Trust Consciousness WeekTrust Consciousness Week16 March 200616 March 2006

The Living TrustThe Living Trustis alive and wellis alive and well

Reynaldo G. GeronimoReynaldo G. GeronimoPartnerPartner

Romulo Mabanta Romulo Mabanta BuenaventuraBuenaventura

Sayoc and De Los AngelesSayoc and De Los Angeles

Versatility of the trust Versatility of the trust devicedevice• trust “is an institute of great trust “is an institute of great

elasticity and generality; as elastic, elasticity and generality; as elastic, as general as contract.”as general as contract.”-Frederick William Maitland-Frederick William Maitland

• ““the purposes for which trusts can the purposes for which trusts can be created are as unlimited as the be created are as unlimited as the imagination of lawyers…The trust imagination of lawyers…The trust can be and has been applied as a can be and has been applied as a device for accomplishing many device for accomplishing many different purposesdifferent purposes” -” -Austin Wakeman Austin Wakeman ScottScott

Elements of a trust relationElements of a trust relation

• Trustor, or settlor, or grantor, or Trustor, or settlor, or grantor, or creator, or donorcreator, or donor

• Property, or trust res, or trust corpus, or Property, or trust res, or trust corpus, or principalprincipal

• Transfer, or conveyance, in trustTransfer, or conveyance, in trust

• Trustee, or fiduciaryTrustee, or fiduciary

• Purpose, or objectivePurpose, or objective

• Beneficiary, or Beneficiary, or cestui que trustcestui que trust

Who can be a trustor?Who can be a trustor?

• Generally: Anyone who has the legal Generally: Anyone who has the legal authority to perform the act needed to authority to perform the act needed to effect a valid transfer in trusteffect a valid transfer in trust

• Specifically:Specifically:

Testamentary trusts: 18 yrs + sound mindTestamentary trusts: 18 yrs + sound mind

Inter vivos, gratuitous orInter vivos, gratuitous or

for consideration: capacity to contractfor consideration: capacity to contract

What property can be put in What property can be put in trust?trust?

• All things which are or may be the All things which are or may be the object of appropriation (Art. 414), object of appropriation (Art. 414), whether real, or personal, or mixedwhether real, or personal, or mixed

• The property must be certain or definiteThe property must be certain or definite

• The property must be transferableThe property must be transferable

What is meant byWhat is meant by“transfer in trust”?“transfer in trust”?

• The settlor must “convey” his title over the The settlor must “convey” his title over the trust res and must clearly show that he trust res and must clearly show that he intended to create a trust.intended to create a trust.

• No particular words are required (Art. 1444).No particular words are required (Art. 1444).

• But if the trust res is real property, the But if the trust res is real property, the document creating the trust must be in a document creating the trust must be in a public instrument, i.e. notarized, in order to be public instrument, i.e. notarized, in order to be accepted as evidence (Art. 1443). To bind third accepted as evidence (Art. 1443). To bind third parties, it must be registered (Sec. 50, Act No. parties, it must be registered (Sec. 50, Act No. 496)496)

Who can be a trustee?Who can be a trustee?

• Any natural person, but aliens cannot be Any natural person, but aliens cannot be trustees of land in the Philippinestrustees of land in the Philippines

• Any juridical person, if so authorized by Any juridical person, if so authorized by their enabling charter: national or local their enabling charter: national or local governments, private corporations, governments, private corporations, partnershipspartnerships

• But, to engage in the business of trust, But, to engage in the business of trust, the trust entity must have a trust license the trust entity must have a trust license from the BSP (Sec. 79, Gen. Banking from the BSP (Sec. 79, Gen. Banking Law)Law)

What purposes may a trust What purposes may a trust pursue?pursue?

