In the Philippines, estate planning is governed primarily by the Civil Code of the Philippines (Republic Act No. 386). Proper planning ensures that a person's assets are distributed according to their wishes while minimizing potential family disputes and navigating the country’s strict "compulsory succession" laws.
Two primary tools used for this purpose are the Last Will and Testament and the Living Trust.
I. The Last Will and Testament
A Last Will and Testament is a legal document where a person (the testator) controls the disposition of their estate to take effect after death.
1. Important Legal Concepts
- Succession: The transmission of property, rights, and obligations to another through death.
- Legitime: This is the part of the testator's estate that the law reserves for compulsory heirs (e.g., legitimate children, spouse, parents). The testator cannot deprive compulsory heirs of their legitime without legal cause (disinheritance).
- Free Portion: The remainder of the estate after the legitimes have been set aside. The testator may give this portion to anyone they choose.
2. Types of Wills in the Philippines
The Civil Code recognizes two forms of wills. Both must be executed by a person of sound mind, at least 18 years of age, and not prohibited by law.
A. Notarial Will (Ordinary Will)
This is a formal document that must comply with strict legal formalities under Articles 804 to 808 of the Civil Code:
- Written Form: It must be in a language or dialect known to the testator.
- Subscription: Signed at the end by the testator or by someone else in the testator's presence and express direction.
- Attestation: Signed by at least three (3) credible witnesses in the presence of the testator and of one another.
- Marginal Signatures: The testator and witnesses must sign every page (except the last) on the left margin.
- Acknowledgment: The will must be acknowledged before a Notary Public.
B. Holographic Will
A simpler form of a will that does not require witnesses or notarization. To be valid, it must be:
- Entirely handwritten by the testator.
- Entirely signed by the testator.
- Entirely dated by the testator.
- Note: If any part is typed or signed by someone else, the entire holographic will is void.
II. The Living Trust (Inter Vivos Trust)
A Living Trust is a legal arrangement where a person (the trustor) transfers property to a trustee (which can be a person or a financial institution) for the benefit of designated beneficiaries.
1. How it Works
Unlike a will, which only takes effect upon death, a living trust is active during the trustor’s lifetime. In the Philippine context, these are often "Revocable Living Trusts," allowing the trustor to maintain control or dissolve the trust at any time.
2. Advantages of a Living Trust
- Avoidance of Probate: Assets in a trust do not usually pass through the court-supervised probate process, allowing for faster distribution.
- Privacy: A will becomes a public record once filed in court. A trust agreement is a private contract.
- Management: It provides a mechanism for asset management if the trustor becomes incapacitated.
- Tax Efficiency: While still subject to estate taxes upon the death of the trustor (if revocable), it can simplify the settlement process and potentially reduce administrative costs.
III. Key Differences: Will vs. Living Trust
| Feature | Last Will and Testament | Living Trust |
|---|---|---|
| Effectivity | Takes effect only after death. | Takes effect during lifetime. |
| Court Involvement | Must undergo Probate (judicial process). | Generally avoids probate for assets held. |
| Publicity | Becomes a public document in court. | Remains a private agreement. |
| Formalities | High (witnesses, notary, or strictly handwritten). | Contractual (Trust Agreement). |
| Control | Testator keeps ownership until death. | Trustee holds legal title; Trustor holds beneficial interest. |
IV. The Process of Estate Settlement
1. Probate of the Will
In the Philippines, "no will shall pass either real or personal property unless it is proved and allowed in accordance with the Rules of Court." This means the heirs must file a Petition for Probate in court to:
- Verify the identity of the testator.
- Ensure the will was executed without duress or fraud.
- Confirm the formal requirements of the law were met.
2. Payment of Estate Tax
Under the TRAIN Law (Republic Act No. 10963), the estate tax is a flat rate of 6% based on the value of the net estate. This must be paid to the Bureau of Internal Revenue (BIR) before titles to land or shares of stock can be transferred to the heirs.
V. Common Pitfalls to Avoid
- Ignoring Legitimes: Giving away the entire estate to a charity or a single child while bypassing a spouse or other children will result in the "preterition" (omission) or "impairment" of legitime, which can void parts of the will.
- Poor Witness Selection: For a notarial will, witnesses must not be beneficiaries and must be residents of the Philippines.
- Unclear Descriptions: Failure to clearly identify properties (e.g., TCT numbers for real estate) can lead to litigation during settlement.
- Failure to Update: Significant life events like marriage, annulment, or the birth of a child should prompt a review of both the will and the trust.