular states:
“Any living trust account that does not meet the requirement on the
minimum entry and minimum maintaining balance or is not invested in
qualified outlets shall be considered as other fiduciary accounts subject
to applicable reserve and other requirements.”
The third and last major change in the rules relates to unrelated trustors.
Circular 521 originally provided only for joint accounts of
trustors only if they are related and only if so related up to only the
second degree of consanguinity or affinity.
This is relaxed by the amendatory circular.
Even those who are not related as well as those related but beyond the
second degree may still open joint living trusts, provided that each of
them contributes at least Php 100,000 each and that the living trust is
established for a common purpose. An
example of such a living trust would be one set up by business partners to
fund a cross-purchase agreement. Essentially,
under such a trust between two unrelated (in terms of blood or affinity)
partners in business, the parties agree that (a) the trust res would be
vested upon the death of one on the survivor, provided that the survivor
is compelled to buy and the estate of the earlier to die is compelled to
sell, based on an agreed formula, the decedent’s share in the business.
This is an estate planning tool which I recommend to business
partners in a non-listed business.
To enable the trust industry to adjust to the latest guidelines, another
period of six (6) months was added to the original transitory period under
Circular no. 521. A trust
account not find compliant by the lapse of this extra period will be
considered as Other Fiduciary Accounts subject to applicable reserve
The foregoing changes in Circular No. 521 should be sufficient to meet most, if not all, of the concerns that trust industry raised in March 2006. If this spirit of cooperation between regulator and regulated continues in 2007, the greatest beneficiary, of course, is the country’s trust clientele.