• Passive trust- objective is for trustee to be mere Passive trust- objective is for trustee to be mere title holdertitle holder

• Active trust- objective is for trustee to have Active trust- objective is for trustee to have affirmative duties of administration and affirmative duties of administration and managementmanagement

• Private trust- for the benefit of identified Private trust- for the benefit of identified personspersons

• Charitable trust- for the benefit of society as a Charitable trust- for the benefit of society as a wholewhole

• Not for illegal purposesNot for illegal purposes

For whom a trust may be For whom a trust may be made?made?

• Any person or group of persons who Any person or group of persons who have juridical capacityhave juridical capacity

• Excluded are persons who cannot Excluded are persons who cannot receive by donation or willreceive by donation or will

• Acceptance by beneficiary is Acceptance by beneficiary is necessary. But acceptance is necessary. But acceptance is presumed if no onerous condition is presumed if no onerous condition is imposedimposed

Common kinds of trustsCommon kinds of trusts

• As to mode of creation:As to mode of creation:– Testamentary trustTestamentary trust– Intervivos or living trustIntervivos or living trust

• As to the finality of transferAs to the finality of transfer– RevocableRevocable– IrrevocableIrrevocable– ReversionaryReversionary

• As to segregation of the trust resAs to segregation of the trust res– Separately or individually managed trustSeparately or individually managed trust– Participating trust in a “CTF”, now “UITF”Participating trust in a “CTF”, now “UITF”

More types of trustsMore types of trusts

• As to powers of the trusteeAs to powers of the trustee– Full DiscretionFull Discretion– Limited DiscretionLimited Discretion– Directory or directed Directory or directed

• As to rights of the beneficiaryAs to rights of the beneficiary– Spendthrift or protected trustSpendthrift or protected trust– Fully transferrable interestFully transferrable interest

• As to duration of the trustAs to duration of the trust– Short termShort term– Co-terminus with attainment of purposeCo-terminus with attainment of purpose

Why the special focusWhy the special focus on Living Trusts on Living Trusts

• BSP is about to issue a circular providing BSP is about to issue a circular providing “Guidelines on Living Trust Accounts”“Guidelines on Living Trust Accounts”

• This is in response to certain market This is in response to certain market behavior that is seen as systemic risk behavior that is seen as systemic risk generatinggenerating

• It is the latest move in the game of “hot It is the latest move in the game of “hot potato” among three parties: (a) the potato” among three parties: (a) the regulator of banks; (b) the regulated regulator of banks; (b) the regulated banks; and (c) the clients of the banks.banks; and (c) the clients of the banks.

Structure of the proposed Structure of the proposed CircularCircular

• Lays down what it takes for a relationship to Lays down what it takes for a relationship to be considered a “living trust” under the be considered a “living trust” under the Manual of Accounts for trustsManual of Accounts for trusts

• Governs the method of marketing the service Governs the method of marketing the service of being a trustee of a living trustof being a trustee of a living trust

• Allows for a transitory period for trust entities Allows for a transitory period for trust entities to reconfigure their current trust accounts to to reconfigure their current trust accounts to conform to the new requirements and conform to the new requirements and provides penalties for non-compliance provides penalties for non-compliance

General Criteria for trusts to be General Criteria for trusts to be qualified as Living Trustsqualified as Living Trusts

• Must be created by an Agreement and must be Must be created by an Agreement and must be operational during the lifetime of the trustor as operational during the lifetime of the trustor as soon as the Agreement is executed.soon as the Agreement is executed.

• Beneficiary must be trustor and 3Beneficiary must be trustor and 3rdrd parties or parties or 33rdrd parties only; not trustor only parties only; not trustor only

• Agreement must specify (a) purpose, (b) Agreement must specify (a) purpose, (b) nature and value of res, (c) trustee’s nature and value of res, (c) trustee’s investment powers,(d) names of beneficiaries, investment powers,(d) names of beneficiaries, and (e) terms of distribution of income and and (e) terms of distribution of income and principalprincipal

Specific Requirements-1Specific Requirements-1

• Size: minimum entry is Php 100,000. Size: minimum entry is Php 100,000. • Investment area of initial fund: Php Investment area of initial fund: Php

100,000 to Php 500,000-ONLY in deposits100,000 to Php 500,000-ONLY in deposits• Lock-up: 6 mos. If terminated before that, Lock-up: 6 mos. If terminated before that,

account must be closed and trustor account must be closed and trustor disqualified to open another one for one disqualified to open another one for one year.year.

