“Estate planning is an important and everlasting gift you can give to your family.”
– Suze Orman, New York Times #1 Bestselling Author
By Realttorney®
Estate planning is a crucial aspect of every Filipino’s financial and personal affairs. It involves the preparation and management of one’s assets during their lifetime and the distribution of those assets after they pass away. However, despite its importance, many Filipinos still overlook the need for proper estate planning, often leaving their families and loved ones with significant legal and financial challenges.
One critical tool that many Filipinos may not be aware of when it comes to estate planning is the use of trusts. Loosely defined, a trust is a legal arrangement where assets are transferred to a separate entity whereby a trustee is identified, who is then responsible for managing and distributing those assets according to the terms and provisions of the trust agreement. Although trusts are commonly used in other countries, they remain a relatively foreign concept to many Filipinos.
At its core, a Trust is a fiduciary relationship established between a Trustor (or Settlor) and a Trustee. The Trustor creates the Trust by transferring assets to a Trustee, who is appointed to manage those assets for the benefit of the designated Beneficiaries named in the Trust.
The Trustee is responsible for ensuring that the assets in the Trust are properly managed and protected on behalf of the Beneficiaries. As such, the Trustee has a fiduciary obligation to act in the best interests of both the Trustor and the Beneficiaries. This fiduciary obligation requires the Trustee to act with the highest level of care and diligence in carrying out his/her duties.
Essentially, the Trustee must operate not just as a “good father of the family,” but as a responsible and diligent custodian of the assets in the Trust. The Trustee must always act in good faith and carry out their responsibilities with the utmost care and attention, to preserve the Trust that has been placed in them by the Trustor and to protect the interests of the Beneficiaries.
This article aims to persuade Filipinos to consider using trusts as an estate planning tool, highlighting its benefits, dispelling common misconceptions, and addressing common concerns.
Benefits of Using Trusts in Estate Planning
One of the primary benefits of using trusts in estate planning is that it allows for better control and management of assets. The Trustor, also known as the grantor or settlor, can set specific instructions on how their assets are managed and distributed, providing greater flexibility and control than traditional estate planning methods. This is particularly useful for individuals who have complex family relations or dynamics, business interests, or charitable objectives.
Another significant benefit of trusts is that it helps to avoid probate. Under our Law on Succession, a Last Will and Testament must be probated before a court for its validity to be recognized prior to the distribution of the estate to the compulsory heirs, devisee, and legatees named therein. This can be a costly and time-consuming process, as it involves legal fees and potential delays in the distribution of the assets to the heirs.
By contrast, using a Trust can avoid the need for probate entirely. Therefore, assets can be distributed more efficiently, and beneficiaries can receive their inheritance without the need to go to court. But how is this possible?
When assets are transferred to a Trust, they become the property of the Trust and are managed by the Trustee for the benefit of the designated Beneficiaries. Since the Trust is a separate legal entity, the assets held in Trust can be distributed to the Beneficiaries without the need for court intervention.
But it must be remembered that the legitime of the compulsory heirs must be respected and cannot be burdened with any condition. This means that the Trustor must ensure that the rights of compulsory heirs are respected and that they receive their minimum entitlements.
The Trust Deed or Trust Agreement is the crucial document that outlines the Trustor’s instructions regarding who should benefit from the Trust, when and how they should receive those benefits, and under what conditions. If the Trust holds hard assets, the Trustor must also specify what those assets are and how they should be distributed. Similarly, if the Trust holds cash, the Trustor must specify how much each Beneficiary is entitled to receive.
Overall, the Trust Deed or Trust Agreement serves as a critical blueprint for the Trust and should be drafted with the utmost care and attention to detail. By specifying his/her wishes in a clear and comprehensive manner, the Trustor can ensure that his/her assets are managed and distributed in accordance with their desires, while also protecting the rights of their heirs.
So, after the Trustor passes away, the Trustee is responsible for implementing the distribution of assets to the Beneficiaries according to the Trustor’s instructions. In most Trust arrangements, the Trustor has the option to appoint a Protector or Overseer, who is typically a trusted family member or a close family friend. The Protector’s role is to oversee the Trustee’s actions and ensure that they are fulfilling their fiduciary obligations to the highest degree.
By appointing a Protector, the Trustor can provide an additional layer of oversight and ensure that the Trustee is acting in the best interests of the Beneficiaries. The Protector serves as an independent voice and can intervene if the Trustee is not fulfilling their obligations, thereby providing an additional level of protection for the Beneficiaries.
Overall, the role of the Trustee and Protector is critical in ensuring that the Trustor’s wishes are carried out in accordance with their instructions. By appointing trusted individuals to these roles, the Trustor can have peace of mind knowing that their assets will be managed and distributed with the utmost care and attention.
All told, a Trust can provide significant benefits to those who are looking to protect and manage their assets in a more efficient and cost-effective way. By using a Trust, individuals can ensure that their assets are distributed according to their wishes without the added burden of a lengthy and costly probate proceeding.
