The creation of trusts in the Philippines is primarily governed by the Civil Code of the Philippines (Articles 1440 to 1457) and relevant provisions of the Rules of Court. A trust is a legal relationship wherein one person, the trustor, establishes a fiduciary arrangement for the benefit of another person, the beneficiary, regarding specific property managed by a trustee.
In the Philippine context, these are powerful tools for estate planning, asset protection, and ensuring the long-term financial security of heirs.
1. Types of Express Trusts
The law recognizes two primary forms of express trusts based on when they take effect:
- Living Trust (Inter Vivos): Created during the lifetime of the trustor. It takes effect immediately upon the execution of the trust instrument and the transfer of assets.
- Testamentary Trust: Created through a Last Will and Testament. It only takes effect upon the death of the trustor and after the will has undergone judicial probate.
2. Setting Up a Living Trust (Inter Vivos)
A living trust is often used to avoid the lengthy and public process of probate for specific assets.
Key Steps:
- Selection of Trustee: The trustor appoints a trustee (an individual or a corporate entity like a bank’s trust department).
- Execution of the Trust Agreement: A "Deed of Trust" or "Trust Agreement" must be drafted. This document specifies the trust's purpose, the beneficiaries, the powers of the trustee, and the duration of the trust.
- Formal Requirements: Under Article 1443 of the Civil Code, an express trust concerning immovable property (real estate) cannot be proved by parol (oral) evidence; it must be in writing and embodied in a public instrument (notarized).
- Transfer of Assets: The "funding" phase. Title to the property must be legally transferred from the trustor’s name to the trustee (e.g., "Juan Dela Cruz, as Trustee for the Benefit of Maria Dela Cruz").
- Registration: For real property, the Deed of Trust must be registered with the Registry of Deeds where the property is located to bind third parties.
3. Setting Up a Testamentary Trust
This is an arrangement where the trustor dictates that certain parts of their estate be held in trust for heirs rather than being distributed outright.
Key Steps:
- Incorporation in a Will: The trustor must include a provision in their Last Will and Testament (either Notarial or Holographic) expressly creating the trust.
- Compliance with Will Formalities: The will must follow strict legal formalities (witnesses, notarization, or being entirely handwritten/signed/dated by the testator) to be valid under Philippine law.
- Judicial Probate: Upon the death of the trustor, the will must be filed in court for probate. The court must find the will valid before the trust can be established.
- Appointment of Trustee: The court formally appoints the trustee designated in the will. If the designated trustee declines or is unfit, the court may appoint a substitute.
- Implementation: Once the estate is settled, the specific assets are moved into the trust for management according to the terms of the will.
4. Essential Elements for Validity
To be enforceable in the Philippines, a trust must have:
- A Competent Trustor: The person creating the trust must have the legal capacity to convey property.
- A Lawful Object: The purpose of the trust must not be contrary to law, morals, good customs, public order, or public policy.
- Identifiable Beneficiaries: The trust must clearly state who is to benefit from the assets.
- Trust Property (Res): There must be a specific, existing property (money, real estate, stocks) that constitutes the trust.
5. Comparison: Living vs. Testamentary Trusts
| Feature | Living Trust (Inter Vivos) | Testamentary Trust |
|---|---|---|
| When it starts | During the Trustor's lifetime. | Upon the Trustor's death. |
| Requirement | Deed of Trust (Public Instrument). | Last Will and Testament. |
| Probate | Avoids probate for the trust assets. | Mandatory judicial probate required. |
| Revocability | Can be revocable or irrevocable. | Always revocable until the trustor dies. |
| Publicity | Private (unless involving real estate). | Public (court records of probate). |
6. Taxation and Legal Constraints
Legitime and Successional Rights
In the Philippines, a trustor cannot use a trust to bypass the law on Legitimes. Under the Civil Code, certain heirs (compulsory heirs) are entitled to a reserved portion of the estate. A trust that deprives a compulsory heir of their legitime can be contested and reduced.
Tax Implications
- Transfer Taxes: Transferring property to an irrevocable living trust may be subject to Donor’s Tax (currently 6% under the TRAIN Law).
- Estate Tax: Assets in a revocable living trust or a testamentary trust are generally included in the trustor’s gross estate and subject to Estate Tax (6%) upon death.
- Income Tax: The trust itself is treated as a separate taxable entity. Income generated by the trust property is subject to income tax, which is filed by the trustee annually.
Rule Against Perpetuities
While the Philippines does not have a specific "Rule Against Perpetuities" in the same phrasing as common law jurisdictions, Article 870 of the Civil Code limits the "inalienability" of property. A testator cannot prohibit the alienation of property for more than 20 years. This effectively limits the duration of certain conditions within a testamentary trust.