• Reversion of “principal and/or income”–Reversion of “principal and/or income”–allowed only upon revocationallowed only upon revocation

Specific Requirements-2Specific Requirements-2

• Form: May be pre-printed, BUT, in that Form: May be pre-printed, BUT, in that case,the Purpose Clause and Dispositive case,the Purpose Clause and Dispositive Clause must be left blank and filled out by Clause must be left blank and filled out by client upon signing of Agreement.client upon signing of Agreement.

• Purpose clause- samples are provided.Purpose clause- samples are provided.• Dispositive clauseDispositive clause

– Terms and conditions must be clearly definedTerms and conditions must be clearly defined– Must also be coordinated with Purpose ClauseMust also be coordinated with Purpose Clause

Specific Requirements-3Specific Requirements-3

• Settlor/sSettlor/s– May be more than one in one AgreementMay be more than one in one Agreement– But, if so, must be related by consanguinity or But, if so, must be related by consanguinity or

affinity within the second degree affinity within the second degree

• MarketingMarketing– Bank proper personnel cannot market Living Bank proper personnel cannot market Living

Trust products or sign pre-printed AgreementsTrust products or sign pre-printed Agreements– Bank Managers/Officers may refer clients to Bank Managers/Officers may refer clients to

Trust Dept. and make short introduction of Trust Dept. and make short introduction of the products to clientsthe products to clients

Carrot and StickCarrot and Stick

• Carrot:Carrot:

Non-compliant living trust accounts have 3 Non-compliant living trust accounts have 3 months to complymonths to comply

• StickStick– After 3 mos. – non-compliant living trust After 3 mos. – non-compliant living trust

accounts will be TOFA, subject to reservesaccounts will be TOFA, subject to reserves– Violations of Circular- subject to Sec. 37 of R.A. Violations of Circular- subject to Sec. 37 of R.A.

No. 7653, the New Central Bank Act No. 7653, the New Central Bank Act

Assessment byAssessment bythe TRUST GURU

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• The impending circular is a mere stop-gap The impending circular is a mere stop-gap measure to arrest the migration of funds from measure to arrest the migration of funds from CTFs and UITFs pending completion of BSP’s CTFs and UITFs pending completion of BSP’s over-all review of trust regulations.over-all review of trust regulations.

• Last week, an international commercial law Last week, an international commercial law expert, Satish M. Kini, from the Washington expert, Satish M. Kini, from the Washington law firm, GOODWIN l PROCTOR, was here to law firm, GOODWIN l PROCTOR, was here to make an onsite study of our trust industry.make an onsite study of our trust industry.

• I must disclose that we had two sessions, of I must disclose that we had two sessions, of more than two hours each, talking about my more than two hours each, talking about my comments and observations on the trust comments and observations on the trust industry.industry.

Assessment byAssessment by

• The focus of the new issuance is not Living The focus of the new issuance is not Living Trusts but Living Trust Trusts but Living Trust Accounts. Accounts.

• The intention is to give guidelines in order to The intention is to give guidelines in order to qualify an account as a Living Trust in qualify an account as a Living Trust in the Manual of Accountsthe Manual of Accounts for trusts. for trusts.

• The substantive nature of a Living Trust is not The substantive nature of a Living Trust is not affected. affected. What is sought to be achieved is What is sought to be achieved is the unmasking of deposits masquerading the unmasking of deposits masquerading as trustsas trusts..

• The honest-to-goodness Living The honest-to-goodness Living Trust is still alive and well.Trust is still alive and well.

the TRUST GURU

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Thank YouThank You

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