TYPES OF TRUSTS IN THE PHILIPPINES There are many types of trusts that can be used to accomplish accomplish a variety of objectives. In the Philippines the four main types of trusts that are most useful are the family trust, the assets protection trust, the insurance trust and the business trust. The following is an overview these trusts. FAMILY TRUST: TRUST : A Family Trust is an eceptionally useful device that can give considerable con siderable fle fl eib ibil ilit ity y to es esta tate te pl plan anni ning ng and may sa save ve mo money ney at th the e sa same me ti time me.. Typic pical ally ly,, a Fa Fami mily ly Tru rust st is cr creat eated ed to av avoi oid d pr proba obate te,, pr prov ovide ide as asse sett management and in some cases, asset protection. The th thre ree e pa part rtie ies s to th the e Fa Fami mily ly Trus ustt ar are e the gr gran anto torr, tru rus ste tee e an and d beneficiary. The grantor !sometimes referred to as the settlor or the creator" is the perso per son n wh who o cr creat eates es th the e Fam Famil ily y Tru rust st## th the e Tru rust stee ee !w !whi hich ch ca can n be th the e grantor", is the person who is responsible for managing the Family Trust asset ets s
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beneficiary!who can also be the grantor" is the party for whom the Family Trust was created. In the case of the typical Family Trust, the grantor would name himself or herself as the income beneficiary, sometimes as the trustee, while their heirs are named as the remainder beneficiaries. %ne big advantage of a Family Trust is that it can protect the grantor by allowing the grantor to appoint a co&trustee or to provide for a successor trustee to manage the Trust$s Trust$s investments in the event of incapacity .
'anaging one$s own property while you are well and vigorous may be the most attractive option for most individuals. (owever, how do you ensure continuity in the management of your assets if illness or injury were to stri)e, leaving you unable to continue the management your assets. This *uestion is answered by having a family trust that continues to manage trust assets and most often avoid the need for a guardianship. Another advantage of a Family Trust is avoidance of probate. If you own property in your own name such as real estate, ban) accounts, etc., in the Philippines, the +.. or elsewhere in the world, these assets will be subject to probate. This represents etra cost and delay to settle your estate. Fortunately, a probate proceeding would not be re*uired where these assets are held by a Family Trust. This, in turn, reduces the epense to settle the trust estate and delays in distributing assets to distributees of the estate. The Family Trust can be designed to distribute assets directly to beneficiaries or to continue to hold these assets in trust for the beneficiaries for a stated period of time or the life of the beneficiary. A common feature of many Family Trusts is for the assets to be held for the life of the grantor, then for the life of the grantor$s children and then distributed to grandchildren. If the grantor so desires, the children could be giving the power to have the trust assets to continue be held in trust for their children. ASSET PROTECTION TRUSTS: Asset protection Trusts come in many forms. They can be domestic or foreign, self&settle or third&party trust. All are irrevocable.
It is the language used in the drafting of the trust that gives it the asset protection feature. Typically the trust will contain a spendthrift clause and a discretionary clause for distribution of income and-or principal, plus additional provisions that will ma)e it difficult for a creditor to reach the trust$s income and corpus. This type of trust is popular with individuals that wish to protect themselves or their children from creditors, lawsuits, claims of e&spouses and just plain bad judgement or luc). For business persons, an asset protection trust is often used to protect their personal assets from business debt or a business deal gone bad. In the case of the grantor$s children, an asset protection trust is most often used to protect their children from the three $s / divorce, death, and disaster. Two important clauses to include in an asset protection trust are the spendthrift clause and the discretionary distribution clause. The spendthrift clause does not limit the beneficiary rights to income and-or principal, pursuant to the terms of the trust agreement, but it does eplicitly prevent the trust beneficiary from assigning the future payments of income or distributions of principal. 0ecause beneficiaries can$t assign their interest in trust income and assets, creditors are prohibited from reaching the trust$s income and-or principal. The discretionary distribution clause protects trust assets by giving the beneficiary no direct rights in the trust income or assets that can be assigned or attached.