In addition to the two benefits already discussed, trusts can also provide tax advantages for estate planning. Depending on the type of trust and the individual’s specific circumstances, a trust can help to minimize or eliminate estate taxes and reduce donor’s taxes.
What are the types of trust available to estate planners? A Trust can be revocable or irrevocable. Although they may share some similarities, there are significant differences between the two. Here are the three main differences:
Control. The most significant difference between a revocable trust and an irrevocable trust is the level of control that the trustor has over the assets in the trust. With a revocable trust, the trustor retains full control of the assets and can modify or revoke the trust at any time. In contrast, with an irrevocable trust, the trustor relinquishes control over the assets and cannot make changes or revoke the trust once it is established.
Tax implications. The tax implications of each type of trust are also different. With a revocable trust, the trustor continues to be the owner of the assets in the trust, and any income generated by the trust is taxed as the trustor’s personal income. In contrast, with an irrevocable trust, the trustor is no longer the owner of the assets, and the income generated by the trust is taxed separately from the trustor’s personal income. Additionally, assets placed in an irrevocable trust are typically exempt from estate taxes, while assets in a revocable trust are not.
Creditor protection. Another key difference between revocable and irrevocable trusts is the level of protection they offer against creditors. With a revocable trust, assets in the trust are not protected from creditors since the trustor retains control over them. In contrast, with an irrevocable trust, assets in the trust are typically protected from creditors since the trustor no longer owns them.
Common Misconceptions About Trusts
Despite the benefits of using trusts in estate planning, many Filipinos still have misconceptions about trusts that prevent them from using them as a tool for their financial and personal affairs. Below are some of the common misconceptions about trusts and why they are not entirely accurate:
Trusts are only for the wealthy. One of the most common misconceptions about trusts is that they are only for the wealthy. While it is true that trusts can be a useful tool for high-net-worth individuals, they can also be beneficial for individuals with more modest estates. A trust can help to avoid probate, minimize taxes, and provide greater control over how assets are managed and distributed, making it a viable option for individuals with a wide range of asset levels.
Trusts are complicated and expensive to set up. Another common misconception about trusts is that they are complicated and expensive to set up. While it is true that trusts can be more complex than traditional estate planning methods, they do not have to be overly complicated or expensive. There are various types of trusts available, each with its own set of rules and requirements. By working with an experienced estate planning attorney, individuals can find a trust that meets their specific needs and budget.
Trusts are only for the distribution of assets after death. A third common misconception about trusts is that they are only useful for the distribution of assets after death. While trusts are commonly used for this purpose, they can also be used for a variety of other purposes, such as protecting assets from creditors, managing assets for minor children, and providing for individuals with special needs.
Addressing Common Concerns About Trusts
Despite the benefits of using trusts in estate planning, many Filipinos still have concerns about using trusts as a tool for their financial and personal affairs. Below are some of the common concerns and how they can be addressed.
Loss of Control. One of the main concerns individuals have about trusts is that they will lose control over their assets. While it is true that assets are transferred to an entity controlled by a trustee, the trust creator can set specific instructions on how those assets are managed and distributed. The trust creator can also serve as the trustee, providing greater control and flexibility over how the trust is managed.
Trusts are Irrevocable. Another concern individuals have about trusts is that they are irrevocable, meaning that they cannot be changed once they are established. However, there are various types of trusts available, some of which can be changed or terminated if circumstances change. For example, a revocable living trust can be changed or terminated by the trust creator at any time during their lifetime.
Lack of Understanding. Finally, one of the biggest concerns Filipinos have about trusts is simply a lack of understanding. Trusts are still a relatively foreign concept to many individuals, making it difficult for them to understand how they work and whether they are appropriate for their specific circumstances. By working with an experienced estate planning attorney, individuals can gain a better understanding of trusts and how they can be used in estate planning.
Call to Action
In conclusion, trusts can be a powerful tool for estate planning, providing greater control, flexibility, and tax advantages compared to traditional estate planning methods. While the concept of trusts may be foreign to many Filipinos, it is important for individuals to consider the benefits and explore whether trusts are appropriate for their specific circumstances.
If you are considering using trusts in your estate planning, it is essential to work with an experienced estate planning attorney who can guide you through the process and help you choose the right type of trust for your needs. With the right guidance and information, you can ensure that your assets are managed and distributed according to your wishes, providing greater peace of mind for you and your loved ones.
So, take the first step towards securing your financial and personal affairs today by exploring the benefits of trusts and discussing your options with an estate planning professional.
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Atty. Jojo is a real estate attorney, an estate planning attorney, a licensed real estate broker, and a PRC-accredited Lecturer/ Speaker for Training Programs in Real Estate. He is a Chartered Trust and Estate Planning (CTEP®) professional who is committed to educating Filipinos about the value and importance of having an estate plan in their lives.
Realttorney® 