istributions from the trust are subject to the sole discretion of a trustee to or not distribute income and-or principal. The protection from creditor$s claims afforded by the discretionary clause derives from the widely recogni1ed rule of law, that where a beneficiary has no right to compel distribution, a creditor has no right to compel a distribution of the beneficiary$s interest in the trust. %ne way to loo) at an asset protection trust, is to thin) it as an insurance policy. There are many types of insran!e yo !an "y: 0ut you can$t buy insurance to protect your assets from such events as a business deal gone bad, just plain bad luc), claims of creditors that eceed your liability insurance coverage and e&spouses. 2o matter how careful you are, events beyond your control can epose your assets to claims that can wipe you out financially. An asset protection trust may not prevent the claim against you, but it can prevent a creditor from ta)ing the assets held by your asset protection trust to satisfy the creditor$s claim. LIFE INSURANCE TRUST: +nder +.. ta law if you own, have an interest in, or control over an life insurance policy, the death proceeds of the policy are subject to estate taes. Philippine ta law is a little more liberal. +nder Philippine estate ta rules, life insurance proceeds are included in the taable estate to the etent of the amount receivable by the estate of the deceased, his eecutor, or administrator, as insurance under policies ta)en out by the decedent upon his own life, irrespective of whether or not
the insured retained the power of revocation, or to the etent of the amount receivable by any beneficiary designated in the policy of insurance, ecept when it is epressly stipulated that the designation for the beneficiary is irrevocable. A popular planning techni*ue to avoid life insurance proceeds from being subject to estate taes is to have a trust own the life insurance policy that receives life insurance proceeds upon the death of the insured. This removes the life insurance proceeds from the deceased insured$s taable estate and can be etremely useful planning techni*ue for providing estate li*uidity For eample, assume an estate consists mainly of assets of a family business, such as land, buildings, e*uipment, etc. that are necessary to continue the family business. 2ot all of the decedent$s children are interested in being part of the family business. An insurance trust could be designed to provide the cash to buy out the children not interested in the business, while the children interested in the business receive the business assets. Typically, the children that want to continue the business are the beneficiaries of the insurance trust. +pon the insured$s death, the insurance trust would receive the insurance proceeds, which would be used to buy the business assets from the estate !which could be a family trust". The end result, the children that want to run the family business will own the business assets in trust !thin) asset protection" for their benefit, which they can continue to use in the business, while the children not interested in the business would receive cash.
This techni*ue can also be used to provide a surviving spouse with cash, while the children get the property. There are many variations of how an insurance trust can be used to provide li*uidity for business succession planning or the needs of heirs. #USINESS TRUST: All trusts that hold assets are in a sense, a business trust due to the management and investment of trust assets. (owever, some trusts are specifically designed to create or ac*uire a business. 3hatever the purpose, business trusts have been around long before corporations became the common business entity format. Trusts were being used prior to 4564 when the tatute of 7li1abeth was passed in 7ngland. The tatute of 7li1abeth forms the basis of much of the trust law found around the world in 7nglish spea)ing countries today. In 2ew 8or), large sections of 2ew 8or)$s trust law is ta)en word for word from the tatute of 7li1abeth$ o, it can be said,Trusts are not the new )id on the bloc The business trust made its debut in 'assachusetts, +A, in 496. As a result, many business trusts are referred to as a 'assachusetts Trust. The +.. upreme ;ourt has defined the 'assachusetts Trust as a form of business organi1ation where property is conveyed to the trustee in accordance with the terms of the trust agreement, to be managed for the beneficiaries of the trust. In essence, a business trust is your typical trust with a different label identifying it as a business trust due to its main purpose to carry on a business.
The business trust originated in 'assachusetts as a result of negative laws prohibiting the development of real estate without a special act !permission" of the tate. As the laws became more liberal and it was easier to form a corporation, the corporation replaced the business trust as the business entity of choice for most business, but not all. For eample, many mutual funds, money mar)et accounts, I
